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Lotte Mart losses in China climbing to $263 million

May 06,2017
Lotte Mart will lose at least 300 billion won ($263 million) in revenues if its operations in China fail to reopen this month, a highly likely scenario.

In late February and early March, the Chinese government conducted fire inspections on most Lotte Mart branches. Out of its 99 stores, 74 were closed due to violation of fire codes, 13 closed voluntarily and the remaining 12 are operating - but struggling due to a fall-off in customers.

The initial penalty imposed on Lotte Mart branches for violating fire regulations was one month. As most suspensions started in late February and early March, they should be reopened by now.

However, 68 of the branches closed by local governments have not yet received any notice as to whether the suspensions will be ended or prolonged. The other six received notices that the closures were extended by one month in early April. Local governments have been slow to respond to re-inspection requests Lotte made after improving their facilities.

“All we hear from government officials is to wait,” said an employee who requested anonymity. “A large part of the issue is related to politics so we can’t say for sure what will happen in the future.”

All signs are that Lotte Mart branches will stay closed until the end of this month. As Lotte Mart raked in 1.1 trillion won in sales in China last year, halting operations for three months is equivalent to losing 300 billion won in sales.

The effect on the bottom line will be particularly strong because Lotte is still paying wages to its Chinese employees, even though they don’t come to work. Chinese law obliges companies to pay employees 100 percent of their salaries during the first month of business suspension. If the suspensions are prolonged, wages can be gradually reduced on a monthly basis starting with 70 percent of full pay in the second month.

Despite being in its third month of suspensions, the company is still paying 70 to 80 percent of full wages. “Regardless of what is happening now, workers at the Chinese branches are also our employees, so we’re responsible for maintaining their livelihoods,” explained a company spokesman Friday.

A total of 13,000 employees work at Lotte Mart branches making around 700,000 won per month. With almost zero revenue, Lotte Mart will spend around 7 billion won this month in wages alone. Operational costs are even higher if rents are added. Parent company Lotte Shopping came up with 300 billion won in late March to keep Lotte Mart afloat, but it won’t last long if branches can’t reopen.

Before relations between China and Korea went into the deep freeze due to the deployment of a U.S. antimissile system, Lotte was one of the most popular brands in China. It has 24 subsidiaries there including five department stores.

Beijing is furious with Lotte because its board of directors approved a request by the Korean government to swap land in Seongju, North Gyeongsang, to be used as the home for the Terminal High-Altitude Area Defense (Thaad) battery.

In an online survey conducted in March by the Korean research firm Nice R&C, 85.2 percent of Chinese respondents answered that the Thaad issue negatively affected Lotte, which was the highest among any Korean companies. A survey by the Chinese state-owned Global Times ranked Lotte Mart the eighth most disliked foreign brand in China.

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]