Duty-free operators vie for government licenses

Competition is heating up in one of Korea’s most lucrative retail businesses.

Bid submissions for four duty-free shop licenses in Gangnam District, southern Seoul, will close on Tuesday, and the government is expected to grant three of the licenses to conglomerates and one to a midsize company.

The duty-free business is considered a gold mine for Korean companies as one of few industries still seeing growth in a stagnant retail market.

Revenue last month reached an all-time high of $967.9 million, a 6.9 percent increase from $953.6 million in July, according to statistics from the Korea Duty Free Association.

And competition to enter the business is fierce since the government only grants a handful of licenses to operators. When the results of the upcoming bid come out in December, the number of duty-free shops in Seoul will total 13.

While last year’s bids focused on locations north of the Han River such as Myeong-dong, Yongsan District and Yeouido, companies this year are looking south. Their choice is based on the fact that eight of the nine duty-free shops currently operating in Seoul are already located north of the river, mostly around the downtown area.

HDC Shilla Duty Free and Shinsegae DF both won their first licenses last year and are now making bids to open their second duty-free shops in Seoul.

This year, HDC Shilla Duty Free, a joint venture between Hyundai Development and Hotel Shilla, has proposed the I-Park Tower in Samseong-dong as the site of its second branch.

The company says it will complete Shilla’s “duty-free belt” along with HDC Shilla Duty Free’s store in Yongsan District and Hotel Shilla’s duty-free shop in Jung District, both in central Seoul.

Shinsegae DF, which is currently operating its first duty-free location in Myeong-dong, has selected Banpo Central City in Seocho District for its second bid.

The commercial complex is close to the JW Marriott Hotel Seoul and connected to Shinsegae Department Store’s Gangnam branch as well as three subway lines and the Express Bus Terminal. It is also not far from trendy Garosu-gil and Seorae Village, two of the city’s most popular tourist sites.

“The first store in Myeong-dong recorded revenue of 2.6 billion won [$2.3 million] in the first 100 days,” said Sung Young-mok, president of Shinsegae DF. “We hope this success will expand to the second store, which we wish to establish in one of the city’s most heavily trafficked areas.”

Rival Hyundai Department Store has expressed interest in opening a duty-free store in Gangnam District, southern Seoul, since last year but failed to be selected as an operator.

The site they have been pushing for is their department store branch in Samseong-dong, close to the City Air Terminal, a casino and SM Town, a commercial and entertainment space run by SM Entertainment.

Several operators that failed to have their duty-free licenses renewed last year are aiming for a comeback.

Lotte Duty Free’s branch in the Lotte World Tower and SK Networks’ Walkerhill Duty Free were forced to close after the Korea Customs Service decided to end their licenses last year, granting them instead to Shinsegae and Doosan.

Even though Lotte Group is currently embroiled in a high-profile prosecutorial investigation, Lotte Duty Free is still making a bid, with particular emphasis on its expertise as the No. 1 duty-free company in the country in terms of revenue.

SK Networks is also showing enthusiasm for its bid, with the company’s chairman, Choi Shin-won, personally leading the project.

Some industry observers are concerned that overheated competition between the operators for licenses is leading to excessive marketing costs. Several duty-free shops among those that opened between the end of last year and this year’s first half are seeing deficits.

“The selection will be based on each company’s ability and long-term strategy to discover new brands and bring in new customers,” said Choi Min-ha, an analyst at Korea Investment and Securities.

Adding to the pressure is a decrease in tourists coming from China, who have historically contributed to much of duty-free shops’ revenue. The number of Chinese tourists visiting in August totaled 873,771, down 5 percent from July, according to the Korea Tourism Organization. These are typically the two months when tourism from China is at its highest.

“The growth rate of Chinese tourism has recently slowed down,” said Yang Il-woo, a researcher at Samsung Securities.

“Amid uncertainty, it might be safer to keep expectations low on Chinese tourists boosting duty-free sales as they used to in the past.”

BY SUNG HWA-SUN [song.kyoungson@joongang.co.kr]