Costco Korea’s sales growth hits wall; Sales growth slows while Traders, Vic Market expand

2013-12-08 16:04

Costco’s sales growth hits wall

Sales growth slows while Traders, Vic Market expand
By Park Ji-won

Global retail giant Costco is losing its presence in the Korean market. For more than 10 years, it was known as a key warehouse retailer, but in recent years, Korean warehouses, such as Traders and Vic Market, have aggressively expanded their market shares.Costco established itself as the first warehouse retailer in the nation, making its name synonymous with bulk American products at cheap prices. However, its American business model seems to be losing its effectiveness in the domestic market.
Costco Wholesale Korea’s sales have grown at a slower pace for the past year. Its sale grew only by 10.8 percent to 2.53 trillion won in the 2012 fiscal year that closed book in August, according to data from the Financial Supervisory Service. The Korean arm of U.S. firm, headed by country manager Preston Draper, operates nine branches nationwide.
Given that the firm opened new stores in Ulsan and Gwangmyong, existing branches’ growth, in fact, has remained stagnant.
This is in stark contrast to the fact that its revenue had expanded by around 20 to 30 percent from 2009 to 2011. Even in 2008 when global financial crisis shook the market, it grew 19.9 percent.
Costco’s operating profit rose by only 0.4 percent to 137 billion won ($129 million) in 2012. The profit soared to 130.8 billion won in 2010 from 86.4 billion won in 2009 and 53.6 billion won in 2008.
As a result, the operating profit ratio fell to 5.4 percent in 2012 from 6 percent in 2011 and 6.3 percent in 2010.
Vic Market has been engaging in parallel importing and directly sourcing products since it started operations.
“Costco is likely to lose the sense of meeting Korean customer preferences and adapting to market changes. As the number of competitors rise, it begins to lose its color,” analyst Ian Chung at Daishin Securities said.
“The firm should put more effort on marketing to retain its market share if they don’t want to become like Wal-Mart, which retreated from Korea.”
Officials of Costco were not available for comment.
The slowdown in growth came as two Korea-born warehouses, Vic Market of Lotte Mart and Traders of E-mart are expanding in the market. The U.S. retail giant is also facing growing complaints from customers for its policy of accepting payment only by Samsung credit card and cash.
Traders, launched in November 2010 and operating with seven branches throughout the nation, estimates its sales will reach 800 billion won this year, up 25 percent year on year, according to a firm official.
Vic Market, launched in June 2012 and operating with four branches throughout the nation, estimates its sales will reach 280 billion won this year.
“The cheapest product price is what customers want the most in a warehouse retailer. However, Korean customers want even more ㅡ good services. That’s where we are putting our efforts now,” Kim Hyung-pyo of Vic Market said.
Vic Market has various customer service facilities such as theaters and amusement areas for children, animal hospitals and food courts. Meanwhile, Traders doesn’t charge an annual membership fee to customers. Costco does not provide any of these benefits.
To lower their product prices, the two firms are also increasing their direct sourcing from overseas. Traders has started to directly source and parallel-import products toward the end of this year.
“We have expanded the directly outsourced product lineup this year,” Manager Kim Ju-hee at Traders said.
This year, Traders has directly imported some 1,000 new products, out of the 4,500 products it carries, Kim added.