SOUTH KOREA. Duty free sales in the Republic – the world’s biggest duty free market – rose by +8.55% month-on-month in April to KRW1.56 trillion (US$1.39 billion). That represents an approximate +72% year-on-year increase from last April’s US$804 million (itself a -54% year-on-year slump as the then fledgling COVID-19 pandemic began to take its commercial toll).
Once again the market was dominated by foreigners (mostly daigou traders), who accounted for 95% of sales (KRW1.48 trillion/US$1.32 billion, an increase of +9.3% month-on-month). The average transaction value per foreign customer reached an extraordinary KRW29.4 million (US$26,370), a reflection of the daigou-dominated business that Korean duty free has become.
Downtown sales accounted for the vast majority of revenue, reaching KRW1.48 trillion (US$1.33 billion). Airport sales, which remain heavily impacted by the pandemic, totalled just KRW9.7 billion (US$8.7 million).
Offshore duty free (domestic duty free sales to Korean nationals on Jeju island) reached KRW66.6 billion (US$59.8 million), with sales to foreigners on Jeju generating a mere KRW532,556,258 (US$478,000).
Shinhan Investment Corp analysts Sung June-won and Hanny Lee commented in a report in BusinessKorea: “Sales to small-scale Chinese merchants, the main customers of domestic duty free shops, have been on a steady growth track.
“Downtown duty-free shops, the preferred purchase venue of individual Chinese merchants, saw sales expand by +20.6% month-on-month (MoM) in March and by +9.3% MoM in April (some duty free shops outperformed the market in April sales growth and are seeing steady sales continue into May).”
“We believe the strong performance of Hainan duty free shops is a one-off event caused by the pandemic, and expect wealthy Chinese consumers to return to shopping overseas, especially in Korea and Japan, once travel restrictions are lifted” – Shinhan Investment Corp
Even after accounting for weak seasonality – duty free revenues typically dip by up to -5% in May and June compared with April – Shinhan Investment Corp said that it expects Q2 sales to come in “much higher” than Q1.
The analysts forecast quarterly domestic duty-free sales growth at +15.2% quarter-on-quarter (QoQ) for Q2; +12.8% QoQ for Q3; and +6.1% QoQ for Q4. “Duty free sales in terms of absolute value should continue on a QoQ uptrend through the entire year,” they said.
Sung and Lee painted an upbeat picture for Korean duty free retailers, particularly for Hotel Shilla (parent of The Shilla Duty Free). They noted that while sales contribution from the Jeju downtown duty free store remains limited, that business will enjoy larger growth in sales vs. its peers once flights linking Jeju with China recover to pre-pandemic levels.
Hainan a one-off?
More questionably, the report suggested that Hainan’s strong growth of recent times is a “one-off”, driven by the pandemic’s impact on Chinese outbound travel. That may represent wishful thinking given the lingering effect of the pandemic on global and regional travel, the proliferation of retailers in Hainan, and the dramatic impact of the enhanced duty free shopping policy introduced on the island in July 2020.
“Duty free sales growth in China has been driven mainly by wealthy Chinese consumers flocking to Hainan for duty free shopping amid the country’s restrictions on outbound travel,” Sung and Lee wrote. “We believe the strong performance of Hainan duty free shops is a one-off event caused by the pandemic, and expect wealthy Chinese consumers to return to shopping overseas, especially in Korea and Japan, once travel restrictions are lifted.”
The report concluded: “Domestic duty free sales are set to rise at a faster pace once China sees a sharp increase in vaccinations and Korea lifts restrictions on inbound travellers. We expect domestic duty free sales to rise to new highs in 2022, with strong demand from individual Chinese merchants to drive subsequent improvement in earnings at domestic cosmetics companies.”