Golden Ticket
A much-hyped bidding race for licenses to run new duty-free stores in Korea ended on July 10. The license for a shop in Jeju City went to the Jeju Tourism Organization. The Korea Customs Service (KCS) awarded another license to a consortium of Hyundai Development Company (HDC) and Shilla Duty Free. A third license was awarded to Hanwha Galleria. And the fourth license was awarded to SM Duty Free, a consortium of medium-sized companies led by Hana Tour.
Competition was fierce during the bidding process, as these new duty-free stores in downtown Seoul are expected to rake in approximately 1 trillion won (US$868 million) annually due to big demand from Chinese tourists.
Experts say the heated race for the bid also reflects sluggish domestic consumption. Inflation-adjusted private consumption increased only 1.8 percent last year, marking the lowest growth since 2009. The local major retailers took the brunt of the prolonged economic slowdown and sluggish domestic consumption, which was also hit by a boom in online shopping and direct buying from online shopping malls hosted overseas. Chinese tourists’ seemingly insatiable appetite for shopping has been a rare bright spot in a local retail sector grappling with sagging sales.
Big Business
The duty-free store business is booming in Korea. In 2014, the annual sales of the duty-free market in Korea were ranked the highest in the world, recording 10 trillion won (US$8.7 billion), which accounts for 13 percent of the revenues from all duty-free shops on the planet. The same year, the sales of all duty-free stores in Korea increased 22 percent from the previous year, recording 10 trillion won, up from 8.3 trillion won (US$7.2 billion). The average annual growth from the last three years is 14.7 percent.
Overall, duty-free shops in downtown Seoul prove to be more profitable than shops in other cities or at transportation hubs like airports and seaports. According to the Ministry of Strategy and Finance, in 2014 the turnover of downtown duty-free stores in Seoul recorded about 5.4 trillion won (US$4.7 billion), marking a 32.2 percent increase from the previous year. This is even higher than the previous year’s 21.6 percent growth. In contrast, airport duty-free stores recorded a mere 5.9 percent growth, which translates into 2.5 trillion won.
For this reason licenses to operate duty-free stores in downtown Seoul are widely seen as a game-changer for those who are struggling to secure new profit engines.
Monopoly Duty Problem
Despite anti-monopolistic efforts, the industry has been dominated by two market leaders, Lotte Duty Free and Shilla Duty Free, as their sales account for 80 percent of the all sales of 43 local duty-free shops around the country.
In 2013, in a bid to prevent monopolies, KCS revised customs regulations, which obliged the Korea Customs Service (KCS) to redistribute the licenses of existing duty-free stores through open competition every five years. Before 2013, the Korea Customs Service (KCS) simply renewed the licenses of existing operators’ duty-free shops after a cursory checkup. Accordingly, the bids for licenses to run duty-free stores has been open to large corporations, small and medium enterprises (SMEs), and foreign bidders since 2013. The duration of the licenses was also shortened from 10 years to five.
Small Duty Struggle
Despite participation since 2013, SME-owned duty-free stores in Ulsan, Changwon, Daegu, Daejeon, Suwon, Incheon, and Cheongju have been relatively poor compared to those run by major domestic retailers. Although the overall market size of the duty-free business in Korea has been growing, the share of SME-run duty-free stores has been relatively insignificant. According to data compiled by the KCS last year, the sales of SME-run duty-free stores reached a mere 4.8 percent (amounting to 401 billion won ) of the total sales of 8.3077 trillion won (US$7.2141 billion) of all 43 duty-free stores in Korea.
Among several factors, Industry watchers pointed out “accessibility to Chinese tourists” as one of the most prominent ones. Namely, as Chinese tourists concentrate in cities like Seoul, Busan, and Jeju City, SME-owned duty-free shops missed the fruits of extensive growth in the industry.
High initial investment costs, high lease rates and operating costs represent another hurdle for SME participation. In the 2014 bidding race, of the four licenses for duty-free stores at Incheon Airport reserved for four SMEs, one went to Charmzone Cosmetics. Charmzone Cosmetics struggled to pay the requisite initial six month reservation fee. In the end, Charmzone’s bid ended in failure and the company lost its 10 billion won (US$8.7 million) deposit.
Sourcing ability and handling inventory is another challenge for SMEs. The government announced that it expects an additional 300 billion won (US$260 million) in new investments and the creation of 4,600 new jobs from the opening of new duty-free stores in downtown Seoul.
A high lease rate is another barrier for successful entry by SMEs. For instance, according to the 2013 record, the annual rent for a duty-free shop at Incheon airport, recorded 615 billion won (US$534 million) at a minimum.
Duty-free Plans
[[{"fid":"12157","view_mode":"body_image_right","fields":{"format":"body_image_right","field_file_image_alt_text[und][0][value]":"Hanhwa plans to open a 9,900 square meter luxury duty-free store at 63 Square in Yeouido, at the foot of one of Seoul's landmark skyscrapers. (Photo via Hanhwa Galleria)","field_file_image_title_text[und][0][value]":""},"type":"media","link_text":null,"attributes":{"alt":"Hanhwa plans to open a 9,900 square meter luxury duty-free store at 63 Square in Yeouido, at the foot of one of Seoul's landmark skyscrapers. (Photo via Hanhwa Galleria)","height":372,"width":550,"class":"media-element file-body-image-right"}}]]HDC Shilla and Hanwha Galleria were the winners of the contest. Also, Hana Tour won the golden ticket competing with the seven SMEs that had competed for the slot reserved for them. The KCS evaluated the businesses on factors like management abilities, tourism infrastructure, support for smaller companies, contribution to society, and a very crucial five minute presentation a day prior to the announcement. “Through accurate due diligence and fair evaluations, we picked businesses that can invigorate the duty-free industry,” said Lee Don-hyun, vice commissioner of the KCS.
Shilla duty-free paired up with HDC, another conglomerate, to develop what they call the world’s biggest downtown duty-free complex in Yongsan, the railway hub nestled in between key tourist spots. HDC Shilla plans to open its duty-free shop at the I’Park Mall with a floor space of 65,000 square meters (121,000 square feet). It has parking capacity for 400 large tour buses. I’Park Mall is adjacent to a KTX express train terminal that links Seoul with the rest of the country.
The company also has plans to boost the economy of Yongsan district, collaborating with the electronics retail cluster there to redevelop it as a major destination for foreign tourists.
[[{"fid":"12158","view_mode":"body_image_left","fields":{"format":"body_image_left","field_file_image_alt_text[und][0][value]":"Hana Tour plans to turn its headquarters in Insa-dong into a giant duty-free outlet. (Photo via Hana Tour)","field_file_image_title_text[und][0][value]":""},"type":"media","link_text":null,"attributes":{"alt":"Hana Tour plans to turn its headquarters in Insa-dong into a giant duty-free outlet. (Photo via Hana Tour)","height":688,"width":550,"class":"media-element file-body-image-left"}}]]The second winner, Hanhwa Galleria, will open a 9,900 square meter luxury duty-free store in the 63 Building on Yeouido, one of Seoul's landmark skyscrapers with an unobstructed view of Seoul and the Han River. The building is on a highway linking Seoul and Incheon International Airport. It is also close to five-star hotels in Yeouido, the Han River park, IFC Mall, and both Incheon and Gimpo airports, the main gateways to Korea. “This will be the best location in terms of accessibility,” a Galleria official said.
Hana Tour, the nation's biggest travel agency, unveiled its plans to turn its headquarters in Insa-dong into a giant duty-free outlet. The building is surrounded by major tourist attractions in Seoul like Gyeongbokgung Palace.
“We have time-tested skills and knowhow about products that tourists want to buy and how to attract their attention,” a Hana Tour official said. “We will make full use of our experience to make it a successful duty-free outlet.”
The licenses at stake will be valid for five years under a revised customs regulation that halved the contract period. The winning bidders are required to open their respective stores within six months after winning the bid.