The Shadow of 10 Years of Big-Box Store Regulation and Future Reform Tasks

Legislative Policy Issue Report No. 4

Issues and Liberty

2022.12.21.

1. Bills pending in the National Assembly (Trade, Industry, Energy, SMEs and Startups Committee) to ease big-box store regulations amid a growing deregulatory mood

It has been 10 years since the Distribution Industry Development Act (hereinafter, the Distribution Act; promulgated in January 2012), which contains regulations on large retail stores and SSMs (corporate supermarkets), came into force. It includes mandatory store closures for big-box stores (twice a month, on the 2nd and 4th Sundays), restrictions on business hours (midnight to 10 a.m.), and a ban on opening stores larger than 3,000m2 within a 1 km radius of traditional markets. Those subject to regulation are mainly large discount stores such as E-Mart, Homeplus, Lotte Mart, Costco, Express, and No Brand, where consumers can purchase a variety of goods at low prices. Recently, the Ministry of Trade, Industry and Energy has been discussing a mutual growth proposal with the National Merchants Association and the Korea Chain Store Association through a consultative council, including easing weekend mandatory closures for big-box stores and relaxing restrictions on online sales. According to the Office for Government Policy Coordination, a blanket easing is difficult, and instead regulations will be relaxed by basic local government unit in line with local conditions, which has sharply increased public interest. In Daegu Metropolitan City, for example, the city’s 8 districts and counties signed a mutual growth and development agreement on Monday the 19th with the Daegu Merchants Association, the Korea Chain Store Association, and the Supermarket Cooperative to abolish weekend mandatory closures beginning next year (Asia Economy, December 19, 2022).

At the National Assembly’s Trade, Industry, Energy, SMEs and Startups Committee, however, proposed amendments to the Distribution Act incorporating such deregulation of big-box stores have effectively been dormant for more than 2 years and 6 months. A proposed amendment to the Distribution Act (Bill No. 2201, 2020.7.20.), introduced by People Power Party lawmaker Jongbae Lee (with 10 co-sponsors), includes easing mandatory closure requirements for big-box stores engaged in online shopping operations (mail-order sales). Another proposed amendment to the Distribution Act (Bill No. 10899, 2021.6.18.), introduced by Democratic Party lawmaker Yongjin Ko (11 sponsors including the lead sponsor), also includes exempting big-box stores from mandatory closure and business-hour restrictions when conducting mail-order sales, as well as easing the standards applied to quasi-large stores.

2. The status and changes of traditional markets after the introduction of big-box store regulations

◩ Traditional market sales gradually increased and then stagnated, while the number of stores and average employment gradually declined and leveled off

Looking at changes in traditional market sales over the past 10 years since the introduction of big-box store regulations, sales gradually increased from KRW 19.9 trillion in 2013 to KRW 25.1 trillion in 2020, but have since remained stagnant. In terms of market share by retail format in the distribution market, traditional markets fell from 14.3% in 2013 to 9.5% in 2020. The total number of traditional market stores nationwide declined from 210,000 in 2013 to 207,000 in 2020, while average employment (number of workers) remained stagnant at around 1.6 persons. Even though the overall market may appear to have recovered after the introduction of regulations due to various support policies for traditional markets and regulations on large stores, the market as a whole appears to have either declined or stagnated because of a lack of intrinsic competitiveness.

◩ Despite various support measures, efforts to strengthen competitiveness through modernization and promotion of traditional markets have been lacking

Looking at the level of modernization and promotional performance of traditional markets over the past 10 years after big-box store regulations were introduced, particularly in terms of improving consumer convenience, overall efforts to strengthen the internal competitiveness of traditional markets themselves appear insufficient.

The credit card terminal adoption rate improved only slightly, from 60.8% in 2014 to 71.8% in 2020, meaning that around 3 out of 10 stores still do not accept credit card payments. The POS device adoption rate actually fell, from 7.1% in 2014 to 6.8% in 2020. The adoption rate of online shopping malls showed only a marginal change, from 1.0% in 2014 to 2.7% in 2020. Meanwhile, market promotional facilities such as event plazas, themed streets, arches/sculptures, TV/LED advertising boards, and market guide maps actually declined from 1,536 in 2014 to 1,401 in 2020, a decrease of about 135.

3. The shadow of 10 years of big-box store regulation: a multifaceted analysis showing no regulatory effect

◩ No effect whatsoever in protecting or revitalizing traditional markets; only contraction and stagnation in the offline retail market

The purpose of the amendment to the Distribution Industry Development Act, which introduced mandatory holiday closures and restrictions on business hours for big-box stores, was to protect and revive traditional markets from the impact of large-scale retailers. Looking at sales trends by competing retail format from 2015 to 2020 after 10 years of implementation, big-box store sales remained at a similar level, rising only from KRW 32.8 trillion in 2015 to KRW 33.8 trillion in 2020, which means they saw little real growth when inflation is taken into account. Traditional markets, meanwhile, increased slightly from KRW 21.1 trillion in 2015 to KRW 25.1 trillion in 2020, but this too amounts to only a KRW 4 trillion increase even before accounting for inflation. Similar patterns of stagnation or contraction were seen across the board, including supermarkets and miscellaneous-goods stores classified as offline retailers. The same pattern also appears in academic research. Both Seo Yongguk et al. (2019) and Hyun-a Kim et al. (2022) found that after the introduction of the regulation, sales and consumption growth rates declined simultaneously for big-box stores, traditional markets, and nearby commercial districts, concluding that the regulatory policy failed to achieve its intended effect.

◩ Caused rapid growth of the online retail market: excessive regulation of large offline retailers

Sales by online retailers grew rapidly, nearly tripling from KRW 5.41 billion in 2015 to KRW 15.94 billion in 2020. This trend is expected to have intensified further following the COVID-19 pandemic over the past three years. Seo Jinhyung et al. (2022), using card transaction data and consumer survey results focused on big-box stores in Gyeonggi Province, also analyzed the regulatory effects of store openings and closures. They found that new store openings actually generated a trickle-down effect that revitalized the surrounding commercial district, while use of nearby supermarkets on mandatory closure days existed but did not increase substantially. Instead, online shopping accelerated further, worsening the imbalance between online and offline retailers.

Looking at changes in market share (share of sales) by retail segment, big-box stores fell sharply from 21.7% in 2015 to 12.8% in 2020, down about 9 percentage points. Traditional markets also declined from 13.9% in 2015 to 9.5% in 2020, down about 4.4 percentage points. By contrast, online retailers’ market share rose sharply from 35.7% in 2015 to 60.2% in 2020. In other words, rather than increasing use of traditional markets, regulations on large retailers drove consumers toward the more convenient online market. This shows that while helping the online retail market grow, excessive regulation of big-box stores led to contraction and stagnation in the offline retail market.

◩ The competitive structure of the retail market has shifted from big-box stores vs. small and medium-sized supermarkets/traditional markets to offline vs. online

With changes in consumer behavior and the growth of the online market following the pandemic, the competitive structure of the retail market is no longer one between big-box stores and small supermarkets/traditional markets, but has shifted to competition between offline and online retailers (Korea Chamber of Commerce and Industry (KCCI), 2019). Jeong Hoesang (2022) also found that big-box stores in Seoul are not in a competitive relationship with small supermarkets, and that competition and substitution exist only among retailers of similar scale. Accordingly, he concluded that regulations on the business operations of large retailers for the purpose of protecting small and medium-sized distributors are likely to be highly ineffective.

◩ With no beneficiaries, only “consumer choice” and the constitutional “principle of proportionality” are infringed

Big-box store regulations not only fail to achieve their legislative purpose, but also produce no actual beneficiaries. Instead, they merely infringe on the choices and convenience of consumers who cannot use big-box stores on Sundays, at night, or early in the morning. Furthermore, as Justice Yongho Cho—who alone issued a dissenting opinion in the Constitutional Court’s June 2018 constitutional complaint case concerning big-box store regulations—noted, such regulations may also violate the “principle of reasonableness,” one component of the constitutional principle of proportionality in public lawmaking, which requires that a measure be used only when the expected public benefit outweighs the private harm it causes.

4. Future tasks for improvement: pass the pending bills to ease big-box store regulations and fully abolish the regulations within the term of the 21st National Assembly

Ten years after the introduction of big-box store regulations, they have produced no effect in protecting or revitalizing traditional markets, while the offline retail market as a whole, including big-box stores, has instead experienced contraction or stagnation. Recent trends in market share among competing retail formats also show that the structure has shifted away from competition between big-box stores and small and medium-sized supermarkets/traditional markets and toward competition between online and offline retail. In addition, traditional markets have shown little self-help effort to strengthen competitiveness through modernization and promotion. Under these circumstances, regulation of large retailers should be regarded as a failure: ineffective and only infringing consumer choice.

Beginning with the case of Daegu Metropolitan City, one hopes that mutual growth agreements to ease weekend mandatory closure regulations will continue at the level of individual basic local governments, based on mediation by the Ministry of Trade, Industry and Energy and metropolitan governments. The pending amendment to the Distribution Act, which would exempt big-box stores from weekend mandatory closures and business-hour restrictions for online shopping and mail-order sales, needs to be passed promptly after the budget session ends. Gradually, the country should move toward fully abolishing weekend mandatory closure and business-hour regulations within the term of the 21st National Assembly. Finally, it must be remembered that the survival of traditional markets depends on market merchants themselves improving competitiveness through efforts and investment aimed at increasing consumer convenience, raising the level of modernization, and strengthening promotion in order to win consumer choice.

◩ References

∙ Kang Hyejeong, Kim Byeongryul, and Kim Seongu (2016), An Analysis of Changes in Consumers’ Food Consumption Expenditures Following Business Regulations on Big-Box Stores, Journal of Food Distribution Research, 33(3).

∙ Hyun-a Kim, Seo Jinhyung, and Jo Chunhan (2022), The Impact of Big-Box Store Closures on Nearby Commercial Districts and Employment, Journal of Distribution Research, 27(1).

∙ Korea Chamber of Commerce and Industry (KCCI) (2019), Report on the Effects of Regulations on Large Stores and Policy Improvement Measures.

∙ Seo Yongguk and Jo Chunhan (2019), An Analysis of the Effects of Regulatory Policy on Big-Box Stores and SSMs, Journal of Distribution Research, 24(3).

∙ Seo Jinhyung, Jo Chunhan, and Hyun-a Kim (2022), An Analysis of the Regulatory Effects of Big-Box Store Openings and Closures, Journal of Distribution and Logistics Research, 9(2).

∙ Small Enterprise and Market Service (2015–2021), Report on the Results of the 2020 Survey on the Management Status of Traditional Markets, Shopping Districts, and Stores.

∙ Partial Amendment to the Distribution Industry Development Act, introduced by lawmaker Jongbae Lee (10 co-sponsors), Bill No. 2201. 2020.7.20.

∙ Partial Amendment to the Distribution Industry Development Act, introduced by lawmaker Yongjin Ko (11 co-sponsors), Bill No. 10899. 2021.6.18.

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=4

---

Original title: 대형마트 규제 10년의 그림자와 향후 개선과제

Author: Center for Free Enterprise (CFE)

Date: 2022-12-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=issue&pn=2&idx=25220