Duty free shops cash in on Chinese visitors

By Lee Hyo-sik

Competition is heating up among duty-free shop operators, fueled by the surging number of consumption-oriented Chinese visitors.

Incheon International Airport will select new operators early in February, sending retailers scrambling to win rights to operate the world’s largest duty free shopping zone by revenue. The government also plans to issue licenses for four new stores ― three in downtown Seoul and one on Jeju Island ― in the first half of this year.

Lotte and Shilla ― Korea’s two largest duty free franchises ― have been seeking to maintain their dominance here and using it as a springboard to become a globally competitive player such as DFS and Dufry. On the other hand, Shinsegae, Galleria and other mainly newcomers are looking to expand their business at the expense of existing players.

Retailers here are desperate to expand their duty free business to cash in on the growing number of foreign tourists who spend billions of dollars each year on cosmetics and other Korean-made products at duty free shops. In contrast, department stores, discount stores and other conventional retail businesses have been struggling.

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ncheon to select new operators

The operator of Korea’s main gateway to the outside world plans to accept applications on Jan. 29 from companies wanting to operate its duty free shops.

Not only Lotte, Shilla, DFS and Dufry, but also Shinsegae, Galleria, Dongwha, Sheraton Grande Walkerhill and other mid-sized players are expected to apply. In December, officials from 27 companies attended a briefing session about the bidding.

“We have divided the space into 12 areas. We will let large companies run eight sections and small-and medium-sized firms the remaining four,” said an Incheon International Airport Corp. (IIAC) official. “We will accept applications from duty free companies on Jan. 29 and organize bidding the following day.”

The official said the IIAC would evaluate applicants’ business proposals (60 percent) and bidding prices (40 percent) before selecting operators. The winners will be given rights to open duty-free shops at Korea’s largest airport for the next five years and they will be able to extend the contract for two more years.

In 2014, the airport operator earned 600 billion won ($550 million) in rent and expects to generate more than 700 billion won from this year.

“We will do everything we can to secure as many sections as possible at Incheon Airport,” a Lotte Duty spokesman said. “The IIAC will have to select at least three companies for eight sections. This means that we can obtain a maximum six areas. We see Shilla as our biggest rival. We don’t know yet who will take part in the bidding among foreign companies.”

The spokesman said Lotte had been beating competitors by offering popular brands lower prices.

“We are confident that we will emerge as a winner because we know how to operate duty-free stores better than any others,” he said. “We also have a nationwide, efficient logistics network, enabling us to offer customers various goods at affordable prices.”

Shilla also will bid.

“As always, we will do our best to run as many sections as possible at the airport for the next five years,” a Shilla Hotel spokesman said.

Four new duty free stores in Seoul

Duty free operators are also showing keen interest in four new shops, which will open in downtown Seoul and on Jeju Island.

“The government has said it will approve the opening of three new stores in Seoul and one on Jeju Island to better serve the soaring number of Chinese and other foreign tourists,” said an industry official.

“The government has not yet finalized guidelines on how it will select the operators. We expect the Korea Customs Service (KCS) will make the guidelines public within the first half of the year.”

The official said companies were more interested in downtown duty free shops because they were cash cows.

“Everybody knows that companies do not make money from airport shops because of high rents,” he said. “They make up the losses by operating stores in downtown Seoul and Busan, and on Jeju Island.

“Besides Lotte, Shilla and other existing players, the I’Park Mall, Booyoung and other companies have expressed interest in running downtown duty free shops. Competition for the four spots will be really fierce.”

Many retailers here have been looking to make inroads into the lucrative duty free business to capitalize on the surging number of Chinese and other foreign tourists. Many Koreans reluctant to open their wallets often go on a buying spree at duty free shops when traveling overseas.

According to the Korea Tourism Organization (KTO), the number of inbound foreign tourists reached 14 million in 2014, up 16 percent from a year earlier. Of the 14 million, 6.1 million were Chinese, up 40 percent.

Duty free operators here earned a combined 8.3 trillion won in revenue last year, up 21 percent from 2013, thanks largely to visitors from China, according to the customs agency.

According to the KTO, about 15 million Chinese will visit Korea in 2020, spending a combined 30.5 trillion won here.