Korean retail giant Homeplus goes European
Brainbox behind the Big Box: Lim Il-Soon
A leading figure in the Korean trade is Lim Il-Soon, CEO of Homeplus. The country's second-largest retailer has just given a big shot of Asian expertise to international buying group European Marketing Distribution (EMD).
Homeplus is a former Tesco subsidiary. The company now spans a bricks & mortar network of 140 hypermarkets, accounting for the lion's share of annual revenues (€8.5bn), as well as 351 supermarkets and 261 convenience stores. But Homeplus also has big online ambitions and already claims to run the world's largest home delivery service. More significantly, it says the business is profitable.
Polite and reserved, like so many Asians, Ms Il-Soon spices her conversation with a pleasing dash of wit and humour. Generally regarded as a financial expert and something of a turnaround wizard, her retail CV boasts a stint as CFO with US warehouse club operator Costco in her home country. Last but not least, Lim Il-Soon is one of the very few female CEOs in South Korea or for that matter Asia (come on guys, this is one act you've still got to get together!).
It was therefore a double pleasure to talk with this successful manager last week when Homeplus officially joined Swiss-based EMD, whose twelve other retail members run 250 grocery chains in 19 countries with a combined annual turnover of €180bn.
"Europeans want more seaweed and sushi"
"Because it is powerful": Lim Il-Soon and EMD president Philippe Gruyters sign in Homeplus as the 13th member of the international retailer buying and marketing alliance
For 17 years, we were a subsidiary of leading UK retailer Tesco, during which time we introduced European quality food to the Korean market. Our annual global sourcing reached $400m to $500m. But when Tesco sold the business in 2015, our access to European products became limited. We now need to open up other channels, as we would like European goods to exceed 30 per cent of our overall sales again.
Do Korean shoppers really want so many foreign products?
Definitely. Korea typically serves as a testbed for global FMCG innovations before they enter the broader Asian market. Therefore our customers are very aware of global food trends and are open to experiencing new lifestyles through foreign products. They perceive European products as high quality, even more so than American ones. Our consumers are very demanding and sophisticated.
Why did you choose EMD over other buying groups?
Because it is powerful. EMD membership will be one of our key strategic advantages in accelerating and expanding our private label development.
To what extent will EMD give you a competitive advantage over Korea's number-one retailer, Emart?
I think we can overtake them very soon, and EMD will help us do this. We can differentiate ourselves with European goods. Emart doesn't have many of them. They are highly dependent on their own large domestic manufacturing facilities for their own label.
But won't your cooperation with EMD mostly concentrate on private label too?
At first, yes. We should like to offer European products at very accessible prices. We shall start with cereals, oil, and cheese – eight product categories in all – and see how it works. EMD will recommend European suppliers to us and bundle our buying volume together with other members' volumes.
"Private label makes up less than five per cent of overall sales, so we would like to raise this share significantly"
Yes, it is becoming a big thing right now. In the past, Korean customers stuck to the big brands they already knew. But nowadays people like to experiment, especially younger people up to around 40 years of age. They are significantly less attached to big brands and more aware of budget constraints.
Currently, private label makes up less than 5 per cent of overall sales, so we would like to raise this share significantly.
Are you cooperating with EMD in any other fields, such as the joint purchasing of A-brands, knowhow exchange or promotions?
We will focus on building good relationships with other EMD members during the first year. It's important to establish personal links between buyers. In a second stage we will look at co-sourcing A-brands. Then we will start one-on-one collaboration with EMD partners in order to obtain private label from their local suppliers. Examples might be pasta from Italy, cheese from France, or ham from Spain. Spain is Korea's number-two holiday destination, after all.
Looking at things the other way around, what Korean products could interest European retailers?
Korea is a very advanced market in the health & beauty segment. It's one of the reasons why Unilever, for example, recently bought local skin cosmetic brand AHC. And seaweed is becoming more and more popular because of the sushi boom in Western countries.
How will EMD profit from your membership?
Our volume will strengthen EMD's international buying position, and adding us will help the alliance to become truly intercontinental. The development of our private label program, based on our customer insights, would be a great starting point for understanding Asian consumers.
How do you plan to overcome the obvious cultural differences between Korea and Europe?
As a former subsidiary of Tesco, we are used to intercultural exchange. We also acquired 35 hypermarkets from leading French retailer Carrefour in 2008. So we are very excited about cooperating with European partners again.
"Koreans tend to be very adventurous and risk-taking. Quite often we just try things. Europeans are generally more conservative"
Koreans tend to be very adventurous and risk-taking. Quite often we just try things. Europeans are generally more more conservative.
Why do you think it is that big Western retailers like Walmart or Carrefour have not been able to establish themselves in your country?
Foreign retailers who entered our market were destined to fail, as they did not fully appreciate the complexity of the customers they serve. Koreans demand both value and quality, have a strong appetite for local and global goods, and expect a high standard of customer experience.
Let us look at what Homeplus is doing on its home market. One of the most striking things is how hard you push your online business. Why so?
Because local demand for online home delivery is constantly growing. Korean customers are really into it. The digitally addressable population is almost 90 per cent. E-commerce has now reached a 26-per-cent share of the total retail market and is growing faster than anywhere else in the world.
Where do you see your advantage in this game?
We have been a pioneer in the online grocery business since we started our e-commerce division in 2006. Most other retailers can't deliver fresh food on the same day it is ordered, but we can. When it comes to dry goods, competition is only price-driven at the moment, as everybody offers the same products. But with EMD's private label, we intend to change the game.
"We don't have online giants like Alibaba or Amazon in Korea, and we would like to keep it that way"
We are now the world's number-one retailer in fresh food online delivery sales. But online sales still only account for 8 per cent of our overall annual sales. We would like to boost this share to 30 per cent within the next three years. After all, we don't have giant online players like Alibaba or Amazon in Korea, and we would like to keep it that way.
European retailers are surprised that your online delivery service is profitable. How have you managed to achieve this?
We utilize our offline store network for procurement. Therefore we don't have to build any additional logistics centres for which it is difficult to obtain government authorization and which people don't like in their backyard. We charge a fee of around $3 on orders of less than $40. Together with our marketing activities, this motivates our customers to order an average basket of $70. What's more, most of our deliveries are in major cities and suburbs, where delivery vans only have to drive an average of five to ten kilometers.
Will you share your online expertise with your new EMD partners?
Yes, we are open to that. Korea is very densely populated, though, which might be an advantage for our online delivery in comparison to Europe.
How do you utilize the data obtained from your online business?
It mostly comes from our customer loyalty program with six million members. It is a heritage from Tesco, but regulations regarding data privacy have since become very restrictive. So we had to re-establish the program right from scratch. Now, with the consent of the persons concerned we can personalize ads and coupons. We try to understand each customer and communicate with them directly via our smartphone app.
We don't use mass communication anymore: no ads on TV, radio, or in the newspapers. The only old-school advertising sales channel we still use is the customer leaflet.
Why is personalization so important to you?
It's becoming increasingly challenging to predict and satisfy customer expectations. This is especially the case in Korea where the majority of consumers are digitally connected and urbanized with dynamically changing shopping behaviors.
Does bricks & mortar retailing still have a future in your country?
Physical retail is still a powerful and evolving platform, both in itself and as a supporting infrastructure for online retail. Bricks & mortar stores support online fulfilment and serve as click & collect points. But, more importantly, they act as a social meeting place and experiential shopping destination. Physical stores remain an effective stage on which to showcase supplier brands. In the past, we used to manage our individual channels separately, but now we focus on creating a seamless customer experience across different channels via a multi-channel approach.
A Homeplus Special store
At the moment, 75 per cent of our annual revenues come from our 140 hypermarkets. But this format faces a number of threats from online and neighborhood-store formats. It will not survive in its traditional form, at least not in Korea. The choice is to adapt or die. We have to change our model.
We are implementing a new concept called HDS (Hybrid Discount Store). This is a combination of warehouse and hypermarket store. And it also serves as a fulfilment center for online orders.
A lot of your hypermarkets are located in shopping malls. Won't their time be up soon too?
Korea isn't like Europe. Our malls aren't located in suburbs, but in prime locations in densely populated residential areas of big cities. We own the buildings that contain our 'Big Boxes' as well as cinemas, restaurants, cafés and lots of other smaller retailers.
"Government regulations restricting the opening of new stores also work as a natural barrier to the entry of new competitors"
Restrictive regulations are both a challenge and a great opportunity. The government tries to protect small & medium enterprises, as well as 'Mom & Pop' stores, and asks mass retailers for a certain level of collaboration with them. On the other hand, regulations restricting the opening of new stores also work as a natural barrier to the entry of new competitors.
One last question regarding corporate ownership: Homeplus is currently controlled by private equity fund MBK. When could they sell the company?
I understand that they are contemplating many strategic options as they have a broad horizon and are a very strategic investor. Operationally, they don't tell us what to do, and Homeplus management is completely independent.
Read in German: 'Sich anpassen oder untergehen' by Mathias Himberg on pages 36 & 37 of Lebensmittel Zeitung, no. 5, 01.02.2019