DEA Efficiency Analysis for Retail Industries in Korea

Korea’s retail sector represents a large and growing portion of the overall economy ; in 2010 it accounted for 8.5 percent of the GDP, and an even larger percentage of the overall employment at 15 percent. Korea’s retail industry, which had previously been dominated by small-scale businesses, began to diversify and include larger and more modern establishments such as multi-store retail chains, and experienced a substantial structural change since the opening of the distribution market in 1996. The 1997 financial crisis damaged the retail sector in general, along with all other economic sectors, and stifled growth of the industry. In the process, modernization of retail industry has advanced, which has served to increase the efficiency and productivity of retail industry and benefit consumers. But during that process, small and medium-sized retailers have declined. Nevertheless, retail industry shows positive growth thanks to chain retailers operated by large companies while independent retailers and traditional retail networks are giving way rapidly to large discount chain stores. In particular, large retailers have strengthened their power through grocery retailing.Grocery product purchases have increased as modern grocery retailers such as hypermarkets and supermarkets have enhanced their grocery offers by adding diverse categories of products. In addition, consumers have shown a tendency to purchase fewer non-grocery products at modern grocery retailers due to the expansion of mixed retailers as well as non-store-based channels such as internet retailing, home shopping and direct selling. Consumers are now more familiar with convenient shopping methods and delivery services such as internet or home shopping. So it is expected that non-store retailing will continue to grow while store-based retailing will show weaker performances as independent retailers are expected to decline.The relative productivity of Korea’s retail industry was 0.42 in 1998 and has increased to 0.57 in 2010. However, it is still at a low level compared to other industries such as the manufacturing industry (1.81) and overall service industry (0.85). In order to strengthen the competitiveness of Korea’s retail industry, retail firms need to be operated more efficiently in an organized manner as to increase productivity. Yet, small and medium-sized retailers function positively in terms of employment and vitalization of the local economy, making it hard to pursue large-firm centered unilateral organization centered in the retail industry. large firms-centered upsizing and organizing unilaterally in retail industry. The support of small and medium-sized retailers may conflict with productivity improvement in the retail industry. Nevertheless, both issues must be considered in establishing policy for strengthening competitiveness of the retail industry.This article explores the relative efficiency of Korea’s retail firms using the Data Envelopment Analysis (DEA) method. Financial data was collected from 111 retailing companies from the years 2006 to 2010. Some policy suggestions for strengthening competitiveness of the retail industry are also provided