Concerns growing over duty free store's China dependence

By Lee Hyo-sik

Shoppers pack a Shinsegae Duty Free store in Myeong-dong, downtown Seoul, on its opening day, May 18. Concerns are growing over duty free stores’ heavy dependence on Chinese shoppers. / Courtesy of Shinsegae Duty Free

Lotte, Shilla and other duty free shops here are too dependent on Chinese tourists who are responsible for nearly 70 percent of their sales.

Analysts say the growing dependence of duty free shops on Chinese shoppers is their biggest risk, cautioning that they would suffer greatly if the Chinese stop coming. The stores should make efforts to diversify customers by attracting more people from Russia and Southeast Asia, they said.

According to data submitted by Lotte Hotel to the Financial Services Commission, Sunday, the nation’s largest duty free store operator said it earned 70.8 percent of its sales from Chinese customers in the first three months of 2016, up from 63.3 percent a year earlier.

In contrast, Japanese shoppers accounted for only 3 percent of Lotte Duty Free sales, down sharply from 21.6 percent in the first quarter of 2012.

Shilla and other duty free shops are also in similar situations, suggesting that the fate of Korea’s duty free industry largely hinges on those coming from China.

“It is an uncomfortable truth that local duty free shops are surviving on Chinese tourists. Without them, they wouldn’t last even a day,” said an official at one of major duty free shop operators, who declined to be named.

“But the problem is that Chinese would stop coming here at anytime like when the Middle East Respiratory Syndrome (MERS) outbreak swept the country a year ago,” he said. “It is too risk depending on customers from one particular country. The Japanese used to account for over 50 percent of duty free shoppers, but since 2012 when their number began declining, the stores suffered greatly. They should not repeat the same mistake.”

In addition, the intensifying competition has aggravated the profitability of duty free stores.

HDC-Shilla, Hanwha Galleria, Doosan, Shinsegae and Hana Tour have opened stores in Seoul this year, pushing the number of stores in the capital to 10. Four more stores are expected to open in Seoul in the first half of 2017, making duty free stores less profitable.

“Fourteen shops will be competing fiercely to attract a limited number of Chinese and foreign visitors next year. This is just not good for stores,” the official said. “Duty free has and will be a less profitable business.”

Duty free stores are also found to have earned about 60 percent of their revenues from selling skincare and other cosmetics products, while paying more and more money to travel agencies to bring foreign tourists who travel in group to their stores.

In the first quarter of this year, cosmetics accounted for 58.9 percent of Lotte Duty Free sales.

The company also paid an average of 11.1 percent of sales as an incentive to travel agencies or tour guides, who brought foreign tourists to its shops. This is up from 10.8 percent in 2015 and 9.9 percent in 2014, in line with the increasing number of duty free stores.