Only one bidder for 6 city duty-free licenses

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Only one bidder for 6 city duty-free licenses

Interest in new duty-free licenses has withered due to market saturation and the yo-yo effect of shopping-crazy tourists from China.
As a result, two of the current operators pulled out of the latest round of license bids.

Thursday was the deadline for applicants for six additional licenses for inner-city duty-free stores, which were announced by the Finance Ministry in May.

Three licenses were being offered within Seoul and one each for Incheon, Gwangju and South Chungcheong.

According to the Korea Customs Service, Hyundai Department Store was the only applicant for a license in this round.

Hyundai Department Store has already signed an agreement to take over Doosan’s duty-free business in Dongdaemun District for 61.8 billion won ($53 million), which includes 47.6 billion won to lease the duty-free stores. The department store will be paying 10 billion won annually for the duty-free space.

But it still needs a license.

Last month, Doosan decided to pull out of the business and surrender its license after its duty-free business in Dongdaemun suffered an accumulated 60 billion won deficit over the last three years (although last year it was able to make a 1 billion won profit). In its first year, 2016, the Dongdaemun duty-free suffered a 47.7 billion won loss. In 2017, it suffered a 13.9 billion won loss.

Hyundai Department Store operates a single duty-free store at its branch in Samseong-dong, which is next to Coex in Gangnam District. If the government approves the Dongdaemun license, it will have two. Its agreement with Doosan goes into effect on Feb. 28.

The last time duty-free bids were accepted was 2015, when major names including Lotte, Shinsegae and SK competed for two new licenses.

Five years ago, duty-free was considered a cash cow business as Korea attracted hordes of Chinese tourists.

Revenues from duty-free sales grew 20 to 30 percent annually.

The only time duty-free revenue growth fell below 20 percent annually since 2015 was in 2017, when China blocked tourists from coming here in retaliation for the deployment of a U.S.-led antimissile defense system. But even then it grew 18 percent.

In fact, the market has recovered since then.

According to the Korea Duty Free Shops Association, revenues for the first quarter of this year in the duty-free business amounted to 18.9 trillion won, equivalent to the entire year of 2018, and they are expected to reach 25 trillion won by the end of the year — a 32 percent increase year-on-year.

The lack of interest from major players is a matter of shrinking profits. In fact, other than the top three major duty-free operators ­­— Lotte, Shilla and Shinsegae — other operators have reported operating losses.

In September, Hanwha Galleria decided to end its duty-free business in Yeouido. The Yeouido duty-free business reported 100 billion won in losses over the last three years, although like Doosan, Hanwha also saw a turnaround last year and made an 800 million won profit.

But neither Doosan nor Hanwha considered their turnarounds sustainable.

Last year, Lotte ranked top in profit for the duty-free industry with 205 billion won, while Shilla trailed with 195 billion won and Shinsegae came in third with 36.4 billion won.

Smaller operators including Dongwha and SM reported losses.

Industry analysts say one of the reasons is that the number of players has more than doubled.

While there were six inner-city duty-free shops in 2015, that number increased to 13 including small- and medium-sized operators.

An increase in Chinese surrogate shoppers, known as daigou, has also affected the Korean duty-free profitability.

Daigou are shoppers who purchase items from duty-free shops and profit from selling them for higher prices in China.

Chinese shoppers — including daigou — account for 70 percent of local duty-free shop customers. Duty-free operators have been tour companies that bring them Chinese shoppers.

A study by a Democratic Party lawmaker estimated that inner-city duty-free operators spent 1.3 trillion won in such payments in 2018.

As some commissions are very high, the profitability of duty-free shops has plummeted.

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