Duty free drives Hyundai Department Store’s first double-digit growth since Q3 2016 but costs drag

Korean duty free: A special report

Look out for Martin Moodie’s profile of Hyundai Duty Free, including an interview with Managing Director Yuk Woo Seok, in the May 2019 edition of The Moodie Davitt Report.

It is part of a comprehensive on location round-up from the world’s biggest duty free market, which also includes interviews with:

• Lotte Duty Free CEO Kap Lee
• The Shilla Duty Free President of Travel Retail Division Ingyu Han
• Shinsegae Duty Free MD Merchandising Team Director Seok-Ho Hong
• Entas Duty Free CEO David Yu
• Korean Air General Manager Inflight Sales Team Seung Joon Oh
• Incheon International Airport Corporation Executive Director/Concession Development Group Chang-Kyu Kim

SOUTH KOREA. Duty free was to the fore as Hyundai Department Store today reported a 15.3% year-on-year increase in gross revenue in the first quarter to KRW521 billion (US$440 million), its first double-digit sales growth since the third quarter of 2016.

Operating profit declined 26.9% to KRW75.1 billion (US$63.4 million), however, as the company increased marketing expenses to drive duty free sales.

Hyundai’s first quarter results provide a glimpse into the early days of its new duty free business in Seoul, which opened its doors in November 2018 and drove the total sales growth.

The results are of particular interest with Hyundai Department Store being a newcomer to the duty free market and another relatively recent sector debutante Hanwha Galleria having just announced its exit from the channel.

Hyundai’s duty free business grossed KRW157 billion (US$132 million) in the first quarter, but losses widened to KRW4 billion (US$3.4 million). The company is also targeting daigou customers with its increased marketing spend. More than 80% of its duty free sales were estimated to come from daigou shoppers, whom the company has worked tirelessly to attract to its stores.

Daily average sales at the company’s store climbed month-on-month in the first quarter, as they did at The Shilla Duty Free. Hyundai reported average duty free sales of KRW1.4 billion (US$1.18 million) in January, KRW1.5 billion (US$1.26 million) in February, and KRW1.8 billion (US$1.52 million) in March.

Hyundai said that its department store sales were flat. It was always going to be a difficult period in comparitive terms as the opening of the 2018 Winter Olympics in the first quarter of 2018 drove higher than usual traffic and sales. Department store revenue growth was buoyed by growing sales at the company’s new Daegu outlet and recently-expanded Kimpo and Cheonho-dong stores.

Important arrival: Hyundai Department Store Duty Free opened for trading last November at the famous retailer’s Trade Center branch in Seoul’s Samseong-dong business district.
Source: Moodie Davitt Research.
Source: Moodie Davitt Research.

Buoyed by increased demand and spend per person among VIP customers, sales of department stores in major metropolitan areas have outperformed total retail sales since the beginning of 2018. However, department store operators have increasingly found it difficult to open new stores in key locations because of market saturation and the lack of available land.

Hyundai Department Store’s last double-digit sales increase (prior to the first quarter of 2019) was in the third quarter of 2016, when 10.3% year-on-year growth was recorded. The result was in large part due to growing sales at the company’s then-new Pangyo department store, which was at the time the world’s largest department store.

Hyundai Department Store total sales growth by quarter. Source: Moodie Davitt Research.

Hyundai’s duty free performance is vital if the company is to achieve its long-term ‘Passion Vision 2020’ goal of grossing KRW20 trillion (US$16.9 billion). The existing business at the Hyundai Department Store Group grossed KRW16 trillion (US$13.5 billion) in 2017. But with growth lagging and no immediate plans for major M&A activity in the near-term, building up sales of the duty free business remains key.

Beauty (above) and luxury (below) are the key categories at Hyundai’s duty free store.

All hands are on deck to prioritise sales growth at the company’s duty free shop in the Trade Center department store, but the company is already planning for future duty free licence tenders. The head of Korea’s Ministry of Strategy and Planning has convened a committee to review new duty free licence issuance, with at least two new permits expected this year based on the booming (though daigou-driven) market of 2018.

Hyundai Department Store is believed to be reviewing its Dongdaemun store and its new department store in Yeouido-dong as potential sites to launch its bid from.

Martin Moodie met Hyundai Department Store Duty Free Managing Director Yuk Woo Seok at the new store. Look out for his comprehensive report on the South Korean duty free market in the May 2019 edition of The Moodie Davitt Report.
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