Discount Stores Versus Manufacturers

“How about participating in next month’s promotion event? Why don’t you come to our store this afternoon,” says a buyer at a discount store. “I have a previous appointment. Why don’t you come to our company sometime later,” answers an employee of Nongshim, one of Korea’s largest food companies.

As Korean discount stores are enjoying increasing buying power, manufacturers are always accommodating to such stores. They keep a good attitude because they would suffer a major blow to sales if such stores rejected their products. If discount stores request manufacturers to cut their supply price or participate in a promotion event, manufactures have to do so against their will.

However, some manufacturers are against such high-handed attitudes from discount stores. Among them are Nongshim, Samsung Electronics, LG Electronics and CJ Cheiljedang. To the envy of others, they stand on an equal footing with discount stores thanks to their overwhelming market dominance and diverse distribution channels.

Nongshim, the country’s number one ramen maker, boasts a 70 percent market share. In particular, thanks in part to its hugely popular flagship “Shinramyeon” that raises 300 billion won in sales annually, discount stores ask Nongshim to “supply products on time.”

Emart, one of large discount stores in Korea, said, “We ask other ramen manufacturers to participate in ‘one plus one’ events where they offer a throw-in. But we cannot do so to Nongshim.”

CJ Cheiljedang also uses its unrivalled market dominance as a weapon. The company has some 20 products that enjoy number one market shares in the country. In particular, “Dashida” and “Cooked White Rice Bowl” have 82.9-percent and 65.8-percent market shares, respectively, giving the company bargaining power in price negotiations with discount stores.

Since September last year, consumers in the Seoul and Metropolitan area cannot buy Jinro’s “Chamisul Fresh” at Emart stores. The supply was suspended after the two companies failed to reach an agreement on a supply price.

The launching of Chamisul Fresh last September triggered their disputes over price. Emart had requested a supply price discount since Hite acquired Jinro in 2005, but Jinro said, “We cannot cut the supply price further.”

Jinro can raise its voice against Emart because it has diverse distribution channels. Jinro provides 55 percent of its total production to restaurants and bars through its own distribution channel network. It sells 45 percent of its product through discount stores. But, as it supplies to Home Plus and Lotte Mart at the prices that it wants, its sales do not suffer much, although it does not supply Chamisul Fresh to Emart.

Experts say that Samsung Electronics and LG Electronics no longer have to please discount stores as they export a large proportion of their products. Their exports as a percentage of total sales reached 82 percent (Samsung Electronics) and 74.3 (LG Electronics), respectively. They also sell many of their products through their own distribution networks and electronics stores.

Baek In-soo, director of the distribution industry research institute at Lotte Department Store, said, “In order not to be swayed by discount stores, manufacturers need to secure market dominance or brand power or diverse sales channels.”

Jin-Hup Song Jeong-Hyo Jin Hyong-gwon Pu jinhup@donga.com wiseweb@donga.com booku