Korea regulatory challenges cost Tesco 175 billion Won

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Tesco has just published its 2012/13 results covering the 52 weeks to 23 February 2013 (pdf download). In the UK, the mainstream media focused on a tiny drop in like-for-like sales in the UK and the threat from low-cost competitors. Naturally, at LKL we were also interested in results in Korea, which is Tesco’s biggest market outside of the UK, and where it operates through two wholly owned subsidiaries, Homeplus Co., Limited and Homeplus Tesco Co., Limited. Here’s the story for Korea:

“Our Asia performance was in line with expectations and was dominated by the South Korean regulatory changes concerning trading hours. These changes held back headline numbers, and the impact on trading profit was broadly in line with our £(100) million guidance [around KRW 175 billion], with significant levels of Sunday store closures throughout the second half and considerable uncertainty in the market about exactly which stores would be closed and when, impacting operations even when stores were able to open. Following the passing of the legislation in January this year, the situation seems more certain, with more consistent store closures expected on alternate Sundays. As such, we expect the full-year effect of the regulations, combined with the extension of 24-hour trading restrictions to between midnight and 10am, to lead to an incremental impact of around £(40) million in 2013/14.” (2013 Annual Accounts, p21)

Including that extended quote above, regulatory challenges in Korea get mentioned 10 times in the annual report, and the earnings release (pdf download) issued two weeks before the annual accounts highlighted like for like sales decline in Korea of 5.3%.

In addition, it is possible that the defined benefit pension scheme in Korea is also contributing to a group pension deficit, though the report does not separately identify any issues in Korea. Overall, the group has deficits of £1.8bn on its pension schemes (p119) (after recognising deferred tax benefits), of which half is attributable to the UK (p117).

Now, according to the report (p117), “the most significant overseas schemes are the funded defined benefit schemes which operate in the Republic of Ireland and South Korea”. Given the economic linkages with the UK, Ireland can be expected to have a deficit, and possibly a bigger deficit for the size of the scheme than the UK, so maybe the Korean scheme is not too much of a drag, if at all. As an aside, I’d be interested to hear if any of you have any anecdotal evidence about the corporate provision of defined pension schemes in Korea – something which is definitely on the way out in the UK.

There are some good news stories from Korea: the report highlights the launch of a property fund which contributed to profits. They found sale and leaseback investors for four of their Korean stores.


But more significant are the virtual shopping walls in Seoul’s subways, which were also introduced to Gatwick Airport in the summer of 2012. (Update: the ones in Seoul intrigued the Hairy Bikers during their visit to Seoul later in 2013). Tesco’s Internet Retailing director echoes a familiar story about Korea being the testing ground for hi-tech:

Our business in Korea is teaching us a lot about how customers and technology are transforming shopping. It gives us a unique window into the future and the chance to try out exciting new concepts

And despite the regulatory restrictions, the group is overall positive about prospects in Korea:

Looking forward, the opportunities to build on our already strong positions in these fast-growing economies [Thailand, South Korea and Malaysia] remain compelling and are therefore our highest international priority.


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