Our duty to duty-free

The Korean duty-free retail industry is destined to go nowhere but down if the government doesn’t start to leave it alone.

The government changed the customs law in 2013 to ensure fairer competition and less dominance by select large companies. The move was somewhat understandable. Duty-free licenses were shortened to five years from 10. It also stopped the practice of automatic license renewals for existing players to give some opportunities to new contenders. The awarding of the licenses over the weekend was the first under the new law.

Shinsegae and Doosan Group each stole licenses from Lotte Group and SK Group, which have been running duty-free shops in the World Tower in Jamsil, southeastern Seoul, and Walkerhill Hotel in northeastern Seoul, respectively, for the last two decades. Lotte retains a duty-free shop in downtown Seoul to compete with Shinsegae, which will also open a shop in its flagship department store downtown. SK has to exit the market altogether.

But the newcomers will have to worry about their fate five years later. They, too, may end up handing over their licenses. Business insecurity and interruption could occur every five years.

The operators naturally cannot hire permanent workers. How can they, when they do not know if they will be in business five years later? More than 2,000 employees of the World Tower and Walkerhill duty-free shops could find themselves without work by the end of next month. The groups could reposition them in other affiliates, or they can try to find jobs at the Shinsegae and Doosan shops. Not all are likely to be rehired.

Some say the concern about job losses is overblown, since the two newcomers will need similar levels of workers. But the quality of the workers may not be the same. Who wants to continue in a business that secures jobs for just five years?

Waste is another problem. All the investment that goes into setting up a duty-free shop will go down the drain if the license is called off after five years. Lotte invested 300 billion won ($256 million) to move the duty-free shop from Lotte World in Jamsil to the new Lotte World Tower across the street. SK has also been renovating the Walkerhill duty-free shop.

The change in the customs law is now suspected of having a masked ulterior motive. The tax-free retail business is a rent-guaranteed business since it requires government licenses. Rent-seeking typically refers to the limiting of access to lucrative businesses through lobbying for government subsidies or grants of preferences in state licensing or regulations on competitors to increase market share.

In such a market with monopoly privileges at stake, players curry favor with the government rather than improving their quality or offering better prices. They need not invest to hone productivity or competitiveness. Their business focus is entirely on winning the license from the government. The customs office has the whip hand. Companies will fight to recruit retired senior officials for executive positions.

Under such circumstances, customs officials would inevitably be approached with temptations. Any company would be interested in a rent-seeking business that guarantees easy money. Bureaucrats must have post-retirement plans at heart. They are also guaranteed perks. They have made a comfortable arrangement for themselves with little regard for consumers. Lobbying expenses will be passed on to the customers.

Korea accounted for 10.6 percent of global duty-free sales as of 2013 thanks to Chinese tourists. Visitors from China plunged due to the outbreak of the Middle East respiratory syndrome in the first half of the year. The duty-free business is susceptible to non-business factors. Tourists will stop coming if there is a disaster or infectious disease. Duty-free shops cannot run entirely on spending by nationals. A license review every five years and rent-seeking competition cannot provide long-term investment.

Regulations and interference create rent-seeking. Licensing only fattens bureaucrats. There must be smaller-scale duty-free shops competing with specialized merchandising and services. Any qualified companies must be welcome to compete. Larger ones could create value-added duty-free experiences through fair competition.

The duty-free business should not be regarded in the same way as radio frequencies. Why does the government go on with licensing businesses? A heavily protected playing field with just select key players has little room for innovative progress. Authorities must break down the fences in Korea’s duty-free shop business.

JoongAng Ilbo, Nov. 18, Page 32

*The author is the business and industrial editor of the JoongAng Sunday.

by Kim Jong-yoon