Wal-Mart Selling Its South Korea Stores for $882M

SEOUL – Wal-Mart Stores Inc. (WMT) is selling its loss-making South Korean stores to Shinsegae Co. Ltd. for $882 million, making it the second global retailer to exit the country after Carrefour.

The sale by Wal-Mart, the world's top retailer and No.5 in South Korea's $22 billion discount store industry, highlights intense competition in the region among global retail players and a shift into fast-growing markets such as China and India.

The news sent Shinsegae shares up 6.6 percent, as analysts expect the country's top discount store chain to cement its lead and win more negotiating power with vendors to cut prices.

The South Korean retailer had agreed to buy a 100 percent stake in the U.S. company's 16 domestic outlets for 825 billion won, the two firms told a news conference on Monday.

In late April, the world's second-largest retailer Carrefour sold its South Korean operations for $1.85 billion to move resources to China's $240 billion retail industry, where investment costs are smaller but the potential spoils are bigger.

"China, obviously, is potentially a much bigger market than South Korea," said Paul McKenzie, head of consumer research at CLSA. "Unlike South Korea, you don't have one dominant player.

"Shinsegae's E-Mart just dominates the field, whereas China's market is much more fragmented so there's more opportunity there."

McKenzie said China's deregulation at the beginning of 2005, which made it easier for foreign players to open new hypermarkets, made them more aggressive in expanding in China, Asia's second-biggest retail market after Japan.

WAL-MART STRUGGLED IN KOREA

After eight years in South Korea, Wal-Mart won just 4 percent market share, trailing Shinsegae, Samsung Tesco, 89 percent-owned by Britain's Tesco Plc., Lotte Shopping Co. and Carrefour.

South Korea's discount store sector has been growing at about 17 percent a year over the past five years at the expense of traditional mom-and-pop stores, but the expansion has helped the top three players out-muscle smaller players.

"As we continue to focus our efforts where we can have the greatest impact on our growth strategy, it became increasingly clear that in South Korea's current environment it would be difficult for us to reach the scale we desired," Mike Duke, vice-chairman of Wal-Mart, said in a statement.

Wal-Mart Korea posted a net loss of 9.9 billion won in 2005 on sales of 728.7 billion won.

Shinsegae, which has a third of South Korea's discount store market with 79 outlets, will operate the Wal-Mart stores under its E-Mart store brand. It lost out in the bidding for Carrefour's South Korean stores to local fashion retailer E-Land Ltd.

South Korean retailers are seeking scale to win greater negotiating power over suppliers as they battle margin-crushing competition in the $120 billion retail industry.

Shares in Shinsegae, which also operates the third-biggest department store chain in South Korea, closed up 6.6 percent at 460,000 won, against the wider market's 2.46 percent drop.

Shares in Lotte Shopping, which had also unsuccessfully bid for Carrefour Korea, fell 4.62 percent to 361,500 won, after earlier hitting a record low of 356,000 won.

"I think the value of the deal is appropriate, considering the book value of Wal-Mart Korea is about 830 billion won," said Na Hong-suk, an analyst at Goodmorning Shinhan Securities.

"This deal will create a wider gap between other competitors like Lotte Mart and Samsung Tesco, helping it increase pricing power against vendors and boost profits."

Shinsegae Chief Executive Koo Hak-su told reporters the deal would also allow the firm to focus more on its Chinese business as expansion became more difficult at home.

Shinsegae's discount store business made an operating profit of 530.8 billion won in 2005 on sales of 6.6 trillion won.