Hit by Political Crossfire, Lotte's China Exit Said to Stall

(Bloomberg) -- Lotte Group’s efforts to sell its China stores have stalled as buyers aren’t sure they will be able to run the outlets normally after government allegations of fire safety infractions, a company executive said.

South Korea’s largest department store operator, Lotte Shopping Co., has taken a sales hit in China over the past year after the group provided land for South Korea’s deployment of the U.S. missile defense system known as Thaad. Most of the retailer’s outlets in China were soon after forced to suspend operations by authorities for the fire safety violations.

Lotte last year fixed the issues that were raised, but the fire authorities haven’t moved forward with the company’s request for a reinspection, said the Lotte executive, who declined to be named due to internal policy. Lotte had been investing aggressively in China and the setbacks have been a financial blow, highlighting the risks to multinationals who run into political trouble in China.

“Lotte Shopping is losing 50 billion won ($46 million) every quarter due to the China situation,” said Oj Nam, a Seoul-based analyst at Samsung Securities. “The worst scenario is that the sale drags on for a long time. If it fails to find buyers, it has to close down some stores which will bring losses.”

The delay comes as Lotte Group faced another setback on Tuesday, as Chairman Shin Dong-bin was sentenced to 30 months in prison, creating a vacuum at the top of the conglomerate. A Seoul court convicting the tycoon of bribery for his role in a scandal that toppled South Korea’s former president.

Shares of Lotte Shopping dropped 4.2 percent in Seoul on Tuesday, while the benchmark Kospi index gained 0.4 percent.

Negotiating

Lotte is open to various sale possibilities and negotiating with several companies, a Lotte Shopping spokesman said, adding that the company has the option to sell its entire China mart business to one company, or to split up the operations to sell to several firms. Goldman Sachs Group Inc., which Lotte hired five months ago for the sale of the China marts, declined to comment. China’s fire services department didn’t immediately respond to an emailed request from Bloomberg for updates on the Lotte stores.

Lotte Group, South Korea’s largest retail conglomerate with interests spanning from hotels to amusement parks and supermarkets, has been in Beijing’s crosshairs from the start of the Thaad dispute. Thaad, which stands for Terminal High Altitude Area Defense system, is supposed to help South Korea protect itself from a North Korean military attack, but China sees it as a threat that will break “the strategic equilibrium in the region.”

After Lotte agreed last February to provide land from its golf courses to the South Korean government to host the Thaad system, the Chinese party newspaper the Global Times wrote in an editorial that “Lotte Group’s development in the Chinese market should come to an end.”

The Chinese government began a series of inspections at Lotte marts, the chaebol’s most visible presence on the mainland. Within a month, 74 of the 99 marts had operations halted by local authorities for alleged fire safety violations, while 13 were suspended by Lotte itself. Twelve marts and 13 supermarkets are still operating.

China Travel

After the first sign of thawing ties last October, some local Chinese travel agencies have been allowed to resume tour groups to South Korea, but they’ve been told to leave out Lotte’s hotels and duty-free shops from the itineraries, Yonhap News Agency reported in November. And even as Hyundai Motor Co. and Kia Motors Corp.’s sales in China are recovering, construction on Lotte’s 3 trillion won theme park in northeastern China has remained at a standstill.

China’s restrictions on group travel to South Korea last year caused Hotel Lotte Co., the duty-free operator, to report falling sales for the first time since 2003.

With South Korea’s finance minister having met with Chinese officials in recent weeks to discuss economic cooperation, and the scheduled attendance of Chinese leaders at the Winter Olympics in Pyeongchang, Lotte’s reprieve may yet come. The Lotte spokesman said the company hasn’t seen signs of an improvement for its China retail business as yet, although it is still hoping to complete the sale in the first half of 2018.

In addition to its marts, Lotte also plans to sell its 49 percent stake in home-shopping businesses in Yunnan and Shandong.

At one Lotte outlet in Shanghai on a recent winter day, a cashier said she hadn’t rung up a sale all day. Half the shelves were empty, while the other half had bottles of dusty wine and old packets of flour. Items lay piled up in clearance bins. The few people wandering around the premises seemed to have gotten lost after dining at the neighbouring KFC outlet.

“The store isn’t closing, but we’re not getting any new stock either,” said the cashier. “We are just holding on, and we don’t know when we’re holding on until.”

To contact Bloomberg News staff for this story: Sohee Kim in Seoul at skim847@bloomberg.net, Rachel Chang in Shanghai at wchang98@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Sohee Kim, Rachel Chang