SEOUL — Walk into any of South Korea’s three biggest department stores and it would be hard to believe predictions that Asia’s fourth-biggest economy will contract this year. The floors of Seoul’s biggest department stores are teeming with shoppers.

This story first appeared in the April 17, 2009 issue of WWD. Subscribe Today.

At Hyundai’s flagship in the trendy Apujong area, shoppers are overwhelmingly well-heeled Korean women. Clad in designer jeans and jackets if under age 40 or in fur jackets if over 50, they clutch shopping bags with European designers’ motifs as they ride escalators with friends to the store’s restaurants for lunch.

“The rich are not influenced by the economic crises,” said An Ka-ram, a marketing analyst at Hyundai.

Still, looks can be deceiving. Hyundai, Lotte and Shinsegae, South Korea’s three biggest department store operators, saw their collective sales in February fall 0.3 percent, according to South Korea’s Ministry of Knowledge Economy. That’s a relatively meager dip compared with retailers’ performance in many other parts of the world, but it’s coming off a 10.4 percent jump in January. And observers here expect things will only get worse.

South Korea’s finance ministry expects the economy to contract by 2 percent this year, while a more pessimistic International Monetary Fund forecasts it will shrink 4 percent.

Swiss bank UBS said private consumption in South Korea will shrink 4.4 percent in 2009. The central bank has cut interest rates to a record low in a bid to kick start the credit markets, ease the debt burden of businesses and bolster domestic demand.

“The Korean economy is indeed in dire straits,” the country’s finance minister Yoon Jeung-hyun said in his inaugural speech in February.

Hyundai Department Store’s An draws a descending staircase to illustrate her forecast for retail sales. Koreans, she said, have yet to curtail their spending but when they do, sales of luxury items are expected to fall far and fast. Lee Hee-jong, who has a shop that sells shirts to some of Korea’s most famous actors, expects that many consumers will begin shopping in Seoul’s Dongdaemun and Namdaemun districts where clothes are inexpensive.

A surge of tourists, mainly Japanese, has helped boost sales at Shinsegae, Hyundai and Lotte over recent months. The Japanese yen has just come off a strong run against the Korean won, which made the world’s leading fashion brands, especially if purchased at duty free prices, especially attractive for Japanese visitors.

Every morning at around 11 a.m. outside the Galleria department store in Seoul’s Gangnam district, a bus disgorges Japanese tourists. South Korea is a popular destination for Japanese, particularly women in their 20s such as Yukiko Yamada, who is traveling with her three girlfriends. Seoul is less than a two-hour flight from Yamada’s residence in Osaka or the Japanese capital, Tokyo. While in Seoul, Yamada planned to visit Louis Vuitton and Gucci to buy a leather bag.

Japanese tourists have helped to make up for a 30 percent drop in purchases between November and January by Koreans at a major Italian fashion label at the Galleria department store, the store’s manager said. The manager is worried, fearing purchases by Japanese tourists will drop now the traditional December to January sales season is over.

Business in the first half of the year is likely to be “disappointing,” said a distributor of another major Italian fashion label in South Korea with outlets at Lotte, Shinsegae and Hyundai.

Stores located outside the major department stores are also glum. Son Won-jong, who manages the women’s store Caramel on the fashionable Seoul street of Garoo Soo Gil, said sales have fallen 30 percent from a year ago. The drop has come despite the fact the store’s prices are about 40 percent cheaper than those in department stores.

Still, one of Korea’s best known designers, Junn J, said there is still a strong base of support from a dedicated group of shoppers who buy local designers. “My fans ask me to be more creative. It is not very commercial, but I love it so much,’’ he said.

Lotte, Korea’s biggest department store company, is also optimistic. Its 25 Korean stores reported a more than 10 percent increase in January sales, thanks in part to an earlier-than usual Lunar New Year holiday season. “I still believe there is some [sales] growth” for 2009, said Kim Woo-kyung, the general manager of the company’s investor relations team. Kim said wealthy Koreans and Japanese tourists are buying luxury leather goods and cosmetics, but sales of men’s and women’s suits are down.

Seok Kang, chief executive officer of Shinsegae’s Department Store, is also trying hard to be upbeat. He said the company hopes to bolster sales by stressing before and after sales service to its wealthiest customers. Shinsegae has 999 people who are members of its “Trinity Club,” open to people who spend 75 million won, or $56,850 at current exchange, at its stores annually. There is also another group of 5,000 customers who spend more than 30 million won, or $22,740, a year. These two groups are lavished with personal attention. The company has sale personnel greet the customers, escort, introduce and advise them on purchases while carrying their bags and sending personal invitations to fashion shows at its stores.

Seok said the company is targeting 2 to 3 percent sales growth in the first six months of this year. The chain will have a network of eight stores as of March.

The retail executive said he expects the Korean economy to turn around in the second half of the year, recalling the dedication and hard work that lifted South Korea out of the 1990s Asian financial crisis.

“Korea’s recovery will be faster than any other country,” he predicted.

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