Duty free stores struggle to sell mountains of inventory

Industry

Published: 24 May. 2020, 18:00

Duty free stores struggle to sell mountains of inventory

A duty-free store in the Incheon International Airport is empty on April 22, hit by the coronavirus pandemic. [YONHAP]

High-end shoppers might have to wait until July to know if Chanel bags and Gucci loafers collecting dust in duty-free warehouses will be offered for sale outside airports and department stores.

Duty-free stores are faced with a tangle of unresolved issues before the government and their suppliers decide on what to do with the backlog of wares caused by the coronavirus pandemic. Even if they reach an agreement, industry analysts are skeptical that half-priced high-end luxury goods will be offered anytime soon.

The Korea Customs Service accepted a request from the duty-free industry on April 29 to sell some of the mountains of duty-free items left unsold due to the pandemic. The approval is limited to 3 trillion won ($2.4 billion) worth of tax-free goods that have been sitting in inventory for the past six months.

The number of customers at duty-free stores dropped on year by 86.5 percent in March, the biggest drop in history. Sales for the month of March fell 14 percent compared to the same period a year earlier, from 2.17 trillion won to 1.87 trillion won.

Analysts say customers are unlikely to see those goods in the market until early July due to disagreements between brands and retailers on exactly how big a discount will be offered.

Before the pandemic, leftover stocks of duty-free goods were subject to strict regulations. According to the law, leftover stock had to be returned to the original supplier or discarded. The customs service accepted the industry's request because of the unprecedented situation. Duty-free stores in airports, for example, saw a 93 percent on-year drop in airport visitors in March.

Duty-free items are heavily controlled because they are exempted from tax. If they are allowed to be sold to regular shoppers — instead of foreign tourists — they should have the relevant taxes included.

But the stores want to get rid of inventory, and you don't do that by adding to the sales price.

Under the temporary exemption, the government will allow 3 trillion won of duty-free goods that have been sitting in inventory for more than six months to go through customs and be sold in retail stores outside the airport such as department stores and outlets. This is to help duty-free retailers make some money, get rid of inventory and weather the coronavirus storm. Technically, the vendor has the right to set prices.

A closure notice in front of Lotte Duty-free Store at the departure gates of Kimpo International Airport, marking the first in the airport's 40 years of history to close its duty-free store. [KWAK JAE-MIN]

In addition, since there are so many different types and categories of duty-free goods, industry analysts say that it will be difficult to apply the same discount formula to each and every one.

The retailers also have to negotiate with their suppliers, who are very particular about how their goods are priced and sold. If the retailer upsets the supplier, it may not get any of their products in the future. Luxury manufacturers aren't keen on discounting.

“The biggest concern for duty-free retailers is having a popular luxury brand decide to withdraw from their stores,” said an industry source. “Realistically speaking, there is no retailer willing to release goods when luxury brands say no.”

“I am not sure if luxury brands would accept even a 5 percent discount. Judging by the atmosphere, brands like Louis Vuitton, Chanel, Gucci and Hermes would not allow their duty-free goods sold in local markets,” he said.

“Our headquarters wants to stick to company policy and not offer any discounts,” said one executive of a foreign luxury brand. “We do not accept return of goods from vendors unless they are defective products, or allow them to be sold for a lower price than in other distribution channels.

“However, taking the unusual circumstance of the coronavirus into account, there is room for negotiation,” she added.

“It will take at least two months for the industry to iron out the complexities,” predicted a source in the duty-free industry.

The National Customs Agency gave six months, until October, for duty-store retailers to report their inventories to customs.

BY MOON HEE-CHUL, KANG JAE-EUN [kang.jaeeun@joongang.co.kr]