SOUTH KOREA. Incheon International Airport Corporation (IAAC) expects to unveil its much-anticipated duty free and food & beverage tenders for the new Terminal Two in the first week of December.
Bidding for the five-year contracts will close by mid-February 2017 with awards expected to be announced by the end of the same month, according to IIAC Deputy Executive Director, Commercial Marketing Group, Bum-Ho Kim.
The tight timeline recognises that the first phase of the ambitious T2 development will open next October, with ultimate project completion in 2023.
Kim, speaking to The Moodie Davitt Report at Incheon International Airport on Saturday, said that the food & beverage tender will be restricted to Korean companies but duty free (as reported previously) will be open to international and local players. Local/international joint ventures are not permitted by law [only individual entities are allowed to bid].
T2 is a US$5 billion project and Kim said that the commercial tenders are crucial to its funding, especially as duty free accounts for almost 40% of total Incheon International Airport revenues.
Nonetheless he noted that IIAC was conscious of the heavy financial burden that the T1 retailers (principally Lotte Duty Free, The Shilla Duty Free and Shinsegae Duty Free) are facing and has tweaked the financial model for T2. “We have slightly changed the rental scheme,” he said. “For them to survive and boom is actually very important for Incheon Airport also.”
Meanwhile, as previously reported, the terms of the T1 concessions will be adjusted by the same percentage (roughly 30%) of traffic that is moving to T2 (Korean Air flights plus SkyTeam alliance members, including Delta Air Lines, KLM and Air France). While retailers would like to see an additional adjustment given that the highest-spending passengers are moving to T2 (those on Korean Air flights, which will generate 90% of the terminal’s traffic), Kim emphasised the need to wholly fund the T2 development without government support.
T2’s passenger mix will vary considerably from T1 with Chinese nationals accounting for around 14% of the mix, compared to about 25% at T1 (where Koreans represent 65% and Japanese 5%).
“Terminal 2’s business environment is different from T1,” said Kim. “The size of the shops is less than a third of T1 – almost 10,000sq m. And the shops’ layout will be concentrated in the central area.”
As a result of that concentration, IIAC will opt for fewer directly competing retailers than T1, Kim said.
The key categories (perfumes & cosmetics, around 40% of current sales), liquor & tobacco (almost 35%) and fashion & other products (circa 25%) will each be tendered on a still undecided formula. It is unlikely that a single retailer will win multiple categories due to monopoly sensitivities. Having three or four main retailers is likely, though Kim emphasised nothing is decided. T2 will also have at least one small & medium enterprise (SME) retailer.
Pressed on whether international retailers really stand a chance against local rivals, Kim said: “Incheon Airport has been open 15 years and we have had three duty free [concession] terms. We have had only one international concessionaire before – DFS – and we’ve had one or two try to come in since but they failed unfortunately. There are no barriers for them [international players] but as you know the main items on the Korean market are Korean cosmetics and perfume. So the committee wonders how they [foreign retailers] could handle local brands – that’s the main worry.”
Other concerns include the Korean market’s volatility and ultra-competitiveness, he added, noting: “So they [international retailers] have to show us their strategies and their key factors to survive.”
The food & beverage tender will follow a similar timeline. Because of the airport’s focus on Korean food (some 90% of the offer), international bidders are not being invited. Additionally, in-demand international brands (for example, fast food favourites) can be handled competently by Korean operators. Kim said.
Strong market recovery in 2016
International passenger numbers are expected to rise +19% this year to 56 million, Kim said. “It’s an amazing number, we were expecting only an +8-9% increase. These are very good numbers, even allowing for the MERS crisis last year.
“The non-aeronautical revenue increase has also been very nice. For the duty free business, sales are up by around +15% over last year. Compared to 2014 [a more realistic base year due to MERS in 2015 which devastated traffic and sales for several months -Ed] we had a duty free sales increase of +10% – even though there have been many changes at Incheon Airport with many operators under the one umbrella. We were worried about that, with too much competition, but the result is good.
“Sales are ok – also for the SMEs, which are doing good business. The problem [for the major retailers] is that they proposed too much for the rental fees.”
Does that reality of heavy loss-making retailers concern IIAC? While the corporation understands the situation, the rental system cannot be changed, Kim replied, adding, “Unfortunately there is no way to reduce their rental fee even though they lose money. But it’s a long-term business, not dictated by any one year.”
Look out for an extended interview with Bum-Ho Kim in our special Korean report in the next issue of The Moodie Davitt Report Print Edition.
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