Incheon duty-free battle heats up with China in the fray

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Incheon duty-free battle heats up with China in the fray

Incheon International Airport Terminal 1 bustles with travelers on March 1. Lotte Hotel, Hotel Shilla, Shinsegae and Hyundai Department Store Duty Free and China Duty Free Group have submitted license bids for space at the airport. Designated operators will open on July 1. [YONHAP]

Incheon International Airport Terminal 1 bustles with travelers on March 1. Lotte Hotel, Hotel Shilla, Shinsegae and Hyundai Department Store Duty Free and China Duty Free Group have submitted license bids for space at the airport. Designated operators will open on July 1. [YONHAP]

A Chinese company is bidding in Korea's largest duty-free license tender ever, and it could end up winning a significant amount of space at Incheon International Airport, by some measures the largest airport in Asia.  
 
The rules of the process are so transparent and fair that concerns about a Chinese entity having such a massive presence at Korea's main international gateway may not tip the scales enough to make up for price and the potential business that the bidder could do at the airport.  
 
With the easing of Covid-related border restrictions, footfalls at the location are likely to be near or above pre-pandemic levels soon. The licenses being made available are especially attractive, as they run 10 years, five years longer than normal, and include flexible rental terms.
 
The contest was to be between big Korean names fighting for the valuable rights as traffic rebounds, until a foreign entity got involved.  
 
Lotte Hotel, Hotel Shilla, Shinsegae and Hyundai Department Store Duty Free, all Korean companies, submitted bids by the end-of-February deadline. Beijing's China Duty Free Group is also participating.
 
All submitted multiple bids for space within the five duty-free sections available to large corporations, including those for cosmetics, perfume, liquor, tobacco, fashion, accessories and luxury goods sales.
 
A total of 20,842 square meters is available, and bidders can be awarded a maximum of two of the five licenses available.  
 
Who will win is more than just a matter of price, as business capacity is weighted 60 percent and the price 40 percent evaluating the proposals.  
 
Specific criteria for business evaluation includes marketing, operation strategies, investment, current sales and management conditions.  
 
“Although CDFG has weaker brand power due to its lack of experience in duty-free operation outside of China, it is highly likely to surpass competitors in terms of tender price, which accounts for 40 percent of the bidding evaluation,” said analyst Cho Sang-hoon from Shinhan Securities.
 
Bidding could take time, and the results could end up being unpopular.
 
"I believe that the domestic companies will not have differed their bidding tactics just because CDFG participated in the game," Lee Jin-hyeob, an analyst from Hanwha Investment Securities, said. "Companies would not have made a bid that goes against their interests or profits. Although media reports forecast that domestic companies would face financial pressure due to CDFG's participation, i believe that the pressure will be fall more heavily upon the reviewers, the airport and Korea Customs Service.
 
Travelers pass by the duty-free shops at Incheon International Airport Terminal 2 on March 2. Lotte Hotel, Hotel Shilla, Shinsegae and Hyundai Department Store Duty Free and China Duty Free Group have submitted license bids for space at the airport. Designated operators will open on July 1. [YONHAP]

Travelers pass by the duty-free shops at Incheon International Airport Terminal 2 on March 2. Lotte Hotel, Hotel Shilla, Shinsegae and Hyundai Department Store Duty Free and China Duty Free Group have submitted license bids for space at the airport. Designated operators will open on July 1. [YONHAP]

 
"As an airport which represents Korea, if the organization gives the license to a Chinese company, it will face opposition from the public."
 
CEOs from the bidding companies are set to give a presentation about their business plans and visions on Monday. After the first round of screening in March, Korea Customs Service will determine the winners through a review in April. The designated operators will open at the airport from July.
 
Domestic companies may have the upper hand in the review from Korea Customs Service. Its opinion counts for 50 percent of the total evaluation, with the earlier evaluation, done by Incheon International Airport with support from outside advisers, counting for the other half.  
 
In making a determination, 500 points out of 750 will be for management capacity and 250 points for contribution to economic and social development. The specifics include its proposals to coexist with small-and-midsized enterprises (SMEs), how much it will contribute to the betterment of the labor environment and creating jobs and eco-friendly management.
 
According to local reports, the government organization will be more favorable towards domestic companies, especially in terms of corporate contribution to society, but the customs service emphasized the standards will be equally applied for all operators.
 
"We have heard reports that it will not be easy for CDFG to cross the threshold of corporate contribution, but the screening process is the same for all companies," said a spokesperson from the Korea Customs Service. "We do not distinguish the company from any other candidates or have another set of evaluation criteria just because it's a foreign company."
 
The attention now falls to the CDFG, which is the world’s No. 1 duty-free operator in terms of yearly revenue.
 
CDFG reported 9.37 billion euros of revenue in 2021, followed by Lotte Duty Free at 4.46 billion euros and Shilla Duty Free at 3.96 billion euros, according to data from UK-based media outlet Moodie Davitt Report.
 
If the company got a spot at Incheon International Airport, it would be only the second time a foreign duty-free company has operated at the airport since its opening in 2001. Hong Kong-based DFS operated at the airport from 2001 to 2008, but failed to win the bid for the next term.
 
Established in 1984, CDFG is under the China Tourism Group and is the only state-owned enterprise authorized by the government to operate duty free businesses in the country. It achieved rapid growth during the Covid-19 pandemic, with the key driver being Hainan offshore duty free sales. Hainan is a Chinese island but offers duty free sales for domestic travelers.
 
The Chinese operator now needs a new source of profit.
 
CDFG’s annual operating profit for 2022 took a nosedive of 48.63 percent to 7.6 billion yuan ($1.1 billion). Sales fell 19.52 percent to 54.5 billion yuan.
 
With Chinese borders restrictions relaxing, the Chinese operator can no longer rely on Hainan duty free, so it’s turning its attention to its nearest source of new income at Incheon Airport, historically ranked as one of the biggest airport duty free sales locations alongside Dubai International Airport.
 
The total sales made from domestic duty-free business plummeted to 17.8 trillion won last year, compared to 2019’s 24.8 trillion won. Foreigners accounted for 83.7 percent of the sales, at 20.8 trillion won.
 
“If CDFG is awarded the duty-free license, it is feared that the company may also vie for downtown duty-free license or absorb most of the demand from Chinese travelers,” said analyst Cho.    
 
Some say having CDFG in the airport will take a toll on SMEs.  
 
“If CDFG does make it through the doors of Incheon airport, its impact will be felt more by SMEs,” said a spokesperson from a duty free operator who wished to remain anonymous. “Based on the data from 2019 before the Covid-19 pandemic, 40 percent of the sales made in duty-free stores at the airport came from Chinese consumers. And they tend to be patriotic in terms of their spending. So if CDFG takes one of the sections in tobacco or liquor, I believe they would veer towards buying Chinese products. For big companies, such as Shilla, Shinsegae and Lotte, we have other operating branches outside of the airport and also overseas as well, but for SMEs, sales generated from the airport is their primary source of profit.”

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]
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