Lotte mulls over China mart sale
As the chilled relation between Korea and China shows signs of thawing, Lotte Group is looking into various options over its bid to sell unprofitable branches of Lotte Mart in China. It has to decide whether it should make a complete exit from one of the biggest consumer markets in the world, or leave some stake there for future opportunities.
Since last September, Lotte has been struggling to sell the stores in China, with a Thai bidder withdrawing from the deal after the Chinese government stated it would not allow them to reopen.
However, last week China pledged it will cooperate in the sale of the stores, after President Xi Jinping’s envoy State Councilor Yang Jiechi met President Moon Jae-in.
Yang was quoted as saying “China will support the smooth sales of Lotte Mart’s Chinese stores and the resumption of the construction of a Lotte Town in Shenyang,” stressing that Korea can “trust that there will be tangible results in the near future.”
Lotte has been pursuing the sale of the stores, after their operation was hit hard amid diplomatic friction between the two countries caused by Korea’s decision to deploy a U.S. Terminal High Altitude Area Defense (THAAD) battery here.
Being one of the hardest hit Korean businesses, 87 Lotte Mart stores in China are not currently operating. Seventy-four of them were shut down by the local authorities, while 13 were closed by the company. Lotte has 99 Lotte Mart branches and 13 Lotte Super outlets in China.
The group spent 690 billion won ($652 million) to maintain the status quo of the stores last year, but decided to sell them in September in the belief that the businesses would not improve, even if the two countries’ diplomatic relations did.
Reportedly, the total economic damage Lotte has suffered from the THAAD row amounts to 1.2 trillion won.
After Yang’s friendly remarks, Lotte issued a statement saying, “we are highly anticipating the Chinese government’s effort will be a turning point for Lotte to rebound from our difficulties,” sparking expectations that it may change its plan to sell the stores.
However, Lotte said its intention to sell has not changed.
“There is nothing we have fixed, but it is clear we are not going to make changes to our initial stance of selling Lotte Mart stores in China,” said an official at Lotte Corp., the group’s holding company.
For Lotte, the THAAD row is not the only reason for it to pursue selling the stores, as it was suffering losses even before China to start to exert economic pressure on Korean companies in 2017. According to SK Securities, Lotte Mart has been logging operating losses in its China business since 2011. Starting from 26 billion won in losses that year, they continued to expand to 121 billion won in 2016.
“Even if China lifted its restrictions on Lotte Mart stores in China, it would be difficult for the company to normalize its businesses there,” SK Securities analyst Son Yoon-kyung said. Other analysts said that Lotte Mart’s China business has been posting an average of 100 billion won in losses every year.
Currently, Lotte is in negotiations with three to four potential acquirers for Lotte Mart China. One of those is Chinese retailer Liqun Group, which has recently carried out an on-site inspection of the stores.
“Lotte is in negotiations with a number of Chinese companies and looking into various sale methods — either through splitting stakes or selling them as a package,” the official said.
It is expected that Lotte is unlikely sell all its Chinese stores, as the official did not deny this, saying “every option is open.”
Industry sources also said Lotte will not likely opt to sell all the stores, given it is almost impossible for a company that fully withdraws from a country to make a re-entry. After Yang’s remarks, the share price of Lotte Shopping, which runs Lotte Mart, rose sharply.