Can Local Companies Be Revived?

By Gi Yong-ho, Guest Reporter

    It has been five months since Big Mart announced it would sell most of its discount stores around Gwangju. In 1995, Big Mart started its business as the first local discount store in Jeolla Province. As a local mid-sized company, it achieved quite a good performance and it also gained a good reputation since its establishment.  However, for several years, it was predicted that Big Mart would suffer from heated and cutthroat competition in the field of distribution against several other large discount stores operated by conglomerates with larger capital and resources. Big Mart finally reacted to this critical situation that was caused by the indiscriminate penetration of the relatively large-sized distribution companies such as E-mart, Lotte Mart, and Homeplus.
   

    A Faded Success Myth of Big Mart
   
    For twelve years, Big Mart had held a firm position as a local mid-sized company opening fifteen more discount shops at home and abroad, and hiring more than 1700 employees. It established its global branch in Shenyang, aimed at the Chinese market in 2000. As a local company, Big Mart adopted strategies to reinforce its regional-friendly image. 
     Firstly, Big Mart tried to keep symbiotic relationships with local vendors. Most large-size distribution companies with a nationwide network of wholesalers are under a package purchase order system, but Big Mart considered sharing profits with the local producers, which would be a pillar in the regional economy. Consequently, nearly 90% of its total sales were circulated within this area. In contrast, almost 70% of the total sales of the large-size distribution companies have moved out of the area and entered into the metropolitan area. 

     Secondly, Big Mart had a great regard for its corporate social responsibility (CSR) management was the basic principle of business activity. By reducing the cost of producing pamphlets, flyers, and catalogues which are the main marketing methods in the distribution industry, it started to support the disadvantaged, such as students going without meals and needy neighbors. Moreover, it is a well-known fact that Big Mart has run Gwangju Dream which is a local daily newspaper distributed free of charge and Jeonlado.com which is a cultural magazine dealing with Jeolla province’s current issues, must-see places, and ordinary people’s lives.
  

    The Predictable Crises & Problems
   
    In this industry, economy of scale plays an important role: the larger a company is, the more profit is generated. Big Mart had targeted niche markets when it looked for a shop site where a   large-sized discount store could not be located. Compared to the number of other large-sized discount stores (E-mart five, Lotte mart three, and Homeplus one), Big Mart had steadily multiplied its shops at strategic points. The faster the rival companies showed signs of market penetration, the more Big Mart became anxious. When the initial stage of competition was developed in 1998, Big Mart opened three new shops in 1999 and two more in 2000. In order to maintain its market share, Big Mart had to expand it investment by opening new shops which cost 20 billion won each. As a result, the debt rate was drastically on the increase to nearly 700%. In spite of the high debt rate, the business condition was not so bad thanks to high net profits for years. However, as the competition got heavier and heavier, the total sales and net profit drastically decreased. Consequently, high debt rate and the diminishing amount of total sales and net profit brought about the financial crisis. That is one reason Big Mart should sell out fourteen of its sixteen shops.

    The policy of expanding shops was not any more effective to guarantee more market share and sales than expected. This resulted from the lack of capability to maneuver its competitive advantage, which means an advantage over competitors gained by offering consumers greater value, either by means of lowering prices or by providing greater benefits and service that justify higher prices. Big Mart has pursued the cost advantage strategy but a couple of customers complained, “When Big Mart first appeared on the market, its price was cheaper. But these days, it has little difference with large-sized discount stores and is partly even more expensive.”

     Regarding price competition, Big Mart has fundamental drawbacks compared to other rival companies: along with the increasing number of shops, additional transactions would become more complicated and the range of products became more diversified. This can cause distribution costs to rise. In this situation, distribution centers can be a very effective way to manage inventories and reduce distribution costs. But, Big Mart does not have a distribution center at all. By the influence of this added-up cost, the increase of the total sales was not directly connected to that of net profit. 

    Shortly after Mergers and Acquisitions (M&A) decided with Lotte Shopping, Ha Sang-yong, CEO of Big Mart said in the press release, “we would restart Big Mart to be a genuine local company through recalling beginner’s mind which we thought of 12 years ago. However, it is quite the unknown how the already shrunken company will recover its vitality. 

   Conclusion 
   
   The market position of small and medium sized local companies has shrunk in an age of unlimited competitiveness in society.  With respect to the current reality that lacks representation of the regional companies in Gwangju, it may be wrong to only blame the worsening situation or troubled enterprises. Local citizens’ deep concerns and affection as well as the pro-business environments rendered by local government are essential for making local companies survive.

    Without any doubt, they are the beneficiaries of prosperity. At the same time, local companies should work out their own strategies such that Big Mart deployed in its early years. Then, they could increase the competitiveness and get closer to target niche markets to which the large-sized companies could not approach.

   In the cold-blooded world of business, conventional wisdom dictates that making a sustainable profit while pursuing CSR at the same time is hard to achieve. But, there is no way to say it might happen for Big Mart to achieve both goals, the rationalization of enterprises management and the fulfillment of its CSR.

   <A New Beginning for the Second Takeoff> 
   

   Q: Can you tell me the aftermath of M&A with Lotte Shopping?
   A: As of last May 8th, the whole process of M&A with Lotte Shopping was completed. From last January, the sales were on the decrease due to our market shaking leadership and the early signs of M&A. Right after announcing this M&A, we tried to regain our prior customers by implementing the minimum price promotion. As a result, the sales at the two remaining shops have turned around and customer acknowledgement is being improved.

   Q: What is going on with the process of organizational restructuring & rebuilding?
   A: We did not sell all the shops we had. That is because we have not only confidence in our sales department, but also the strong sense of CSR. Thanks to the inflow of M&A capital, our financial condition gets better. Voluntarily, 50 passionate and highly motivated staff still remains with the aim of regaining our past glory by making internal substance stronger.

   Q: Do you have brilliant strategies for realizing competitive advantages?
   A: We have three different competitive advantages against the rival large-sized discount stores. Firstly, we will make our identity clear: the first local discount store, good quality & low price, and freshness. Undergoing radical reforms, our organization became slim. Small organization can respond to the rapid changes in the business environment faster than the other large competitors. The last but none the least, we will try to continuously keep in touch with local community.