Incheon Airport arrivals duty free sales make slow start

SOUTH KOREA. The preliminary performance of Incheon International Airport’s new arrival duty free stores opened on 31 May suggests that gross revenue is tracking behind target, writes Min Yong Jung*.

Incheon International Airport Corporation (IAAC) announced that revenue from the first week of operation totaled KW1,197 million/US$1.030 million (T1 KW871 million, T2 KW326 million) with average daily sales of KW174 million (US$150,000)– short of the government’s plan for daily sales of KW300 million (US$260,000).

Source: Incheon International Airport Corp; Moodie Davitt Business Intelligence Unit

An IAAC representative commented that the new store requires time to ramp up. It will also take time for awareness of the new duty free shopping opportunity to build among Korean travellers.

Duty free shopping on arrival gets a foothold at Incheon International Airport. But first-year sales may be more modest than projected. [All pictures: Min Yong Jung]

Without tobacco products (excluded from the permissible categories), the main sales driver in arrivals duty free has been wines and spirits, which generated 50% of early revenues, followed by other categories led by cosmetics.

While retailers have weighted the mix evenly between cosmetics and liquor, sales of the former are so far much lower than expected, not aided by some popular brands being unavailable.

Some customers interviewed at the stores commented that cosmetics prices were higher than on the internet. Another disincentive was that downtown duty free offers a much wider variety of products.

Source: Incheon Airport, Moodie Davitt Business Intelligence Unit

Headwinds to Korean arrivals duty free shopping

Incheon International Airport and its arrivals duty free retailers, SM Duty Free and Entas Duty Free, will be hoping that an increase in the duty free allowance (currently under government review) can improve sluggish sales. However, the following reasons will act as a headwind for the stores to meet the government’s target of KW300 million in average daily sales.

– The annualised sales revenue of the arrival duty free stores based on Incheon International Airport’s daily average sale target of KW300 million is KW109.5 billion. This is roughly 3.6% of the airport’s total duty free revenue in 2018 and slightly above the 2-3% sales proportion from benchmark arrivals duty free operations elsewhere in Asia [that ratio varies wildly, however. For Changi Airport, cosmetics sales would be at the lower end of the scale at about 4%, while liquor would be higher, though the recently reduced allowance will hurt business. For Centrair in Japan, the ratio is around 2-3%.]

_ The Korea Transport Institute estimates arrival duty free store sales will gross KW73 billion in 2020, implying average daily sales of KW200 million (US$172,000). Based on a run rate of the first week’s performance the store is geared to gross KW63.4 billion. However, as awareness of arrivals duty free increases that should change.

Shinsegae Duty Free has successfully shown that a build-up of available brands and effective marketing can improve sales from a start-up position. However, based on their QoQ growth rate, the arrivals DFS stores will still find it difficult to meet the KW300 million average daily sales target.

Implied arrivals duty free sales based on improvement shown at Shinsegae’s T1 airport duty free departures store which opened in August 2018; Source: Moodie Davitt Business Intelligence Unit

Struggling duty free sales and the risk posed by arrival duty free stores have prompted Asiana into reviewing the re-introduction of tobacco products.

– Even if the government follows through and raises the current US$600 per person duty free limit after review, it is unlikely the limit on liquor (1 bottle), tobacco (1 carton – and in departures only) and perfume (60ml) will be raised.

– The arrivals stores will continue to depend on the sale of liquor to drive growth, with the government having drawn a line against tobacco sales. So it’s difficult to see any increase in the duty free allowance translating to arrivals sales growth.

– As for cosmetics, which takes up a significant portion of total duty free sales, the arrival store retailerswill find it hard to compete with much larger downtown duty free operators who can provide more variety and price competitiveness.

– Duty free sales at Korean Air and Asiana Airlines in recent years have struggled in recent years as downtown duty free retailers have taken increased market share. More Koreans have opted to buy their duty free goods downtown, planning their purchases in advance rather than purchasing inflight. However, the introduction of arrivals duty free stores has spurred airlines into action with additional promotions and discounts offered from 26 May (arrivals duty free opened on 31 May).

– Korean media reports suggest struggling duty free sales and the risk posed by arrival duty free stores have prompted Asiana into reviewing the re-introduction of tobacco products. Both Asiana and Korean Air suspended the sale of tobacco products from 1995 and the early 2000s, respectively. The introduction of tobacco products allied to increased inflight retail promotions could also dent arrivals duty free sales growth.

Duty free sales have continued to decline even as airline performance indicators have improved

INCHEON INTERNATIONAL AIRPORT ARRIVALS SHOPPING IN PICTURES

*Note: As reported, Min Yong Jung has been named Senior Retail and Commercial Analyst at The Moodie Davitt Report. His appointment, the first of its kind in travel retail media, also marks the creation of the Moodie Davitt Business Intelligence Unit, a new division that will provide a new level of research and analysis for the travel retail channel.

Jung, currently based in Seoul, South Korea, will be based at The Moodie Davitt Report headquarters in London from early July. He can be contacted at MinYong@MoodieDavittReport.com

 

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