Chaebol's attempt to earn easy money raises eyebrows

By Choi Sung-jin

Major conglomerates, faced with slumping exports and sluggish domestic sales, are trying to find breakthroughs in up-market retailing by attracting cash–rich Chinese shoppers, market sources said Wednesday.

Nothing showed this better than the live-or-die struggle to win licenses for duty-free stores among distributors affiliated with giant business groups last year, they said. Yet critics of chaebol are raising issues with such strategies to earn easy money, claiming that it is neither sustainable nor desirable.

In early 2015, the Ministry of Strategy and Finance announced that it would add three tax-free shops, for the first time in 14 years, to help reinvigorate the economy through attracting more foreign tourists. To get two of three new tickets allotted to large businesses, not only the existing operators but also distributors with no experience of running duty-free shops jumped into the fray.

Leading these efforts were some scions of chaebol owners, such as Lee Bu-jin, CEO of the Shilla Hotel and daughter of Samsung Group Chairman Lee Kun-hee, and Chung Mong-kyu, son of Hyundai Motor founder Chung Se-yung and chairman of Hyundai Development. As many as 10 consortiums vied to win the other licenses allocated for small businesses.

In the “Second Duty-Free War” to find new operators for the three existing duty-free stores whose licensing periods expired late last year, the existing operators and their challengers staged a cut-throat competition. The Shinsegae Group, which was suffering from falling sales at its department stores and super superstores, and the Doosan Group, reeling from sluggish orders for overseas plants, went all-in to win the licenses.

Behind the fierce competition was the influx of Chinese tourists armed with newly-earned money, since 2010, attracted by the many well-stocked luxury stores here and the geographical proximity to China. The Chinese visitors exceeded Japanese tourists in number for the first time in October 2012. In 2014, the number of Chinese tourists to Korea totaled approximately 6.12 million. The sales at duty-free stores almost doubled from 4.52 trillion won ($3.78 billion) in 2010 to 8.30 trillion won in 2014. Chinese shoppers accounted for 70 percent of the sales at Lotte Duty-Free Store in 2014.

Yet there are clear limitations to duty-free shops serving as a breakthrough for a dormant economy, business sources say. Luxury goods and other imported items take up to 80 percent of the duty-free store sales, meaning there is little added value produced for the national economy except for profits garnered by duty-free shops. Government and business officials say they will raise the shares of local products among total sales but few can say for sure whether this can become a reality because all this is up to the Chinese shoppers, they note.

Even more uncertain, no one knows whether the Chinese will continue to come to Korea to spend money. Since 2007, Korea had exceeded Japan in terms of the number of foreign tourists attracted but this trend turned around last year. According to Japanese tourism authorities, the number of foreign tourists to Japan in the first nine months of 2015 totaled 14.48 million, up 48.8 percent from a year earlier, thanks to more than 100-percent increase of Chinese tourists. Over the cited period, foreigners who visited Korea fell 8.4 percent to 9.58 million.

Aside from the uncertainty of tourism, critics of family-run conglomerates point to the rapidly dwindling entrepreneurship among third- or fourth-generation managers among chaebol family members.