In this blog post, we’ll examine whether the operating restrictions on large supermarkets and medium-sized stores in South Korea are effectively achieving their original goal of strengthening the competitiveness of traditional markets and small and medium-sized merchants, and we’ll consider the problems with the current system and possible alternatives.

Why Were Operating Restrictions on Large Supermarkets Implemented?

According to the current Act on the Development of the Distribution Industry, the heads of special self-governing cities, cities, counties, and districts may restrict the operating hours of large supermarkets and medium-sized stores or designate mandatory closing days if they deem it necessary to establish a sound distribution order, protect workers’ right to health, and promote the mutual growth of large-scale stores and small and medium-sized retailers. Under current law, operating hours may be restricted within the range of 12:00 a.m. to 10:00 a.m., and large supermarkets and similar establishments are required to designate two mandatory closing days per month. However, large-scale stores where sales of agricultural and fishery products account for 55% or more of total annual sales may be exempted from these regulations pursuant to local government ordinances. This system was first fully implemented in 2012, and at that time, several local governments—including the Seoul Metropolitan Government—enacted ordinances, resulting in large supermarkets being forced to close. At the time, significant friction arose between large supermarket operators and local governments over the implementation of this system. The courts ruled that some local government ordinances were unlawful, citing procedural issues, among other reasons; subsequently, local governments revised their ordinances and reimplemented them. At the time, the Korea Chain Store Association filed a constitutional appeal, citing the constitutional right to freedom of occupation and consumers’ right to choose, while also mounting a nationwide legal challenge against local governments through multiple lawsuits. This mandatory closure system for large supermarkets was introduced primarily to safeguard the livelihoods of small and medium-sized merchants working in traditional markets and similar venues. However, there has been ongoing debate over whether the system is actually achieving that objective sufficiently. In particular, critics have consistently pointed out that restricting the operations of large supermarkets does not automatically shift consumer demand to traditional markets. Therefore, it is necessary to examine whether the business regulations for large supermarkets under the Distribution Industry Development Act are actually effective in enhancing the competitiveness of traditional markets and small and medium-sized merchants.

Have these operating restrictions actually helped traditional markets and small and medium-sized merchants?

First, the impetus for this law was the harm suffered by traditional markets and numerous small-scale merchants who had long been part of local communities due to the indiscriminate proliferation of SSMs and large supermarkets on every street corner. So, have these people actually benefited directly from this law? According to a 2012 survey commissioned by the government from AC Nielsen, there was no significant difference in traditional market sales between days when operating restrictions were in effect and days when they were not. In fact, traditional market sales sometimes declined on days when large supermarkets were restricted from operating; this was because small and medium-sized suppliers to large supermarkets, as well as primary producers in the distribution chain, were unable to find places to deliver their goods on time. In other words, because large supermarkets were closed, countless producers linked to this distribution chain suffered losses for an entire day. Furthermore, perishable foods with short shelf lives were sometimes unable to be sold in a timely manner due to the operating restrictions on large supermarkets; as a result, these items had to be sold at a discount, which also reduced the sales and profitability of the farmers and fishermen who supplied them directly. Small-scale merchants operating within large supermarkets also suffered losses because they were unable to conduct business for a day. In other words, this resulted in economic losses for society as a whole. Some large supermarkets even generated significantly higher sales than usual through marketing campaigns and sales promotions on the day before the closure. Furthermore, according to interviews and surveys conducted at the time, most consumers who were aware that large supermarkets would be closed tended to do their grocery shopping in advance on the day before the closure. They did not visit traditional markets on the day of the closure. Furthermore, even among those who turned to traditional markets because they were unaware of the closure, a significant number purchased only what they needed and planned to shop again on the day the large supermarkets reopened. Consequently, it was pointed out that the mandatory closure of large supermarkets did little to revitalize traditional markets. As such, not only did small-scale merchants—who should have benefited the most—fail to gain any direct benefit, but some farmers and fishermen also suffered losses.

What loopholes exist in the Distribution Industry Development Act?

The second issue concerns the limitations that arise during the application and enforcement of the law. Under the current Distribution Industry Development Act, large-scale stores—such as those where sales of agricultural and fishery products account for 55% or more of total annual sales—may be exempted from business regulations in accordance with local government ordinances. In the past, this threshold was 51%, but it has now been raised to 55%. Consequently, some stores with a high proportion of agricultural and fishery product sales—such as Nonghyup Hanaro Mart—may be exempt from the business restrictions imposed on large supermarkets. If people go grocery shopping at a store near a Hanaro Mart and discover that the large supermarket is closed, they are likely to shop at the Hanaro Mart rather than a traditional market. Restrictions on large supermarkets’ operations do not necessarily benefit traditional markets; rather, competitors not subject to the regulations may reap the benefits instead. Another issue was the level of administrative fines. In 2012, under the Distribution Industry Development Act, fines were set at 10 million won for a first violation and 20 million won for a second violation; critics pointed out that these amounts were ineffective when compared to the daily sales volume of large supermarkets. However, the system has since been strengthened, and violations of operating hour restrictions or mandatory closure orders can now result in fines of up to 100 million won. Therefore, unlike in the past, it is difficult to conclude that the current system is ineffective simply because the fines are too low. Furthermore, the provision that allows local governments to set specific operating hour restrictions and mandatory closing days through their ordinances is another factor that can create regional variations. For example, if the mandatory closing days in Gangnam-gu and Seocho-gu, both in Seoul, do not overlap, consumers can drive to large supermarkets in other areas. Furthermore, if local governments adopt different methods for designating mandatory closing days, large supermarkets may face issues of fairness due to being subject to varying regulations across regions. Given these limitations of the system, it is difficult to assume that restricting the operations of large supermarkets will necessarily benefit small retailers, and the effectiveness of the regulation may be limited as long as consumers continue to prefer large supermarkets.

Wouldn’t regulations on large supermarkets restrict consumer choice?

The third issue is that such regulations could restrict consumer choice. Consumer choice is just as important as ensuring the interests of small merchants. If the government intervenes in the market, the range of products and services that consumers can freely choose from may narrow. As recently as twenty years ago, traditional markets were far more vibrant than large supermarkets. However, at that time, private cars were not as widespread as they are today, nor were there as many dual-income couples as there are now. The way people shopped back then is quite different from how they shop today. For today’s couples, using their own cars to do all their grocery shopping at once on weekends—when they are not working—may be the most efficient method. Compared to traditional markets, which often lack sufficient parking facilities, large supermarkets—equipped with parking lots and stores—allow shoppers to do their grocery shopping without having to move around much and to purchase all necessary items at once. In this sense, the rise of large supermarkets may be a natural phenomenon. Furthermore, consumers have the right to choose better products at lower prices and with greater convenience. However, imposing uniform restrictions on the operating hours of large supermarkets could result in limiting these consumer choices. In fact, many young consumers prefer large supermarkets to traditional markets, and forcing large supermarkets to close on weekends—when many consumers do their grocery shopping—could result in a restriction of consumer choice.

Should regulations on large supermarket operations be maintained?

For the reasons outlined above, it is clear that the current system surrounding regulations on large supermarket operations has several problems. In particular, it remains questionable whether the original purpose of the law—to strengthen the competitiveness of small and medium-sized retailers and traditional markets—can be sufficiently achieved solely by restricting the operations of large supermarkets. Therefore, rather than unconditionally maintaining or abolishing the current system that regulates the operations of large supermarkets and medium-sized stores, it is necessary to improve the system by considering both the purpose of the regulation and its actual effects. The following alternatives can be considered as possible solutions.

Is it possible to regulate large supermarkets through means other than operating hours?

The first alternative is to regulate large supermarkets through other means. For example, we could consider measures such as restricting TV or newspaper advertisements by large supermarkets to strengthen the competitiveness of traditional markets. If advertisements announcing supermarket sales or grand openings were regulated, we could expect some sales to be redirected to small merchants located near residents’ homes. Alternatively, if measures—such as restricting TV commercials during specific time slots or prohibiting the use of sale-related phrases in advertisements—are established through consultation with large supermarkets, this could create a way to reconcile the interests of both parties. Conversely, the government could expand support for traditional markets by increasing their promotion and advertising and conducting neighborhood-based campaigns. Thus, rather than imposing blanket restrictions on the operations of large supermarkets, adjusting the conditions of competition and creating an environment that encourages consumers to visit traditional markets could serve as a viable alternative.

Can the indiscriminate opening of new large supermarkets be prevented?

The second alternative is to restrict the opening of new supermarkets. One of the reasons this problem arose in the first place was the indiscriminate proliferation of numerous supermarkets in every alleyway. Accordingly, the establishment of new large-scale supermarkets or SSMs could be managed by restricting their opening in residential and quasi-residential zones, or by requiring registration with local governments to ensure that local conditions are taken into account. In fact, the current Distribution Industry Development Act requires those intending to open large-scale stores to register with local governments before commencing operations and to submit both a commercial district impact assessment report and a regional cooperation plan. Furthermore, within Traditional Commercial Preservation Zones, the law allows for restrictions on the registration of large-scale stores or the imposition of conditions. Therefore, it is difficult to view the current system as one that allows large supermarkets to open freely based on a simple notification alone. However, additional management measures that take local characteristics into account—such as limiting the number of large supermarkets per population or per unit area—could be considered. Through such systems, it is necessary to prevent the excessive concentration of large supermarkets in specific areas and to create an environment where local retailers can compete on a level playing field.

What is needed to enhance the competitiveness of traditional markets?

The next alternative involves strengthening the market’s competitiveness by exploring ways to attract people through the direct efforts of the merchants themselves. The primary reason people do not frequent markets is accessibility. Of course, there may be a market close to home. However, as mentioned earlier, markets often lack amenities such as parking lots. Many people would find it inconvenient to have to walk a long distance to load their purchases into their cars after shopping. Therefore, by developing in-house delivery services or introducing small carts to help people transport their goods more easily, markets could attract more customers by offering both price competitiveness and convenience. Additionally, efforts such as constructing parking lots in the surrounding area could be pursued in the long term. If issues common in markets—such as difficulties using credit cards or the failure to issue cash receipts—are addressed, the number of visitors could increase. Ultimately, for traditional markets to compete with large supermarkets, it is more important to address the factors that cause consumer inconvenience one by one rather than simply lowering prices.

Can Traditional Markets Be Transformed into Specialized Spaces?

Another approach is to specialize existing markets. By focusing on selling local specialty products or specializing in specific goods—such as herbal medicine or musical instruments—markets can grow and compete with large supermarkets in distinct areas. Furthermore, these markets could be developed into tourist attractions, serving as souvenir shopping districts. Hosting various cultural events at the markets to attract people could also be a viable approach. While large supermarkets offer the advantage of conveniently purchasing a wide variety of products in one place, traditional markets can provide a unique value—one that is difficult to experience at large supermarkets—by integrating with specific regions, products, or cultures. Therefore, developing the markets’ unique characteristics can serve as a way to compete differently rather than competing head-to-head with large supermarkets.

Is Strengthening Competitiveness More Effective Than Regulating Supermarket Operations?

So far, we have examined measures that could be implemented as alternatives to regulating supermarket operations. Of course, the actual effectiveness of these measures may depend on the specific policy design and implementation methods. However, there is insufficient evidence to conclude that consumers who would otherwise shop at supermarkets will automatically shift to small and medium-sized merchants if supermarkets are forced to close. This is because consumers do not necessarily shift to traditional markets simply because large supermarkets are closed; they may instead choose other large retailers or online distribution channels. On the contrary, imposing blanket restrictions on large supermarket operations could affect partner companies, producers, and tenant merchants linked to the distribution process, and could also raise issues of fairness due to regional regulatory disparities, as well as concerns regarding the restriction of consumer choice. Therefore, the operating restrictions on large supermarkets currently enforced under the Distribution Industry Development Act need to be reviewed carefully in terms of their purpose and effectiveness and improved accordingly. Rather than indiscriminately regulating the operations of large supermarkets, it would be a more socially and economically sustainable approach to strengthen the competitiveness of traditional markets and small- and medium-sized retailers, develop the unique characteristics of each market, and improve the environment so that consumers can conveniently use these markets.