South Korean duty-free operators chasing another boom

After years of struggle in the face of a decline in Chinese tourists and increased competition, South Korean duty-free operators are in search of a more stable and sustainable business portfolio — to reduce their reliance on Chinese visitors and generate decent profits.

The country’s duty-free business has raked in huge revenues on the back of soaring tourists, mostly from China.

But a diplomatic row between Seoul and Beijing over a missile defense system in 2017 and regulatory changes vividly underscored the need for leading duty-free operators — Lotte Duty Free and Shilla Duty Free — to accelerate their overseas push.

Sales at local duty-free stores continued to show solid growth in the past few years, reaching their highest-ever of US$17.23 billion last year, with an annual growth of 23 per cent over the past two years, according to data from the Korea Duty Free Shops Association.

The spectacular result comes even when the number of Chinese package tour travellers to South Korea continued to drop after the travel ban imposed by Beijing in 2017 in protest against Seoul’s hosting of a US missile defense system.

The number of Chinese who arrived in South Korea peaked at 8.07 million in 2016 but shrank to 4.16 million a year later, according to the state-run Korea Tourism Organization (KTO).

The number, however, rebounded last year rising 14.9 per cent to 4.78 million, accounting for 31.2 per cent of 15.34 million foreign visitors to the country, which marks a 14.9 percentage-point rise from the previous year.

Market watchers said the robust growth in their sales was mostly attributable to Chinese vendors or individual Chinese merchants who buy their duty-free purchases, such as cosmetic products, in large quantities and sell them back at their home.

But commissions doled out to the sellers, who also work with travel agents to bring in big-spending tour package groups, have been excessive, eating into the profits of South Korean duty-free operators.

The local duty-free market’s dependence on foreign tourists continued to increase with sales from foreigners accounting for 83 per cent of the total market last year, according to separate data. The figure for downtown duty-free outlets is even higher at 90 per cent.

“It is difficult to just paint a rosy picture for duty-free operators given excessive marketing costs, such as commission fees that are needed to maintain a certain level of Chinese customers,” said Cha Jae-heon, an analyst at DB Financial Investment Co.

Competition to bring in individual merchants and group travellers may intensify as more duty-free outlets are set to open in Seoul and other parts of the country later this year.

The number of downtown duty-free outlets in Seoul more than doubled from six in 2015 to 13 last year. Earlier this month, the government said it will also issue five additional licenses to local retail conglomerates.

Against this backdrop, market leader Lotte Duty Free, the travel retail division of Lotte Hotel Co, has been actively tapping into overseas markets by opening the first outpost in Jakarta, Indonesia, in 2013.