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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

Seven Characteristics of Earnings for Domestic-Oriented Companies during Recession

Seven Characteristics of Earnings for Domestic-Oriented Companies during Recession

KIM Keun-Young

June 15, 2009

Transcript

Welcome to our Video Program. I’m Jung-Ho Lee from the Management Strategy Department.

The domestic market, which has been in a long slump since the credit card bubble burst in 2003, is facing more declining demand due to the recent global economic recession. Today, we will take a close look at changes that are taking place in today’s domestic market from the perspective of the performance of domestic-oriented companies.

Domestic-oriented companies suffered a sharp decline in sales and profitability from the fourth quarter of 2008 to the first quarter of 2009 when the world slid into a full-fledged recession. In particular, companies saw their operating profits fall by 72.8% year on year in the fourth quarter of 2008, with 39% of the 795 companies surveyed suffering an operating deficit.

Operating profits of domestic-oriented companies, however, registered a 3-fold jump in the first quarter of 2009 compared to the previous quarter, on the back of aggressive restructuring and cost-saving efforts.

From the perspective of business performance, domestic-oriented companies saw a large difference in performance by type of business. Even in the same business category, the position of the No. 1 player with strong brand power was strengthened further. The key features of the domestic market during a recessionary period can be categorized into seven key points as follows.

First, there is a change in the list of basic consumption products. Basic consumption products refer to basics which are needed to survive. These products are not much affected by changes in the economic cycle. During today’s economic recession, sales of cosmetics, education and health/medicine increased rather than declining, indicating that these products are becoming basic necessities. In contrast, sales of apparel companies fell sharply, indicating that the nature of clothes is shifting from basic necessities towards optional items along with an increase in the overall wealth of society. In other words, the decline in sale of apparel in times of recession is not because consumers closed their wallets but because their closets are already bursting with clothes.

Second, reliability matters more than low prices. Value consumption is becoming a pattern as consumers opt for “already-proven” brands when buying basic necessities, although they are attempting to reduce the overall level of consumption. This explains why the share of steady sellers in total sales of the book market is increasing and why sales of PB products whose quality is guaranteed by large retailers are growing today.

Third, consumers attempted to minimize cash spending. Small retail shops like supermarkets and neighborhood convenience stores have performed better than large discount stores. Small retail shops enable small quantity purchasing and allow consumers to avoid impulse buying. Under this backdrop, large discount stores like E- Mart, Lotte Mart and Homeplus are vying to create a presence in neighborhood commercial districts. Rental companies also achieved outstanding performance. Woongjin Coway, for example, set a new record in order intakes in the first quarter of 2009.

Fourth, “at-home” consumption is now booming. Consumers tend to choose less expensive leisure activities in times of recession. Under these circumstances, sales of Internet games and online shopping malls have increased sharply, creating special demand for parcel delivery service companies. Ingredients for home cooking are also benefiting from a decline in eating out.

Fifth, cost-savings has become critical even when it comes to some time honored ways of reacting to stress. Consumers now prefer low-price liquors like makguli (Korean traditional rice wine) and soju to high-priced whiskey and wine. To refresh their mind and soul, people do not hesitate to eat voraciously. This indicates that consumers suffering from stress are looking for products that can give them instant satisfaction, while moving away from an obsession with weight and health.

Sixth, the won’s depreciation was welcomed by some but not by others. In contrast to overseas travel agencies who suffered a sharp decline in performance, department stores, which usually experience a sales slump during a recession, achieved better than expected performance. This is attributable to an increase in purchases by foreign tourists, coupled with a decline in the number of local people traveling abroad, meaning people are choosing to stay at home and do their shopping at domestic department stores.

Last, businesses have pumped up their cost-saving efforts. As businesses tightened their belts, sales of marketing and facility investment-specific companies plunged. Domestic- oriented companies cut their advertising spending by 12% in the first quarter of 2009 compared to the same period last year, with facility investment sliding continuously since the fourth quarter of 2008.

As businesses cut their marketing expenditures, the performance of advertising and media companies was hit hard. The reduction and delay in corporate investment worsened the performance of companies specializing in IT services and manufacturing of machinery and equipment. Under these circumstances, Korea’s major broadcasting companies, including KBS, MBC and SBS, announced emergency management plans which focused on saving costs through the replacement of show hosts and reduction in executives’ wages and production costs.

From the performance perspective, it was difficult to find any case where businesses attempted to surpass business boundaries. In other words, while these companies mounted a fine defense through cost-saving efforts, they lacked an offense. To better cope with the recession, they need to enhance their understanding of business characteristics, and to pinpoint what value they should provide to customers. In particular, trust and reliance are more important in tough times than in good times.

Companies need to keep in mind the famous saying of Japanese industrialist Konosuke Matsushita who said consumer complaints about quality, service, and prices appear all of a sudden especially in times of recession. They should never sacrifice quality and service to achieve cost savings. If they do, it amounts to incurring a great loss for a small profit.

Thank you for watching. I’m Jung-Ho Lee.

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