The Retail Revolution in Korea

1

• The Retail Revolution in Korea

2002. 10. 23
Oh-Hoon Kwon, CIO of LOTTE Group
2
Todays agenda

• I. Trend in Korean Retail Industry
• 1. Growth by Sector
• 2. Trends
• 3. Enabler
• II. Present condition of e-Business in Korean
  Retail Industry
• III. Initiatives
• 1. CRM
• 2. Retail SCM
• 3. TO Be Model
• 4. B2B Strategy eMarketPlace
• IV. Strategy in retail Industry

3
Trend in Korean Retail Industry - Growth by Sector
Discount Store and Home shopping showed Rapid
growth rates in Korea, but supermarket and
Department Store keeps almost flat growth in
Korean retail industry
Market Share by Retail Sector
CVS(1)
Supermarket(4.2)
TV Home Shopping(1.8)
37.5
Discount Store (7.6)
27.9
Department Store (13.3)
1999
2002(E)
Source National Statistics Office, Samsung
Economic Resource Institute
4
Trend in Korean Retail Industry - Growth by Sector
When three companies capture market, customers
can make optimized choice, competition showed
proper level, and market efficiency increases.
Also, market share is concentrated these leading
companies (The Rule of Three)
Market Concentration in Dept. Store Sector
Collective Market Share of Big 6 Discount stores
unit
unit
45p
33p
75
68
35
30
Source National Statistical Office, LG Economic
Research Institute, A. T. Kearney Analysis
5
Trend in Korean Retail Industry - Growth by
Sector (D/S)
Discount stores have grown at about 30 annually
and will overtake department stores in sales by
2003, but the growth rate is expected to decrease
gradually
The Total Number of Discount Store In Korea
Implications and influences

• The Sales of discount store is expected to
  surpass that of department store between 2002 and
  2003

(Trillion Won)

• Low-end pricing contributes to the stabilization
  of consumer prices.
• Discount store lowered consumer prices by 1.79
  from 1996 to 1999
• Power will shift from manufacturers to discount
  store

• Discount stores will number 270 280 by the end
  of 2002, reaching the optimal number and
  afterwards the growth will slow down gradually

Source National Statistical Office, Samsung
Economic Research Institut,
A. T. Kearney Analysis
Source National Statistical Office,, Bank of
Korea, A. T. Kearney Analysis
6
Trend in Korean Retail Industry - Growth by
Sector(T-commerce)
With a growing number of CATV viewers and TV
shopping players, TV home shopping industry has
grown fast and is expected to continue to grow
Key Drivers for Market Growth
Historical Sales Growth

• Increasing Number of Cable TV viewers

(Billion Won)
No. of CATV Subscriber
(Thousand)
CAGR 88.9
CAGR 69.7

• New entry
• Incumbents LG Home Shopping , CJ39
• New entrants Hyundai Home Shopping, Woori
  Home Shopping, AgriculturalFishery TV

• Rapid growth of home shopping leads to
• Growth of courier service companies
• Emergence of an effective sales channel for mid
  and small size companies
• Growing importance of customer relationship
  management

Source Hana Economic Research Institute, A. T.
Kearney Analysis
Source Korea Cable TV Association, A. T. Kearney
Analysis
7
Trend in Korean Retail Industry - Growth by
Sector(T-Commerce)
Conventional market still have accounted for
about 62.5(2002E ) in the Korean retail sector,
while TV Home Shopping has occupied just 2.8.
Therefore, it has a lot of possibility to grow in
Korean retail industry
Growth of CJ39Shopping
CJ 39 Shopping is the frontier and leading TV
home Player in Korea
unit million
Sales Sales Profit
22.6
25
15.2
4.9
8
1998
1999
2000
2001
2002(1H)
Source CJ39Shopping
8
Trend in Korean Retail Industry - Growth by
Sector(Internet Mall)
Internet shopping is expected to be the fastest
growing sector in retail industry, and the
competition is intensifying with new entrants
from other industries
Sales History and Forecast
(Billion Won)

• Among over 1700 players in 2000, only 10 of them
  sell more than 0.1 billion won per month.
• Profitability is the most serious issue plaguing
  all of the players, but some of big players are
  expected to reach BEP in 2002
• Compound Annual Growth Rates of internet shopping
  until 2003 is 103.7

CAGR 103.7
Source Hana Economic Research Institute, A.T.
Kearney Analysis
9
Trend in Korean Retail Industry - Growth by
Sector(Internet mall)
Internet business growth in 2001 is twice than
2000, and the size of e-commerce reached 17.4
billion. Moreover, internet users in Korea
reached 20.2 million. To grow continuously,
internet providers should be concentrated on
solve security Problem.
LOTTE.coms Vision
Todays Lotte.com(www.lotte.com)

• Founded January 2000
• Opened Internet Duty free shop
• Started to sell private brand
• Launched the merchandise delivery
• system jointly with off-line stores
• Started catalog business
• Opened "Lotte B2B Mall for meat"
• Reached 160 million in first half in
• 2002, which increased 358
• comparing to same period in 2001

10
Trend in Korean Retail Industry - Growth by
Sector(Entertainment)
Entertainment Shopping mall provides both
traditional function and entertainment factor
in a same area. A few years ago, In spite of
popularity, it dulled to make profits, but it
makes big progress currently.
Coex Mall
LotteWorld
A Department Store B Hotel C City
Air Terminal D Trade Tower E
Hotel F
Exhibition Center G ASEM Convention Center H
Business office center
Department Store Hotel Theme
Park Discount
Store Clinic
Sports Center Ice Link
11
Trend in Korean Retail Industry - Trends
Currently, Many companies have practiced joint
e-SCM strategy to raise operating efficiency on
S/C in Korean Retail Sector through shared
information between partners.
Domestic Retail sector environment and retail
Strategy
The Next Phase 2000
1950s
1960s
1970s
1980s
1990s
Customer Segmentation and customizing
Balanced Supply and Demand
Cust. Value
Assortment
Distribution
Price
Choice
Quality
SCM
CRM

• Important to Mental distance toward Customer
• Improve quality Compared with Cost
• Expand home delivery and e-Retailing
• Provide Tailored Service

• important to physical distance to customer
• Physically expand number of store and size
• Emphasize on improvement of price quality
• Provide Seamless customer service

Retail Trends

• Current Big Five strategies in domestic Retail
• Strategic Alliance with partners
• Demand forecasting and Replenishment in S/C
• Optimized operation thru Optimized logistics
• Re-architecture of e-Business operation Process
• Product Category Management

Extend e-SCM to e-Retailing srtategy
DSD (Direct Store Delivery by supplier)
N/W Reengineering
Implications for Logistics
Centrali -zed
New Trend in Korean retail sector is Providing of
Tailing service
12
Trend in Korean Retail Industry
Enabler(Internet)
Entering e-Commerce via Internet has
fundamentally changed relationship between
partners on supply chain, and it has recognized
efficiency usage of eCommerce is the one of the
best competency advantage in competition.
Speed

• Prompt response to customer market, fasten
  planning
• End-to-End Real Time Tracking of money, goods,
  service, and info.
• Reduced time to market product Life Cycle Time
• Reduced delivery Lead time

Supplier
Connectivity Go-Global
Information

• Possible Real Time connect one to one or one to
  many
• Reduce transaction/investment/operation cost
• Globalization within organization, between
  organization, and between companies via Internet

Products / Material
Customer
Manufacturer
Retailer
Convergence

• Real time sales info. Analyze
• Sales based on customers needs
• Customization of goods service based on
  customer management such as spending pattern,
  population, and regional types
• Upgrade customer service by
• support both On-line and Off-line
  simultaneously

Third Party Logistics Provider
Distributor
Internet is that, as built connectivity whole
supply chain from customers customer to
supplier's supplier, the connectivity make
possible to support goods and service
transaction, processes, and shared sales
information.
13
Trend in Korean Retail Industry
Enabler(Collaboration)
Collaboration is that, it is important to get
joint vision related with clear forecasting and
joint decision making based on trust and shared
information between partners on Supply Chain
Collaboration
Coordination
Open Market Negotiations
Customer Partnering
Supply Chain Integration Joint
PlanningTechnology Sharing
Information linkage (EDI)Longer-term contracts
Price-based discussionsAdversarial Relationships
With collaboration, we can access following
issues in supply chain..

• Discrepant product supply forecasting between
  retailer and manufacturer
• Manufacturer do not recognize retail sides sales
  strategies and promotion planning, and so on in
  advance
• Retail side do not reflect manufacture sides new
  product development and related advertisement
  planning.
• Absence of joint analysis about market trend and
  consumer information
• Absence of joint demand and supply management
  planning and strategy on Supply Chain
• Absence of access toward Supply chain related to
  Across organization, Between organizations
• manufacture sides marketing, Sales, and
  Production Planner
• Needs supply process that retail sides category
  buyer, person in charge of order, and sales
  forecast analyze team participant in and share
  information

Collaboration is that
Based on Changing in Mind-set and arousing
strategic sympathy on Supply chain,

• Share information and IT technology
• Centralized decision making on Supply Chain
  dimension not sole company unit,
• Inter-dependence between companies in S/C,
• Make efforts maintenance and improve relationship
  between companies
• Regular Communication, prompt response, and
  increased number of communication
• Regular Communication between executives

Supply Chain is not achieved by only emphasizing
tech sided Version-up or depend by a few
specialists. It needs new business mind
based on collaboration and repositioning of
organization and resources
14
Trend in Korean Retail Industry -
Enabler(Collaboration)
Collaboration initiatives between retailers and
their suppliers have gradually evolved from data
capture to supply chain management initiatives
Evolution of Supplier/Retailer Collaboration
UPC
EDI
ERP
XML
Technology Enablers
Private Exchanges
Public Exchanges
CPFR
Efficient Consumer Response(ECR)
Level of Collaboration
QR/VMI/CRP1
Product I.D. Standards
1970
1980
1990
2000
2010
15
Trend in Korean Retail Industry -
Enabler(Collaboration)
Different geographic regions have evolved at
varying rates with respect to their trading
partner collaboration practices
Supply Chain Initiative Adoption by Geography
Private Exchanges
Europe and the United States
Public Exchanges
CPFR
Efficient Consumer Response (ECR)
Asia Pacific
Level of Collaboration
QR/VMI/CRP
Product I.D. Standards
Time
16
Trend in Korean Retail Industry -
Enabler(Collaboration)
Three fundamental collaboration models have
emerged, each with varying types of functionality
and degrees of benefits
CPG-to-Retailer Collaboration Models
CPG
Retailer
Many-to-Many (Retail-Driven)
Public Exchange
Many-to-Many (CPG-Driven)
Many-to-One
Underlying Data Standardization
Private Exchange
One-to-Many
One-to-One
1-to-1
17
Present condition of e-Business in Korean Retail
Industry

• e-Procurement is the first in rate of use. SCM,
  ERP are next.
• The reasons why e-Procurement Solution is the
  first are high-rated procurement by internet as
  well as easy to transform procurement process to
  e-Commerce.

eBusiness Solution Use
Maximum scale of 5points
3.42
KMS
3.47
CRM
3.6
eMP
3.73
ERP
4.33
SCM
4.71
e-procurement
0
1
2
3
4
5
Source KRG, 2001. 10, eBusiness invest 100
higher rank companies
Prospect of rapid growth in SCM, e-Procurement
and eMP in the future.
18
Present condition of e-Business in Korean Retail
Industry
Maturity rate of eBusiness by industries
Source Korea Computer Research/IT Newspaper,
KRG, 2002

• Finance is leading the eBusiness in Korea. It
  recorded 20.53
• The next are RetailSvc(17.87), IT(17.06)
• Manufacture, Construction and Government showed
  low score compared with other industries

Government Manufacture Finance
Retailsvc IT Construction
Total Average
RetailSvc showed relatively high rate but still
low. In addition e-Business is prospected the
high growth in the near future.
19
Present condition of e-Business in Korean Retail
Industry
RetailSvc
SCM is leading solution in DistributionSvc after
2002
Investment plan in 2002 RetailSvc)

• Security is the first(75.9)and next are
  CRM(62.1), KMS(41.4), SCM(37.9)
• RetailSvc is expected to drive the demand of SCM
  compared with other industries.
• Some of big retailors have implemented 1st phase
  and is expected to invest continuously this year.
  According to the research 10s among 29 companies
  are doing SCM Project.
• The reasons why eBusiness is accelerated are
  invasion of Multinational Distribution companies
  and reduction of revenue caused as tough
  competition.

80
75.9
70
62.1
60
50
41.4
37.9
37.9
40
34.5
30
20
10
0
Security CRM KMS SCM DW
Mobile
Source e-newspaper, KRG, 2002
20
Present condition of e-Business in Korean Retail
Industry
SCM and CRM leading the e-business market soon

• E-shopping mall being constructed actively, but
  eCRM expected to lead the market soon.
• SCM is going to be introduced irrelatively
  industries, and eProcurement Infra is expanded in
  distribution and CPG industries.

Source KRG 2001.8, 170 enduser survey, Revenue
over US100M
21
Initiatives - CRM
Reinforce Customer Royalty by CRM

• Easy to apply and introduce CRM as the tendency
  of approaching to customer in Retail industry
• Need different CRM strategy according to types of
  business
• Share customer and Sales information with
  suppliers to deliver goods at right time through
  CRM

Integrated DBMs Closed Loop Process
Integrated DBM Plan
Strategy

• Shared enterprise info.
• Established Consumer-centric Process
• Consumer Segmentation
• Customer Maintenance and acquisition

Customer Acquisition
Customer Retention
Marketing
Market Organizer
Collect Customer info.
Sales Opportunity

• Integrated Customer related work
• such as Marketing, Sales, Service, etc
• Understand Consumers needs
• Efficient Service Management
• Management of redundant data

Work
Customer DB
Sales
Service
Customer maintenance
IT

• Prompt response to fasten changed IT
• Reduced implementation maintenance
• Costs
• Customer info. Analysis tool

Customer Management
Customer Viewpoint
Functional point
22
Initiatives - Retail SCM
Korean Retail players built Web-EDI
preferentially and currently they are driving to
built mainly CMI/VMI, CAO based on improvement of
logistics
Korean Retail SCM Case
SCM
LotteMart, LG Household Health
Care Yuhan-Kimberly, Chelijedang, PG
CPFR
Yuhan-Kimberly, Unilever, Cheiljedang, Hyundae
Dept.
CMI/VMI
LGmart Pulmuone, Aseen FineKorea
CMI/CAO
LGmart Yuhan-Kimberly, PG, Unilever,
CMI
CM
EDI
VMI
CarrefourKorea Ogguki, Cheiljedang, PG
LGmart, DongsuFood, Cheiljedang, LotteMart,
Yuhan-Kimberly
23
Initiatives - To Be Model
We should equip Responsive and Consumer-Driven
System to raise operational efficiency on S/C
with working together between retail and
manufacture
We should make simplify and optimize
Products/information/money flow to raise
efficiency from Manufacture-Process-Logistics,
distribution to consumers on supply chain. Then
finally, expanded sales to maximize customer
satisfactory

• Partnership with Supplier
• CPFR Collaborative Planning, Forecasting
  Replenishment
• Reduce Lead time and inventory thru VMI
• Co-managed product planning/development/display/as
  sortment/sales
• Visibility of Supply Chain
• Based on partnership with supplier, Real Time
  handling of inventory and purchasing planning
  through visibility of supply chain
• Shared consumers trends with whole supply chain
• Provide Customized service through reflected
  customers needs instantly
• Cut a price with reducing Lead Time and inventory

Maximized Profit thru Customer Satisfaction
Expanded sales Opportunity
Raised Customer Royalty

• Strategic alliance
• Demand Forecasting
• Optimized Logistics
• e-Business
• Category management

Retail
Consumer
Raised Customer Satisfaction
Raised Operation efficiency
Minimized inefficiency in Supply Chain
24
Initiatives - To Be Model
SCM is total strategy to cover retail and
logistics that to satisfy consumer and remove
inefficiency during the operation through sharing
information with partners on supply chain
Big Five Strategies in Retail SCM

• As joint investment related with partners
  internal and external non-value added activities
  to reduce cost and raise efficiency, provide
  benefits to customers as well as the partner

Strategic Alliance

• Raise flexible supply responsibility and
  effective management of materials as operating
  supply forecasting and planning activities
  according to end-users situation

Demand Forecasting on S/C
Optimized Logistics

• Through strategic alliance, effective equipment,
  and usage of IT technologies, manage product
  distribution network rationally

• Through implementation of advanced e-Business,
  seek to operation efficiencies such as reduced
  cost, minimized error rates, increased
  transaction cycle time, and so on

e-Business

• Through product assortment in retail channel and
  balancing between costs, manage and maintain
  product category efficiently to increase consumer
  value

Product Category Management
25
Initiatives - To Be Model
Based on progressive collaboration between
partners, reduced inefficiency sectors like
external factors and maximized operating
efficiencies
Details of Big Five Strategies in Retail SCM
Demand Forecasting in S/C
Strategic Alliance
Optimized Logistics
e-Business
Category Management

• ABC
• Based on operating activities Cost
  distribution and Management, Support effective
  decision making
• Initiative bundling
• joint technology investment and distribution
• Value based incentive
• distribute profits fairly between partners.

• Standard of Product Code
• Common language in Distribution activities
• Official Product information
• Used Consistent Product info.
• Shared Demand information
• Raised planning and response capability both
  manufacturer and retailer thru shared consumers
  buying info.
• Market-level Forecasting

• Direct Store Delivery
• Fast-moving goods
• Co- Consolidation
• Slow-moving goods
• Joint delivery
• Coordinated transport
• make delivery route to deliver many tasks at
  once
• Cross-Docking

• Balanced variety
• improve product assortment with collaboration
• Product deletion
• Product In/Out
• New Product management
• Centralized conversion
• Based on optimized logistics field, support to
  concentrated on competency advantages in process
  and manufacture field

• Support optimized process
• Built logistics management process
• Exchange and manage product info. - EDI

26
Initiatives - To Be Model
As most companies built SCM components and
infrastructure, Strengthen internal competency
advantages and drive SCM strategies through
partnership on Supply chain
SCM Components and Infrastructure

• - Strategic Alliance
• - Demand Forecasting in Supply Chain
• - Optimized Logistics
• e-Business
• Product Category management

SCM Strategy

• - ABC (Activity Based Costing)
• Bar-code
• Direct Store Delivery
• Consolidation)
• Cross Docking
• Web- EDI
• Replenishment
• category management

SCM Components
- Organization and culture - BSC -
Technologies - Logistics network
SCM Infrastructure
27
Initiatives - Logistics Network


Since 1999, it has increased 30 annually, and it
reached 1.2 billion sized market in 2001.
Currently, Korean prime CVS players carry out
solitary or joint logistics service thru its
store(Lotte.coms merchandise delivery system
jointly with 7-Eleven
Enterprises Integrated Logistic Network
Headquarter
Retails
CPG
Lotte Confectionery Lotte Chilsung, etc
Lotte Shopping Lotte Mart, etc
ERP or Legacy Interface
Logistics Control Center
OMS
TMS
WMS
Customer
Supplier
Lotte Elec. LotteCanon, etc
Lotteria TGI Friday
Eng
Restaurant
Service
LotteHotel Lotte World
7-Eleven
28
Initiatives - B2B Strategy e-Marketplace
While B2B e-market place in Korean retail
industry is in embryo, the government and private
sectors are cooperating to build B2B
infrastructure dubbed KoreaRetailXchange
Worldwide B2B E-marketplace
KoreaRetailXchange

• Participants Ministry of Commerce, Industry,
  Energy, LG Mart, Lotte Magnet, Samsung
  Tesco, Shinsegae E-mart, Hanwha Store, Hyundai
  Department Store
• Start of operation (Planned) Second half of 2002
• Value proposition
• Construction of an e-marketplace of Korean
  nationality
• Enhancing competitiveness of participants by
  enhancing their purchasing power and efficient
  supply chain management
• Functionality
• Operate as a non profit organization to secure
  neutrality
• Maintain openness to secure critical mass
• Improve efficiency for participants through
  process standardization and offering of diverse
  services

Source A.T. Kearney Analysis
29
Initiatives - B2B Strategy e-Marketplace
LCN(Lotte Commerce Net) is Private Community
Network that maximize connectivity between
subsidiaries or subsidiaries and its partner as
converting offline centric business to online
centric business provide us maximum efficiency
and boost profit.
KoreaRetail Xchange
Global-eMP
Korea-eMP
30
Strategy in Retail Industry
Provide consolidated e-Biz environment

• Provide single integrated cyber space both Lotte
  Group subsidiaries and its partners
• Create Win-Win Strategy to share and use
  information

• Only one standardized infrastructure and
  connectivity ? Synergy effect
• Effective business process ? increase profits,
  reduce inventory level, etc

Increase business efficiency
Accomplish to built national infra in retail
industry

• Execute Koreas Ministry supervised business for
  effective EC in field of retail industry
• Seek to way to connect to external e-MP

Lotte Group Branch company
EAN Korea
manufacturer
Retail
Logistics
Share Product Info
Support retail Contents
. Shinsegae . Samsung Tesco
LCN Center
EDI
Alliance
Share Product info
. Authorize retail service . Settle service fee
Global Sourcing
Partners
31
Strategy in Retail Industry
Product Positioning and Create Synergy w Existing
Biz. - Additional Product PDS, CPFR, CM,
e-Tax Bill/Contract, Mobile - Infrastructure
Product XML/EDI, CMS - Collaborative IT
Biz. XML/EDI Service ? Collaborative company IT
Supporting Biz. - Integration of LDCCs
service I ? LCN Portal
Promote profit extension strategy through XML/EDI
- Existing and new consumer retention based
on LCN - Emphasis differentiation strategy
comparing to competitor
Improve eTransformation Business - To be a
leading company in SCM - Promote
e-Transformation biz. to Lotte Groups partners
P D S
C P F R
e I C R M
Collaborative IT Biz
Product
Internet Fax Service
E-Contract
E-Tax Bill
Mobile ASP Service
C M
E-Procurement
K M S
LCN Portal Site
CMS
VPN
Infrastructure
XML/EDI(VAN)
Network Back Born, Security, Contact Center
Lotte GDC Center
32
Strategy in Retail Industry
Establish Global Standard of Infrastructure -
Create new business through co-work between LCN
service and its related organizations -
Establish Global trade infra through expand
standardization through co-work with EAN Korea
Provide convenience to connect with integrate
between LDCCs retail-centric Hub Center and
other retailers - Organize separate retail
community - Co-operate with other
retailers though system connection
KoreaRetail Xchange
EAN Korea
LCN Center
Retail Providers
Accomplish LDCC as a Core HUB Center for
electronic commerce in Retail industry
33

• The Retail Revolution in Korea

Thank You!
ohkwon_at_ldcc.co.kr
LDCC