Lotte Sells Mainland Stores to Chinese Rival for $230M After Missile Defense Clash

The retail arm of Korean conglomerate Lotte Group has shed the first piece of its hypermarket business in China, following a geopolitical spat that has slashed its sales in the country by 77 percent.

Lotte Shopping will sell one of the six companies that operate its Lotte Mart stores in China to Beijing-based retailer Wumei Holdings for around 248.5 billion won ($230.2 million), the company announced to the Korea Exchange. The Seoul-based firm will offload 22 stores in Beijing through the deal, according to a report in Korean newspaper Chosun Ilbo that does not cite a source.

Wumei controls WuMart, one of China’s biggest retail chains with over 400 superstores and convenience outlets in Beijing and nearby cities. Most of Lotte’s 99 stores in China have been shuttered since last year, when mainland authorities took aim at the company for allowing the US to station an anti-ballistic missile system on a golf course it owns in Korea.

Lotte plans to finish selling off its China chain by June, when some $653 million of emergency funds the company has injected into the business are expected to run out, according to a report last month.

China Declares War on Lotte Stores

Lotte Shopping ventured into the Chinese market in 2008 by purchasing Dutch wholesaler Makro’s stores in the country. The company steadily built up its discount hypermarket chain but struggled to gain traction among mainland shoppers, reportedly losing $853 million between 2011 and 2015. Underscoring its challenges, Lotte announced that it was closing four stores in Shandong province in July 2015.

The retailer belongs to Korea’s fifth-largest conglomerate Lotte Group, which in February 2017 agreed to provide land for the deployment of the Terminal High Altitude Area Defence (THAAD) anti-missile system. Beijing condemned the move, arguing that the American-built system posed a national security risk to China.

Fire safety authorities shut down 74 of Lotte’s 99 stores in China over alleged safety violations within two months, after state-run newspaper Global Times wrote in an editorial that “Lotte Group’s development in the Chinese market should come to an end.” An informal boycott also dented sales, forcing another 13 stores to close.

Korean Giant Bails on China After Closures

Lotte announced last September that it had decided to dump some or all of its China supermarkets, tapping Goldman Sachs to manage the sale. The following month, Lotte said it was in “detailed talks” with a number of prospective buyers to sell its Lotte Mart stores by year-end.

Lotte Mart’s sales in China plunged nearly 77 percent from $1.1 billion in 2016 to $243 million last year. In addition to the pressure on Lotte’s stores in China, Beijing’s ban on mainland tour groups travelling to Korea has also squeezed the conglomerate’s revenue closer to home.

Thawing of Tensions Doesn’t Save Shenyang Project

Bilateral tensions began to ease late last year, with Beijing and Seoul announcing they were committed to mending relations on October 31. On the same day, Lotte said it had received approval to start work on the second phase of a $900 million, 66,000 square metre commercial complex in the western Chinese city of Chengdu.

However, construction of a 1.45 million square metre Lotte project in northern China’s Shenyang, featuring apartments and a theme park, remains halted after fire safety authorities ordered the suspension in February 2017.

Lotte Group’s businesses range from candy manufacturing to construction and financial services. The conglomerate built the country’s tallest skyscraper, the 123-storey Lotte World Tower in downtown Seoul.

Lotte Group’s then-chairman Shin Dong-bin was convicted for bribery in February and sentenced to two and a half years in prison.

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