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Retailers fear Iran crisis may dampen economic sentiment
Tourists visit Lotte Duty Free's Star Avenue in Myeong-dong, central Seoul, Jan. 12. Yonhap
By Ko Dong-hwan
Duty-free sector most perilous
The escalating war in the Middle East is fueling concerns across the retail industry in Korea that rising oil prices and currency volatility could dampen consumer sentiment and weigh on spending.
Although the threats have yet to deliver a visible blow to the consumer sector, industry officials are taking a gloomy view, citing past global crises that triggered public anxiety and hurt sales.
The most vulnerable sector is duty-free retail. As duty-free product prices are often set in U.S. dollars, a weaker Korean won directly increases the price burden on consumers.
The exchange rate has fluctuated over the past week, with the local currency weakening overall. According to the Bank of Korea, the average daily fluctuation in the won-dollar exchange rate reached 13.2 won as of March 6, the highest level since March 2020, when volatility averaged 13.8 won amid heightened fears over COVID-19.
Over the past week, the won was generally traded between 1,460 won and 1,480 won per dollar, but in several overnight trading sessions it was traded near the 1,500-won level.
“A drop in the Korean won’s value inevitably raises the perceived prices for local customers,” an official from a duty-free operator said. “When the rate spikes, the number of visitors and sales drop simultaneously.”
Korea’s duty-free industry is already slowing due to factors such as the exchange rate and rising rental costs. Among the country’s four major duty-free operators, Shilla, Shinsegae and Hyundai posted operating losses in the second quarter of last year, with only Lotte remaining profitable. If the crisis in the Middle East drags on, the impact on the sector could deepen further.
Department stores distributing mostly pricey items, including luxury fashion brands and high-end furniture and electronics, are now keen on whether the war will discourage visits by customers.
Major department stores including Lotte, Hyundai and Shinsegae said that the impact is not visible yet, but their sales will be affected if the war prolongs. Unstable oil prices and stock markets here are expected to have a wider effect, freezing consumption across high-priced sectors.
Large-size discount chain retailers, on the other hand, are hoping a potential consumption freeze will turn people to cheaper products, thus becoming a potential boost for them.
At the same time, retailers are also paying close attention to growing uncertainty in supply chains, as many of the products they handle, such as imported fruits, wine, cheese and beef, rely heavily on overseas sourcing, making exchange rate movements a key variable in their cost structures.
“A strong dollar affects most products sourced overseas and can have a broader impact on overall prices,” an official from a major discount store said.
According to the Bank of Korea, consumers have always been sensitive to geopolitical risks. Composite consumer sentiment index (CCSI) here plunged sharply during the 2008 global financial crisis, the early phase of the COVID-19 pandemic in 2020, and the initial stages of the Russian invasion of Ukraine in 2022. After the Russian invasion, CCSI dropped five months in a row to hit 85.7 in July 2022, the lowest since the onset of the pandemic.