Food Retail Chains Worried About Intensifying Price War
|Fried chicken is sold for 6,990 won per bucket at a Homeplus store in Seoul on August 9. Courtesy of Homeplus|
By Kim Jae Heun
Concerns are growing about the financial strength of retailers as they engage in an intensifying price war to attract ever more frugal consumers, according to industry officials Monday.
Chain retailers and convenience stores, in particular, have been introducing “special” prices for popular foods such as fried chicken, pizza and caffeinated beverages since June. However, they did not expect to continue the promotional event for more than a month and have been giving deep discounts for a wider variety of food products at the request of customers, officials said.
Homeplus kicked off the ongoing price-cutting competition on June 30, when it introduced Dang Dang Chicken for 6,000 won (US$4.31) in its stores. The chicken, sold for a fraction of restaurant listed costs, instantly caught the attention of people who were unhappy with local fried chicken franchises spiking prices due to inflated raw material prices and increased labor costs. The retailer has been selling Dang Dang Chicken ever since.
Other retail companies such as GS Retail, E-mart and Lotte Mart were also quick to join the price war. E-mart and Lotte Mart started selling half-price burgers and traditional Korean food bibimbap, while GS Retail’s CU convenience store introduced a 650-won coffee, which is cheaper than mineral water here.
Homeplus sales from its prepared food business soared 74 percent year on year between September 1 and 13. E-mart and Lotte Mart also saw their revenue grow 26 percent and 40 percent, respectively, in the same period.
Despite the growing number of customers and the increase in sales in their stores, retailers are concerned about their profitability. Low prices were originally designed to attract customers and leave almost zero profit margin, if not result in a loss.
“It’s hard to profit from selling food at half the price that franchises sell. However, when a competitor introduces a new product that gains popularity, other retailers have to do the same if they don’t want to be left behind. Their sales can increase, but profits may decrease,” said a local retail official.
In fact, Lotte Mart experienced a loss of 10 billion won in the first half of this year thanks to increased marketing costs. E-mart’s operating profit in the same period also plunged 83.1 percent year on year. The two companies showed a combined loss of 30 billion won in the second quarter of this year alone.
“Retailers will continue their food discount promotions for some time, but they will soon have to decide whether to stop or continue this price war,” the official said.