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Lotte’s China outlets near collapse as spat grows

Mar 21,2017
The China-based retail outlet unit run by Korean conglomerate Lotte Group is teetering on the brink of collapse as protracted business suspension by Chinese authorities is leaving the firm with snowballing losses, industry sources said Monday.

China has ratcheted up what appears to be retaliation against Lotte, Korea’s fifth-largest family-controlled firm, since it handed over one of its properties to the Korean military early this month to be used as a site for a U.S. Terminal High Altitude Area Defense (THAAD) battery.

Seoul’s deployment of Thaad on its soil has angered Beijing, who claims that it will be used to monitor its own military.

According to Lotte, 67 Lotte Mart stores in China have been placed under suspension as of Sunday. Additionally, some 20 more outlets decided to voluntarily shut as aggressive Chinese consumers staged anti-Korea protests near the stores, it said.

That represents nearly 90 percent of 99 Lotte Mart outlets in China that have been forced to close temporarily, while uncertainties remain over their prospects. Lotte has some 120 retail outlets in the neighboring country, including five department stores.

Industry watchers voiced concerns that Lotte may have to pull out given that losses from the shutdowns are growing too fast.

Lotte is predicted to suffer 116.1 billion ($102.7 million) in losses in its Lotte Mart revenue if the shutdown continues for a month. Last year, sales from China-based Lotte Marts reached 1.13 trillion won, or 94 billion won on a monthly basis, the firm said

The profitability of Lotte’s retail outlet business is expected to worsen since it is required to pay full wages to local employees for the first month of the suspension.

The suspension is a serious blow to Lotte, since its China-based business has long been running a deficit even though it’s been 10 years since it tapped the world’s second-largest economy.

In 2016, Lotte recorded a combined 207 billion won deficit in the department store and outlet divisions, of which about 80 to 90 percent came from its Chinese units.

“Lotte must be facing huge risks since the Thaad issue has practically banned the firm from doing business in China. Given that the Chinese units have already been running in the red, it may not be able to handle it any longer if the restrictions and boycott continue,” an analyst said.

A spokesperson dismissed concerns, saying “the company has no intention of pulling out of China, as the retail unit will continue its business like its other affiliates there.” YONHAP