PRINT THIS STORY:

CHANGE TEXT SIZE:

THE WORLD COMES TO KOREA

Bold projects and vibrant retail growth help South Korea shed its reputation as Asia’s ‘hermit kingdom’

By Curt Hazlett

A century ago Korea’s isolation earned it the nickname “the hermit kingdom.” The label stuck even after the Korean War broke the peninsula into two countries: the impoverished North, whose rulers shunned the world, and the industrial South, which exported goods around the globe but jealously guarded its own markets.

North Korea is still a hermit, but these days South Korea has embraced the concept of open markets. And nowhere has the change been more obvious than in the retail industry. Recent years have brought a flood of international brands into the country, along with a crop of new shopping centers and announcements of huge mixed-use projects involving foreign developers.

“Quite a lot is happening in retail, and, certainly, the landscape is a very different picture today than it was just after the Asian financial crisis,” said Sebastian Skiff, managing director of Cushman & Wakefield Healey & Baker (Korea), based in Seoul. “Korea is a very attractive proposition for many retailers. Since the markets were more formally opened, there’s been a huge increase of brands entering the market and domestic brands have expanded rapidly.”

The center of South Korea’s boom is the northwest corner of the country, a region that is home to the capital, Seoul, and to 48 percent of the population. It is there that the biggest changes are taking place as the government pushes ahead with plans to create free-enterprise zones meant to transform South Korea into the business hub of Northeast Asia.

Among the free-enterprise zones is New Songdo City, which is being built from the ground up on a man-made island just off Incheon, about 40 miles from Seoul. Connected by bridge to the mainland and the new, $3 billion Incheon International Airport, New Songdo City is being planned as an international city of 500,000 that will attract global financial businesses and cement South Korea’s future prosperity.

Valued at $20 billion, the project — the first U.S.-South Korean real estate joint venture ever — will contain 10 million square feet of retail, 30 million square feet of residential and 40 million square feet of office space. New Songdo City’s developer, the Florham Park, N.J.-based Gale Co., will hold a 70 percent stake, and Gale’s Korean partner, steelmaking giant Posco, will own 30 percent.

“What the government wanted to do with the construction of the new airport is to create a platform for international business, both coming in and going out,” said John B. Hynes III, managing partner and principal of Gale.

Ground was broken on New Songdo City’s first phase in November, and the developers say they expect the entire project will take about 10 years. Taubman Centers is in discussions with Gale about developing the retail portion of New Songdo City, which would be Taubman’s first international project. The two have not yet reached an agreement, but in April Taubman formed its Hong Kong-based Taubman Asia division to be a “platform for Taubman’s future expansion into the Asia-Pacific region.”

Notably Westernized
Other changes in South Korea’s retail development scene are less monumental, but they are nevertheless notable. Spurred by the government’s loosening of trade rules in the 1990s, the country’s retailing has taken on a more Western look, marked by the emergence of malls and outlet stores and by the spreading of upscale brands to stand-alone stores.

One trendsetter is the COEX (named for the convention-exhibition center that sits above it) Mall, whose size — 1.3 million square feet — caused a stir when it opened beneath Seoul’s convention and exhibition center five years ago. It is one of Asia’s largest enclosed shopping centers, with eight water-themed sections and a 17-theater movie complex, and it has become a popular destination both for locals and tourists.

Lately, it has also become a symbol of the growing importance of brands. With demand for digital devices red hot, such manufacturers as Apple, Hewlett-Packard, Microsoft and Sony have opened stores in the mall, making COEX a place for the “digirati” to gather.

Indeed, the growth of international brands has become a central piece of South Korea’s retail picture. “There used to be a tendency to buy Korean,” said Cushman & Wakefield’s Skiff. “Now it’s acceptable socially to buy foreign.” That has meant a stronger presence in High Street locations for such names as Armani, Hermès and Ralph Lauren, Skiff says. As a result of that movement, rents for many High Street locations have doubled or tripled in five years and are now running about $25 a square foot for ground-floor space, he says.

The shift to stand-alone stores marks a departure for South Korea, where department stores have long dominated the retail scene, says Skiff. “Local department store groups are very expansion-minded, and that has created some extremely large department store centers,” he said. The largest is Lotte Group, which operates 19 department stores, 32 discount outlets and 1,400 7-Eleven stores, as well as a theme park called Lotte World. The company posted $5.7 billion in sales last year.

Hypermarkets are growing fast too.

Until the early 1990s most food retailing was the province of small shops, but this changed rapidly with the arrival of discount food stores. Led by local companies Lotte and discount store operator Shinsegae as well as the U.K.-based Tesco, the hypermarket category posted sales in 2003 of $19 billion, says Skiff.

U.S. segment leaders Wal-Mart and Costco are also making a move there — Wal-Mart with the rollout of 16 stores and Costco with five. With malls and hypermarkets behind them, what is next for South Korean consumers? Outlet shopping.

Smaller outlet stores have been doing business in urban areas for a few years, but outlet malls are just now springing up in outlying areas. This spring U.S. outlet leader Chelsea Property Group, acquired last year by Simon Property Group, launched a joint venture with Shinsegae to develop its Premium Outlet centers in South Korea. The first will go up in the greater Seoul area.

South Korea’s lively retail scene is all the more remarkable given the country’s rocky economy during the past eight years. As the Asian economic crisis deepened in 1997, South Korea’s currency and stock market plunged, bringing the world’s 11th-largest economy to the brink of collapse. Only an emergency loan from the International Monetary Fund prevented it.

In an effort to bounce back, the government adopted freer markets and other reforms, boosting the economy by 10 percent in 1999 and 9 percent in 2000. But a global slowdown soon put South Korea in a recession from which it has not fully recovered. The economy has grown on the strength of exports, but consumer debt and personal bankruptcies have risen, and Koreans have been reluctant to spend as a result.

Nevertheless, the government says recovery is under way and predicts that the economy will grow 4 percent this year.

Skiff is optimistic about South Korea’s future. “This is a wealthy nation, second in Asia only to Japan,” he said. “You can compare it to Japan in terms of the cost of goods and the types of markets. Basically, there’s been a growth here in the psychology of buying.” The hermit days, it seems, are over.

© 2012 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |