SOUTH KOREA. The world’s biggest duty free market continues to be racked with controversy amid political scandal, a slump in Chinese tourism, an aborted IPO and a convoluted airport retail tender.
As reported, South Korea’s duty free industry has been hit hard by the fall-out from the THAAD anti-missile system dispute with China. The country’s adoption of the US system has outraged the Chinese government, leading to a ban on group tours to South Korea from 15 March and a resultant alarming fall in spending.
Korean Tourism Organization figures (see tables below) published this week show a devastating -40% year-on-year decrease in Chinese arrivals for March, representing a 29.2% share of visitors, compared with a 46.8% share for 2016. That blow has been softened to a limited extent by rapid growth in outbound Korean travel this year (up +17.2% for the first quarter) and in Japanese arrivals (+21.5%).
The ongoing regulatory, political, corporate and commercial chaos has cast a dark shadow over what had been one of the most buoyant markets in travel retail history
Given their previously heavy reliance on Chinese shoppers (around 70% of the market by value), all travel retailers are reeling. But industry giant Lotte Duty Free’s agreement to site THAAD on company land meant it has borne the brunt of the ferocious Chinese backlash. With its business heavily dependent on Mainland customers, the ban on group tours prompted a -40% fall-off in Lotte sales to Chinese shoppers between 20 and 26 March and the tail-off has steepened since.
The THAAD crisis is just one of several blows to Lotte Duty Free over the past 18 months. The retailer first lost, then won back, its trading licence for the magnificent new Lotte World Tower Duty Free store. But even its comeback has been tainted by the Korean prosecutors’ recent decision to indict Lotte Chairman Shin Dong-bin on bribery charges. The lawmakers concluded damningly that there was sufficient evidence (for charging purposes) that the company gave KW7 billion (US$6.2 million) to a sports foundation linked to the country’s subsequently impeached President Park Geun-hye in return for favourable treatment on the licence bid.
Worse may be to follow. A Korea Customs Service spokesman, citing tender guidelines, told local media earlier this week that Lotte Duty Free will be stripped of its World Tower licence if Shin is found guilty.
Lotte Group’s much-touted, much-delayed IPO, while not dead in the water, is becalmed, seemingly for some time. Even the fact that it stands to share the major spoils in the Incheon International Airport Terminal 2 duty free tender is little solace – after all, Korea’s main gateway is also facing a worrying downturn in Chinese passengers, off by -37% year-on-year in the first ten days of April.
Even the country’s ability to resolve or at least ameliorate the THAAD dispute has been critically undermined by President Park’s impeachment and the subsequent political impasse
That tender has itself sparked constant controversy, thanks to Korea Customs Service’s insistence on a complex two-tier assessment system, meaning that the government agency is currently reviewing Incheon International Airport Corporation’s (IIAC) tender ranking. As reported, the airport company named Lotte Duty Free and The Shilla Duty Free as its two recommended bidders for the new T2 perfumes & cosmetics and liquor & tobacco licences (no bids were received for the major fashion & accessories concession, which is now being rebid with a lower MAG).
The surprise omission from the recommended bidders was fast-growing, deeply ambitious Shinsegae Duty Free. The Korea Times claimed that the retailer was considering “taking measures” against the IIAC decision, reporting that Shinsegae had outbid Shilla on liquor & tobacco but fallen short on the technical offer. However, a Shinsegae Duty Free spokesperson told The Moodie Davitt Report today: “We respect and will follow the Incheon International Airport Corp’s decision. Our doors are wide open for new opportunities and development of our business.”
The ongoing regulatory, political, corporate and commercial chaos has cast a dark shadow over what had been one of the most buoyant markets in travel retail history. Even the country’s ability to resolve or at least ameliorate the THAAD dispute has been critically undermined by President Park’s impeachment and the subsequent political impasse. The 9 May election therefore cannot come soon enough for the country’s travel retail companies. Whether the results, though, provide any solace to a sector under siege is deeply uncertain.
