A half-baked overhaul

Korea’s licensing of duty-free shops every five years is a good example to show how a regulation or policy decided with little regard for market realities or farsightedness can ruin an industry. The law was proposed by an opposition lawmaker to shorten the duty-free licenses from 10 years to five years, with the goal of ending the market control by select large business groups and providing a fairer playing field in the lucrative business for small and mid-scale players.

The law passed the National Assembly in 2013, and the first review of the five-year business licenses took place last month. The system, however, is being questioned for numerous flaws that could jeopardize the entire industry.

Long-time player Lotte Group lost one of its two duty-free shops, and SK Group was forced to exit the industry entirely by closing down its shop in the Walkerhill Hotel. Their licenses went to newcomers Doosan and Shinsegae Group. HDC Shilla and Hanwha Group won two new licenses. A Hana Tour consortium was also licensed to open a smaller-size duty-free shop in a local area.

The names changed a little, but the playing field is still dominated by familiar corporate giants. The duty-free business requires large investment at the beginning and must have its eyes on the global market, as gaining a merchandising edge over foreign rivals is the key to success.

The five-year limit on the licenses now threatens the industry’s competitiveness. Several traditional luxury fashion houses have sent letters of complaint to the Korea Customs Service claiming the shops that are closing were going to hold fire sales to clear stock and undermine their global product strategy.

They worry that such a change every five years could seriously damage their brands’ reputations. Luxury brands are known to be selective in signing business contracts with companies they are not familiar with. HDC Shilla and Hanwha duty-free shops will open next month without the usual luxury products on their shelves because they failed to draw many of the popular brands.

Korean duty-free shops already face strong challenges as they cannot expect to draw Chinese and Japanese shoppers as before, as the two countries are encouraging their nationals to shop more at home. China will be slashing duties on consumer imports from Jan. 1 to encourage its people to spend more at home. Economic policies should not focus on keeping certain business groups out of the industry, but on enhancing our global competitiveness.

JoongAng Ilbo, Dec. 19, Page 30