SOUTH KOREA. Incheon International Airport Corporation (IIAC) says that it is encouraging foreign companies to bid in the anticipated Terminal 1 duty free tender later this year. T1 represents the biggest share of the revenue spoils at Incheon, the highest-grossing duty free airport location in the world last year with sales of US$2.4 billion.

Several of T1’s five-year concessions covering liquor & tobacco, perfumes & cosmetics and general merchandise held by The Shilla Duty Free, Lotte Duty Free and Shinsegae Duty Free expire in September 2020. The contracts vacated by Lotte Duty Free in July 2018 (DF1, DF5 and DF8) due to the retailer’s concerns over excessive rents are unaffected as replacement retailer Shinsegae subsequently took up a new five-year tenure.

At a meeting with The Moodie Davitt Report at IIAC headquarters near Incheon International Airport today, Executive Director/Concession Development Group Chang-Kyu Kim said, “We are processing the preparations and the plan [for the tender] is for the end of the year, around November.

“The door is always open,” Kim said when asked if foreign companies could bid. “There’s no discrimination against any foreign companies. As an airport company we welcome the participation of any of the foreign operators.”

Incheon International Airport Corporation Executive Director/Concession Development Group Chang-Kyu Kim and Senior Manager/Duty Free Management Team Ms Sul-Hee Shin talk to Martin Moodie at group HQ today.

Questioning that proposition, The Moodie Davitt suggested that South Korea’s controversial dual-assessment system (see panel), which sees Korea Customs Service (KCS) evaluate the bids after IIAC’s initial ranking, would make it very difficult for a foreign retailer to win. The KCS criteria include significant weighting for past local experience and CSR contributions, for example.

However, in an important revelation, Kim said that the IIAC is discussing with KCS a different initial evaluation for foreign companies which do not have a track record in South Korea. By focusing on the respective retailers’ proposals, rather than past performance, a more even playing field would be created he said.

The Moodie Davitt Report also asked if the recent change in Korean duty free licensing arrangements – effectively giving major retailers a five-year semi-automatic extension of their initial five-year licences – might mean the T1 contracts could also be extended. “Currently that is not possible because the contracts have already been struck for five years,” replied Kim.

However, an opposition party bill to also extend the Incheon T1 contract terms by five years has been tabled in the parliament. While the chances of such a retroactive proposal being passed into law by the National Assembly are modest, according to local sources, the development adds further spice to an already highly competitive Korean travel retail landscape.

Bids on the arrivals shops contracts were tabled at Incheon International Airport Corporation headquarters today.

Sources say the issue is a “hot potato” among rival travel retailers. The Shilla Duty Free and Shinsegae Duty Free would be happy to see their contracts extended for additional five-year periods. However, Lotte Duty Free, alarmed by its drop in market share since the controversial T1 exit, is keen to have the opportunity to re-enter the fray (albeit on better terms) and is opposing the move vehemently.

Kim said the tender will basically follow the 2015 configuration, albeit with some tweaking to aid passenger convenience. The financial model will be similar but with online sales increasing so fast, the IIAC will weigh up how to better factor that component into any contracts.

Arrivals shop decision imminent as “world’s biggest SME” tables bid

Meanwhile, bids closed today on the two contracts for the first arrivals shops at Incheon International Airport. The Moodie Davitt Report can confirm that nine retailers tabled offers across the T1 concession (two shops) and T2 contract (one shop), generating a total of 14 offers. Two companies will be short-listed by IIAC and then KCS will select one retailer for each contract (with the possibility of the same operator being granted both concessions).

Dufry Thomas Julie Korea has been operating at Busan Gimhae International Airport since 2013 and recently gained a five-year contract extension.

How the arrivals contracts will be judged

IIAC will assess bids on the basis of a 60% weighting for the business (technical) plan and 40% on the financial proposal. Under the country’s controversial two-tier judging system, the corporation’s results will then be handed to Korea Customs Service for a final evaluation and choice of winners.

In a critical change, introduced by Korea Customs Service on 1 February 1, IIAC scoring will count for just 250 of the final 1,000-point rating that will dictate the victors. The move is intended to reduce the emphasis on the financial component of the tender and thus cool what the government agency views as overheated bidding competition.

Bidders must offer a minimum guarantee rate (MGR) per category – 21.7% for perfumes & cosmetics; 22.3% for general merchandise; and 26.3% for liquor. Tobacco products are excluded from the arrivals offer.

The bid is open only to small & medium enterprises (SMEs), including, controversially, Dufry Thomas Julie Korea Co, operator of one of the two duty free stores at Busan Gimhae International Airport. As Dufry, the world travel retail giant, is only a minority partner in the joint venture, it still ranks as an SME. Its participation in the bid , confirmed today, has caused serious rancour among competitors.

“Dufry must be the world’s biggest SME,” was the sardonic view of one leading Korean travel retail executive, who requested anonymity.

“As a strong multinational retailer in the world, Dufry has greater power and the ability to buy luxury goods at a lower price compared to conglomerates such as Lotte,” a spokesman for Hana Tour-controlled SM Duty Free told The Korea Times.

“The government’s decision to allow Dufry to participate in the tender process goes against their initial plan to benefit SMEs. It is clearly hurting the bottom lines of SMEs.”

That view won’t perturb Dufry or its local partner, which are simply benefiting from regulations as they stand. But while the Swiss-Korean alliance will be a formidable competitor, it faces stiff rivalry from established Incheon retailer Entas Duty Free (which also operates in the nearby Paradise City casino resort), SM Duty Free, Grand Duty Free, City Duty Free and others.

Arrivals sales could hit US$100 million, says airport corporation – but retailers not so sure

“We think sales will hit around US$100 million in the first full 12 months,” said Kim. Liquor will be the biggest portion, he predicted, while ginseng products (much favoured by the Chinese) and other packaged foods, plus beauty products will also be popular he added.

Incheon International Airport Corporation Executive Director/Concession Development Group Chang-Kyu Kim and Senior Manager/Duty Free Management Team Ms Sul-Hee Shin believe first full-year arrivals duty free sales could rise as high as US$100 million, though most retailers believe the figure will come up well short of that. Whatever the figure, competition for the two contracts is intense.

Most retailers in Korea, however, including Korean Air (theoretically the retailer likely be most impacted by arrivals shops), believe sales will be well below the US$100 million mark. The absence of tobacco products will be a crucial limitation, most believe, while most Koreans like to exit Incheon International Airport as quickly as possible and are unlikely to stop to shop, some claim.

Contract awards are expected to be announced in the later part of this month. The target date for start-up is the end of May.

Note: Martin Moodie has been in Seoul this week  preparing an extensive analysis of the Korean travel retail market. Look out for interviews with Lotte Duty Free, The Shilla Duty Free, Shinsegae Duty Free, Hyundai Duty Free, Korean Air, Incheon International Airport Corporation, Entas Duty Free and others in coming weeks.

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