Why Toys 'R' Us, Tesco Are Hits in Korea

By relying on local partners' expertise, the U.S. toy store chain and the British retailer are succeeding where Wal-Mart failed

by Moon Ihlwan

South Korea is a notoriously tough retail market for foreign players. Just ask retail juggernaut Wal-Mart Stores (WMT) and France's Carrefour (CARR.PA), which both pulled out of the country in 2006 after years of losses from fierce local competition. Yet some companies know what it takes to succeed in Korea. Tesco (TSCO.L) posted an estimated operating profit of more than $320 million (BusinessWeek.com, 4/15/08) in the year ended in February, up from $249 million in the previous year, on sales of $5.85 billion, up 15%. And Toys "R" Us has rung up record sales since opening its first Korean store last December.

Now the British supermarket company is pursuing much bigger Korean numbers with a strategy that's similar to that of the American retailer. On May 14, Tesco announced a $2.2 billion takeover of Homever discount chain (BusinessWeek.com, 5/15/08). Both Tesco and Toys "R" Us rely heavily on expertise of local partners for their business strategy, and the British company's new acquisition, which will boost its Korean sales by about a third, indicates their common approach is a winning formula. "Tesco is a rare foreign retail player to flourish in Korea, and the key has been its well-executed localization," reckons Park Jean, retail industry analyst at brokerage Woori Investment & Securities.

What have Tesco and Toys "R" Us done right? Unlike Wal-Mart and Carrefour, Tesco didn't try to repeat its strategy from back home. While Koreans were enthusiastic about the massive discount stores that began replacing mom-and-pop shops in the 1990s, they never liked the lofty shelves and concrete floors of the warehouse experience. The local consumers also prefer not to buy in bulk—the method big foreign discount store operators imposed.

To cater to local tastes, Tesco formed a joint venture with Korea's Samsung Group in 1999. The joint venture's Home Plus chain has tried to satisfy the local appetite for fresh fish and vegetables, ensuring that sushi, squid, cucumber, and spinach are restocked frequently. It has also provided such services as a guide to direct shoppers to a parking spot. Tesco has since increased its stake in the venture to 94% from the original 50% and Korea has emerged as the British company's most profitable overseas market, accounting for half of all its Asian sales.

Thriving Franchise Toy Stores

Going local was the approach Toys "R" Us also took in Korea. To capitalize on local expertise, Toys "R" Us struck a franchise deal with Lotte Shopping, a unit of local retail and hotel giant Lotte Group, and let it run the stores as it sees fit. Lotte wanted a completely new setting for the toy stores to create a "theme park" atmosphere and offer experiences to kids, according to James Sung, general manager for Lotte's Toys "R" Us business team. Departing from the warehouse concept, it decorated five of its sections under different themes of star, moon, sun, aurora, and the galaxy, with register stands built in the shape of trains.

In just over five months after Toys "R" Us opened its first store in South Korea on Dec. 8, the retailer has been on a roll. The shop, located in Guro, a mundane residential district of Seoul, has reported average monthly sales of $1.2 million, the second highest in Toys "R" Us' franchise division that involves 212 stores in 24 countries.