At duty-free stores, Chinese resellers rule the roost

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At duty-free stores, Chinese resellers rule the roost

A duty-free store in Seoul is almost empty. Foreign tourists stopped coming during the pandemic, and the stores are highly dependent on Chinese resellers for sales. [YONHAP]

A duty-free store in Seoul is almost empty. Foreign tourists stopped coming during the pandemic, and the stores are highly dependent on Chinese resellers for sales. [YONHAP]

Duty-free stores are rolling out the red carpet to professional Chinese resellers — or daigong — in a desperate search for revenue during the pandemic. Some stores have become mini-broadcasting studios for the resellers, who hawk products live to customers back in China.
This is a marriage of convenience between duty free and live commerce, the newest way of selling products. Whether it becomes a long-term relationship depends on many things — most of all when Chinese tourists start returning to Korea.
At the Shinsegae Duty Free store in Jung District, central Seoul, on Feb. 25, there was a team of Chinese resellers live streaming at the MLB store. One woman was on her smartphone, filming her teammate showing off sweatshirts, baseball jackets, t-shirts and caps. The store was empty of actual customers. But it was jammed with opened cartons of clothes, which team members rummaged through to find items to hawk on the live stream.  
Daigong is a Chinese word for small-scale merchants who buy products here on behalf of customers back home, or to sell for a profit. They buy tax-free items in Korea in bulk and resell them on Chinese e-commerce marketplaces.  
At Shinsegae, there were three more teams at the cosmetics section on a different floor, live streaming the sampling of lipsticks, foundation and other beauty products.  
"They come regularly," said a salesperson, and "always do home shopping-like sales pitches live streamed on their phones."
Although ordinary shoppers may recoil at the idea of live-streamed sales pitches in Chinese being done in the next aisle, there aren't many ordinary shoppers in the duty-free stores these days, and the stores have to let the daigong do what they do, or sacrifice the only revenue available.
Only 967,000 foreigners visited Korea last year, down 1,663 percent from 17.05 million in 2019. During the arduous 24 months of the pandemic, some 95 percent of duty-free sales were made by the professional Chinese resellers, according to Lotte Duty Free.  
A group of Chinese sellers live stream in front of the MLB store at the Shinsegae Duty Free branch in central Seoul. [LEE TAE-HEE]

A group of Chinese sellers live stream in front of the MLB store at the Shinsegae Duty Free branch in central Seoul. [LEE TAE-HEE]

Bulk resellers go live
Daigong have been a good source of revenue for Korean duty-free stores from way before Covid-19, loading their suitcases with duty-free-items and going back to China to sell them on e-commerce websites such as Taobao. Their presence is more visible nowadays since they're the only customers, and they're far more busy in their shopping since live-streamed sales pitches have become part of the business. 
They mostly go live on Douyin, China's equivalent of TikTok, showing and advertising what they will sell. Viewers then make purchases online and wait for their orders to be hauled back in suitcases from Korea.
Duty-free stores tend to sell products at 60 percent the retail price charged at department stores or online malls, and Chinese resellers enjoy a huge profit above travel expenses and even mandatory quarantines. Korean products sell for a premium in China.
Duty-free companies used to pay commissions to tour agencies to bring resellers to their stores: 15 to 35 percent of resellers’ bulk purchases. But the group tours they traveled on are now non-existent. The commissions are now paid to the professional resellers.  
Total commissions paid last year were 2.3 trillion won, according to the Korean Duty-Free Shop Association, up 155.6 percent on year and up 76 percent from 2019, before the pandemic.
Paying commissions wasn’t much of a profit drain before the pandemic because there were so many regular customers: individuals who paid full price. These days, Chinese resellers are almost the only customers duty-free stores have, so the commissions really eat into profits. 
“Even though sales from daigong require commissions and don't have a good profit margin, competition to attract daigong is becoming more intense,” said Joo Young-hoon, an analyst at NH Investment & Securities. “This can only be solved when sales to normal customers resume.”
On top of commissions, Chinese resellers ask for additional discounts, usually from the individual brands at the duty-free stores. 
Some companies accede but some don’t -– which can lead to boycotts of brands. 
One well-known victim is LG Household & Health Care. The company, behind cosmetics brand The History of Whoo and O HUI, paid the price after it refused extra discounts to Chinese resellers.
Analysts say the company had virtually zero duty-free sales last December after getting on the bad side of the daigong.
“With stronger competition to attract daigong, the company was pressured to lower prices for The History of Whoo products,” said Ahn Ji-young, an analyst at IBK Securities. “LG Household & Health Care didn’t apply an extensive discount on the products to stick with its international pricing standards.”
Relying on influencers  
Brands are also teaming up with big name Chinese influencers -– known as wanghong. The influencers also go live, advertising products by the brand. Purchases can be made through a Chinese online shopping mall, which features various Korean brands.
Companies either pay a fee for hiring the influencers or give them a cut of total sales made from their live streams.  
According to a spokesperson for a retailer that asked not to be named, commissions range between 15 to 25 percent. It is hard to say how much is paid to the influencers because it varies vastly depending on their popularity.  
CJ Olive Young is working closely with Chinese influencers. The company opened its first duty free branch at Hyundai Department Duty Free Store’s Dongdaemun branch in central Seoul, on March 15.  
A broadcasting booth at CJ Olive Young store at Hyundai Duty Free's Dongdaemun branch in central Seoul. [CJ OLIVE YOUNG]

A broadcasting booth at CJ Olive Young store at Hyundai Duty Free's Dongdaemun branch in central Seoul. [CJ OLIVE YOUNG]

“Considering the area is visited a lot by foreign tourists and influencers, we created a broadcasting studio in the store,” said a spokesperson for CJ Olive Young. “We will support wanghong and other influencers so they can do live streams, which will allow us to target not only tourists but also customers abroad.”
A filming booth has been set up in the middle of the store, equipped with LED lighting, camera mounts and backdrops to make it easier for people who want to do live streams.  
Shinsegae Duty Free Store teamed up with influencers to go live on WeChat and Douyin throughout last year. It sold products from cosmetic brands Fresh, Fenty Beauty, Benefit and Kenzo.  
Targeting locals
Although duty free stores are relying on Chinese sales, they are also making attempts to sell more to Korean customers. They know relying on China could backfire, as it did after Beijing retaliated to Korea's deployment of an American missile shield in 2016. 
Koreans may start traveling abroad again now that mandatory quarantines on their return will end on March 21, as long as they're vaccinated.
According to Interpark Tour, flight bookings for overseas destinations rose 281 percent on month between March 11 and 13. March 11 is when the abolishing of mandatory quarantine was announced. On year, bookings rose 873 percent.
More purchases will be allowed to be made starting this month, another good sign for duty-free stores wanting local customers.
Starting this month, the government announced it will suspend the $5,000 purchase limit for Koreans at local airport duty-free stores to encourage more spending and help struggling businesses.
It will also allow foreigners who didn’t visit Korea in person to buy duty-free items online, although the available products will only be those made by local companies.  

Companies are also finding ways to sell to Koreans who didn't travel abroad.  
Shilla Duty Free partnered with Coupang to sell duty-free products that have been in its inventory for a long time in August last year. In April 2020, the government gave a special exemption to allow duty-free stores to sell items in their inventories for six months or more to local customers. The exemption was meant to help struggling duty-free stores. It has made such sales at Shilla Trip, its own online shopping mall, but the partnership with Coupang should give it a wider group of customers.
Hyundai Department Store’s duty free products have been available on convenience store CU’s application starting last December. Lotte Duty Free also started selling their products on Lotte Homeshopping starting March, and it plans to sell them on the 7-Eleven application in April.

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