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(LEAD) Lotte's China biz in peril as THAAD spat deepens

2017/03/20 15:53

(ATTN: ADDS more details in paras 8-9)

SEOUL, March 20 (Yonhap) -- The China-based retail outlet unit run by South 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 a retaliation against Lotte, South 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 the 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 operating in China, Lotte's hypermarket chain, have been placed under suspension as of Sunday. On top of that, some 20 more outlets decided to voluntarily shut down as aggressive Chinese consumers continued to stage 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 down temporarily, while uncertainties remain over their prospects. Lotte has some 120 retail outlets running in the neighboring country, including five department stores.

Industry watchers voiced concerns that Lotte may have to consider a pullout given that losses from the shutdowns are growing too fast for the firm to withstand them.

Lotte is predicted to suffer some 116.1 billion (US$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, according to the firm.

Its losses could widen as Chinese suppliers are refusing to sell their products through Lotte Marts for fear that they might be labeled by consumers as being "unpatriotic" amid growing anti-Korea sentiment, an industry watcher based in China said.

"Lotte Mart's main profit source is the commissions they get from suppliers," he said. "The beverages produced by its affiliate are probably the only lineup it supplies itself with, which means such a development is a serious problem for Lotte."

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

The suspension means 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 first tapped the world's second-largest economy.

In 2016, Lotte recorded a combined 207 billion won in deficit in the department store and outlet divisions, of which about 80-90 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," another industry source said.

A spokesperson from Lotte dismissed the 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."

  

elly@yna.co.kr

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