Convenience stores eye quality with minimum wage set to rise

The saturated convenience store market is seeking ways to continue growth as it faces intensifying competition from latecomers to the industry, further to be burdened by a hike in the national minimum wage.

According to data from major convenience store chains, there are over 34,000 convenience store outlets currently operating in Korea -- about one store per 1,500 people. The number of convenience stores has continued to rise quickly since 2013, when there were just over 25,000 stores according to Statistics Korea.

Convenience stores have been considered a rare sunspot in a lagging consumer economy, thanks to the rise of one-member households that tend to buy single-serve meals instead of shopping in bulk.

However, the large number of stores is leading to a drop in profits for each outlet. In the second quarter this year, the two leading chains in terms of outlets -- GS Retail‘s GS25 and BGF Retail’s CU -- both saw falling sales of 2.6 percent and 4 percent respectively per store on-year according to analyst reports. 

“Although sales at GS Retail‘s convenience stores are expected to grow at about 7 percent annually between 2017 and 2020, rising costs related to increasing the number of stores will keep operating profits stagnant at between 3.3 and 3.5 percent,” wrote analyst Park Shin-ay for KB Research.

Latecomer Emart24, set up by retail heavyweight Shinsegae Group in 2014, is also expected to add to the frenzy with a recent announcement that it would aim to add 1,000 new stores this year with a focus on qualitative changes to the traditional convenience store layout such as cafe-style counters and tables.

In addition to the stiff competition, convenience stores face a looming hike in the national minimum wage. Starting next year, the national minimum wage is set at 7,350 won ($6.50) per hour, up 16.4 percent from 2017. As convenience stores run 24 hours a day, the wage hike is a significant change for convenience store franchisees.

In response to these concerns, GS25 announced last month that it would be directly providing 75 billion won in support funding to its franchisees to maintain a minimum level of income. Industry analysts say that other major players including BGF Retail will “inevitably have to provide support to franchisees to compensate in income,” for fear of losing outlets to rival companies.

Still, officials within the industry have a rosy outlook, saying that the industry can still grow with a shift from quantitative to qualitative growth. 

The fight for growth will not necessarily be in the physical number of stores, but in the quality of partnerships that each chain can make with manufacturers and service providers such as parcel carriers and banks to offer better experiences.

“The numbers show that although we have surpassed Japan in the number of stores per capita, the profits from each store still have room to grow,” said an official from one convenience store chain. 

“So now the question is how we can provide more services and premium products to boost sales, and we still see many opportunities to do that.” 

By Won Ho-jung (hjwon@heraldcorp.com)