South Korean retailers face a double whammy of shrinking profits and increasing financial woes. The rise of e-commerce giants like Coupang and Chinese online shopping platforms has eroded the competitiveness and market share of traditional brick-and-mortar retailers focusing on hypermarkets. As a result, five out of seven major retailers have negative interest coverage ratios, meaning they are unable to generate enough profit to cover their interest payments.
Emart, AK Plaza and Homeplus posted operating losses last year, according to an analysis of the companies’ financial reports by ChosunBiz on April 9. All three retailers reported negative interest coverage ratios. Lotte Shopping and Hanwha Galleria had interest coverage ratios below 1.
The interest coverage ratio is calculated by dividing earnings before interest and taxes (EBIT) by the total interest expense on the company’s outstanding debts. An interest cover ratio below 1 indicates that the company’s earnings are insufficient to cover its interest payment. Companies with interest coverage ratios below 1 for more than three years are classified as marginal companies, suggesting the company’s risk of bankruptcy is high.
Emart recorded its first-ever annual loss last year. The retailer’s operating loss amounted to $35 million (46.9 billion won). The company’s interest expense increased 31.6% from 317.5 billion won in 2022 to 417.7 billion won last year. Emart’s interest coverage ratio fell from 1.5 in 2021 to 0.4 in 2022, and further deteriorated to -0.1 last year.
Hanwha Galleria’s profits from March to December last year reached 9.8 billion won. The retailer posted an interest expense of 20.8 billion won, resulting in an interest coverage ratio of 0.5.
AK Plaza’s operating loss rose from 22.1 billion won in 2020 to 26.9 billion won in 2023. Interest expense also increased from 12.7 billion won to 13.5 billion won.
Experts warn that the competitiveness of these retailers is likely to weaken further in the face of intensifying rivalry in the domestic retail landscape, not just from Coupang but also from Chinese online e-commerce giants like AliExpress and Temu.
“The slow decline of brick-and-mortar hypermarkets is a phenomenon akin to global warming,” said Seo Yong-gu, professor of marketing at Sookmyung Women’s University. “Given the e-commerce market’s advantage in terms of accessibility and price competitiveness, it’s reasonable to assume that the hypermarket customer base has moved on to online shopping platforms.”
