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The Retail Revolution in Korea

The Retail Revolution in Korea. 2002. 10. 23. Oh-Hoon Kwon, CIO of LOTTE Group. Today’s 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

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The Retail Revolution in Korea

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  1. The Retail Revolution in Korea 2002. 10. 23 Oh-Hoon Kwon, CIO of LOTTE Group

  2. Today’s 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. CVS(1.8%) Supermarket(4.2%) TV Home Shopping(3.4%) Discount Store (14.2%) Department Store (13.9%) 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: %] 45%p 33%p 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, Agricultural&Fishery 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: Korea Cable TV Association, A. T. Kearney Analysis Source: Hana Economic Research Institute, 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.com’s Vision Today’s 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. LotteWorld Coex Mall 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. Important to Mental distance toward Customer Improve quality Compared with Cost Expand home delivery and e-Retailing Provide Tailored Service 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 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 customer’s 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 customer’s 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 side’s sales strategies and promotion planning, and so on in advance • Retail side do not reflect manufacture side’s 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 side’s marketing, Sales, and Production Planner • Needs supply process that retail side’s 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 Technology Enablers: UPC EDI ERP XML 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. Retailer initiatives in Asia Pacific tend to be about five years behind those in Europe and the United States. 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 ERP 3.73 SCM 4.33 e-procurement 4.71 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 Retail&Svc(17.87), IT(17.06) • Manufacture, Construction and Government showed low score compared with other industries Government Manufacture Finance Retail&svc IT Construction Total Average Retail&Svc 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 Retail&Svc SCM is leading solution in Distribution&Svc after 2002 Investment plan in 2002 Retail&Svc) • Security is the first(75.9%)and next are CRM(62.1%), KMS(41.4%), SCM(37.9%) • Retail&Svc 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 US$100M

  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 DBM Plan Integrated DBM’s Closed Loop Process Strategy • Shared enterprise info. • Established Consumer-centric Process • Consumer Segmentation • Customer Maintenance and acquisition Customer Retention Customer Acquisition Marketing Market Organizer Collect Customer info. Sales Opportunity • Integrated Customer related work such as Marketing, Sales, Service, etc • Understand Consumer’s 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, P&G CPFR Yuhan-Kimberly, Unilever, Cheiljedang, Hyundae Dept. CMI/VMI LGmart Pulmuone, Aseen FineKorea CMI/CAO LGmart Yuhan-Kimberly, P&G, Unilever, CMI CM EDI VMI LGmart, DongsuFood, Cheiljedang, LotteMart, Yuhan-Kimberly CarrefourKorea Ogguki, Cheiljedang, P&G

  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/assortment/sales • Visibility of Supply Chain • Based on partnership with supplier, Real Time handling of inventory and purchasing planning through visibility of supply chain • Shared consumer’s trends with whole supply chain • Provide Customized service through reflected customer’s 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 Operation efficiency Raised Customer Satisfaction 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 partner’s 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-user’s 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 e-Business Optimized Logistics Category Management Strategic Alliance • 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.com’s merchandise delivery system jointly with 7-Eleven Enterprise’s 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. Retailer Supplier LCN (Private eMarketplace) LotteMart L-ProNet Lotte Dept. E-Tax Bill Collaborated Companies LotteLemon Web-EDI Electric Income K - 7 . . CA CPFR ASP . . . . . . 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 Korea-eMP Global-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 Korea’s 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 Retail manufacturer 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 LDCC’s 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 Group’s partners e I C R M P D S C P F R Product Collaborative IT Biz 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 LDCC’s 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@ldcc.co.kr LDCC

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