Duty free stores offer voluntary resignation schemes in fight for survival

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Duty free stores offer voluntary resignation schemes in fight for survival

Published: 19 Nov. 2024, 06:00

KIM JU-YEON
[email protected]

Customers shop for cosmetics at Shinsegae Duty Free's Myeong-dong branch in Jung District, central Seoul. [SHINSEGAE DF]

Employees of Korea’s “Big Four” duty free firms are on the chopping block as the duty free industry, once expected to recover with buoyed travel after Covid-19 pandemic restrictions were lifted, has yet to see a respite.

The stores' previously most avid customers — Chinese resellers and group tourists — are simply not spending as much as they used to, and tourists’ spending patterns have shifted in priority to experiences rather than shopping.

The “Big Four” duty free shops — Lotte Duty Free, Shilla Duty Free, Shinsegae Duty Free and Hyundai Duty Free — all posted losses in this year’s third quarter. The stores are now slimming their workforces and say they are transitioning into an emergency management phase to save themselves.

Shinsegae DF, the operator of Shinsegae Duty Free stores, said it will accept voluntary resignations this month from all employees who have worked for five consecutive years or more. It is the first time Shinsegae DF has opened such a scheme since the company was founded in 2015.

Lotte, meanwhile, accepted resignations in August following one in December 2022. HDC Shilla also offered voluntary resignation packages in August.

Hyundai Duty Free shop in Hyundai Department Store’s Trade Center branch in Gangnam District, southern Seoul [HYUNDAI DF]

The financial statements of the "Big Four" for this third quarter were bleak. Lotte Hotels & Resorts’ duty free business division posted 46 billion won ($33 million) in operating losses. While the loss includes 16 billion won in one-time expenses for voluntary resignation packages, the business has logged three consecutive quarters in the red. Shinsegae, Shilla and Hyundai also recorded third quarter losses of 16.2 billion won, 38.2 billion won and 8 billion won, respectively.

The failure of the lack of customers to rebound following the pandemic was the largest contributing factor. A total of 1,464,300 foreign tourists visited Korea in September, according to the Korea Tourism Organization. That’s almost similar to the 1,459,664 travelers who came to the country in September 2019, before the start of the pandemic.

The number of people who shopped at duty free stores, however, didn’t follow. Around 20 million foreign travelers bought items at domestic duty free shops in 2019; around 6 million, or not even one-third, shopped at the stores last year.

After retail chains entered China, resellers who offer Korean goods on the mainland have not been purchasing from duty free shops. Tourism trends have changed, too. Individual or small groups of travelers now come to Korea instead of group tours, which typically included a stop at duty free shops, and tourists are spending their money on experiences such as dining instead of shopping.

Chinese group tourists shop at a Lotte Duty Free's Myeong-dong store in Jung District, central Seoul in August 2023. [JOONGANG ILBO]

“Most foreign tourists go to Myeong-dong to experience Korean culture or shops on the street that are frequented by locals, such as Olive Young or Daiso, instead of duty free stores,” a source in the duty free industry told the JoongAng Ilbo, an affiliate of the Korea JoongAng Daily.

“Duty free shops relied on Chinese tourists [for their sales] so China’s struggling economy has contributed to the industry's deterioration.”

Industry insiders worry that an already bleak situation will worsen with the end of reduced patent fees this year as well as Incheon Airport’s expected rent price hike. Duty free shops are required to pay a certain percentage of their sales as patent fees that are meant to return part of duty-free profits to society. After the Covid-19 pandemic, the government amended custom law enforcement rules to cut those patent fees by 50 percent. Companies typically pay a year’s patent fees the following March. The current enforcement rules applied until Dec. 31, 2023, meaning the companies will have to pay the patent fees for 2024 in full in March 2025.

“It’ll be alright if the rules are changed before March 2025 but if not, the industry will be hit hard,” a source in the duty free industry said.

Shinsegae Duty Free and fashion house Chanel opened a holiday-themed pop-up podium, named Chanel Winter Tale, in Incheon Airport's Terminal 2. [SHINSEGAE DF]

The duty free stores of Shilla, Hyundai and Shinsegae, which have shops in Incheon Airport, will be further affected as the airport is expected to raise their rent. Incheon Airport changed its rent calculation formula last year to set prices in line with the number of travelers who use its terminals. If the number of airport users increase, so does the rent.

With Incheon Airport also finishing up its Terminal 2 expansion, stores that had been paying cheaper rent during the construction period will also have to pay regular prices now that its almost over.

"If reducing patent fees is impossible due to the pandemic ending, given the industry's situation, we are desperate for any measures such as levying the fees on the surface area [of the store] instead of revenue, or allowing wider use of the arrival hall for item pickup so that we can get more domestic customers," a source from the duty free industry said.

BY LEE SU-JEONG, KIM JU-YEON [[email protected]]