● Emart`s first-ever hard discount store

Emart has opened its first store dedicated exclusively to its "No Brand" line of products, converted from an Emart Everyday in Yongin (Bora-dong). A second location will open in September in the eastern outskirts of Seoul, at a new shopping complex called Starfield Hanam. In all, six No Brand stores are scheduled to open this year. In our report "Price War" released on May 26th, we analyzed the factors behind the success of private label (PL) discount store chain Aldi, and predicted that Emart would open a Korean version of the hard discount store model. Past attempts to launch hard discount chains in Korea were unsuccessful, as they failed to meet customers` expectations for either the quality and variety of PL products or the store environment (with barebones interiors and services). Emart`s dedicated No Brand store, however, is providing a satisfactory shopping experience to customers while maintaining the core competitiveness of the hard discount store model.

Hard discount chains like Aldi are characterized by 1) solid margins boosted by a higher product mix of PL brands, 2) improved focus and efficiency through lower stock keeping units (SKU), and 3) eliminating inessential cost factors. Emart`s No Brand store is following this blueprint.

No Brand product SKUs have risen to around 700-800. The Yongin branch carries a total of 1,200 products?800 No Brand items and 400 name-brand alternatives. This is a stark contrast to conventional large discount stores, which have more than 60,000 SKUs. Emart`s No Brand store is the first to have a product mix comprising mostly PL products; the company plans to expand No Brand SKUs to 3,000 over the long term.

Margins of No Brand products are similar to those of brand names. PL margins are typically 6-7%p higher than brand-name margins, while No Brand products are almost 70% cheaper than name-brand alternatives. No Brand`s strategy is to return price benefits to customers through cost-minimizing, margin-maximizing PL products. This is the basic and core competitiveness of the hard discount store model.

● Watch for the evolution of a new type of retailer, rather than any immediate effects

Emart`s No Brand product line is not yet powerful enough to have the type of influence in the global market that Aldi enjoys. With annual revenue of only W100bn, No Brand`s contribution is still limited. Although No Brand stores may not have an immediate impact, they are still notable for creating a new type of consumption channel for customers in Korea and for furthering the development of PL products. We expect Emart to see the following impacts:

1) The biggest impact will be a traffic increase in Emart`s distribution channels. No Brand stores should increase customers` exposure to No Brand products, thereby securing customer loyalty. We believe Emart can easily increase traffic for its distribution channels (Emart, Traders, Emart Mall, Everyday, etc.) relative to peers through differentiation, a strong advantage of PL products.

2) We expect Emart Everyday`s performance to improve. Among the six No Brand stores scheduled to open this year, three will be converted from loss-making Everyday stores. We believe Emart will continue to open No Brand stores through its Everyday network. We expect that Everyday, which has already been reducing losses through cost reductions, will further improve performance by converting loss-making Everyday stores to No Brand.

By Aiden Lee, Analyst at Mirae Asset Daewoo Securities

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