SEOUL, Apr. 13 (Korea Bizwire) — When Chung Sung-yeop opened a franchise convenience store in a commercial district of northern Seoul in 2015, there was one competing store within a 1-kilometer radius.
Since then, three more convenience stores have opened within easy reach of his outlet, squeezing profits and hurting sales.
“Literally, the convenience store industry is in a state of supersaturation,” sighed the 52-year-old Chung. “I just managed to break even last month, nothing more, nothing less.”
Competition is intensifying in South Korea’s omnipresent convenience store industry, as too many stores are competing for a roughly flat number of customers.
In Seoul and other major cities, there are convenience stores on almost every street corner, in residential areas and commercial buildings.
According to official data by the Fair Trade Commission, the nation’s antitrust watchdog, South Korea was home to 39,740 franchise convenience stores at the end of last year, compared with 24,859 in 2013.
Analysts believe that the actual number of stores has probably surpassed the 40,000 mark, as the statistics did not include non-franchise operations.
Calculations based on the official data showed that South Korea had one convenience store for every 1,417 people, compared with one store for every 2,226 people in Japan, where the industry took root long before South Korea. This number might represent the highest density of convenience stores in the world and may be contributing to sales at local convenience stores being just one-quarter that of their Japanese counterparts.
Thanks to a rise in the number of single-person households, the convenience store industry has enjoyed a boom in recent years, outpacing sales of department stores and discount store chains.
South Korea’s convenience store industry grew 14 percent on year to 23 trillion won (US$21.6 billion) last year, according to the Korea Association of Convenience Store Industry, an industry lobby of five franchise stores.
In February this year, sales of three major convenience store chains — CU, GS25, and 7-Eleven — advanced 12.6 percent on year, according to monthly government data.
Despite such heady numbers, industry watchers caution that there are warnings signs that need to be heeded.
Chief among these is the 3.5 percent on-month dip in same-store sales reported for February of last year. This marked the first-ever monthly decline for existing outlets, independent of growth of the industry as a whole. Since then, monthly same-store sales have fallen for 11 straight months, according to data.
Lee Sang-hyeok, a senior researcher at the Shopping Area Information Research Institute, said same-store sales have moved south as the pace of new stores opening has accelerated.
Shares of GS Retail Co., the operator of the nation’s second-largest convenience store chain GS25, has slumped about 12 percent so far this year.
GS Retail reported a net profit of 10.7 billion won in the fourth-quarter of last year, down 92.4 percent from a year ago.
Kim Myung-joo, an analyst at Mirae Asset Daewoo, attributed the sharp decline in GS Retail’s profit to a sluggish performance in the company’s convenience store division.
“As competition heats up in the sector, its sluggish performance looks set for more weak growth,” Kim said in a research note.
Reflecting such developments, margins at convenience stores are expected to slide this year due to the rise in the minimum wage, said Park Jong-ryeol, an analyst at Hyundai Motor Investment and Securities.
The government hiked the minimum wage by 16 percent this year as part of an effort to get ordinary people to spend more and boost the domestic economy.
Another major convenience store chain, BGF Retail Co., is also expected to see its profit slump this year, according to Joo Young-hoon, an analyst at Eugene Investment and Securities.
BGF Retail, which operates about 12,000 CU stores in South Korea, is estimated to post an operating profit of 35.6 billion won this year, down 7.3 percent from 2017.
Joo cut BGF Retail’s six-month target price to 235,000 won per share from 250,000 won. The company’s stock has fallen about 16 percent so far this year.
Compounding the problems is the fact that despite the tougher competition, store openings have shown no signs of slowing. According to the trade ministry, the number of convenience stores grew by 14 percent last year.
More store openings are expected, with some 70,000 neighborhood supermarkets wanting to switch their business to convenience stores, industry watchers said.
“People wanting to open new stores may be attracted by the fact that the overall shopping pattern is increasingly moving towards small purchases and preference for stores nearby,” he said.
“These people need to be advised that while the market can grow they may be left with less profit.”