SOUTH KOREA. Due to a collapse in duty free sales caused by the COVID-19 crisis, Korea Customs Service (KCS) has accepted the local duty free industry’s request to offload unsold stock (after paying import taxes) through a range of channels, writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung* in Seoul.

Under guidance announced on 29 April, KCS will temporarily allow:

1) Local distribution of unsold duty free inventory (limited to items held by retailers for over six months)

2) The transfer of ownership of unsold imported foreign goods to another party

3) International shipping and sales of unsold imported foreign goods overseas. According to the existing Customs law (i.e. as applied before the temporary measures), any unsold inventory of duty free products is required to be discarded or returned to the manufacturer. That changes under the relief measures.

The  KCS measures allow duty free retailers the option of: a) direct sales of unsold inventory into local channels (department stores, home shopping, ecommerce and others); b) wholesale of unsold inventory to local third parties; and c) international shipping of unsold inventory to outside Korea (yes to daigou).

This decision could offer upside risk for travel retail sales in near term, especially for downtown cosmetics sales, Morgan Stanley said in a note on 29 April.

Lotte Duty Free, Shinsegae Duty Free and Hyundai Duty Free are each part of large retail conglomerates that have department stores, outlet malls and ecommerce solutions. All parties are expected to utilise their own alternative sales channels. However, The Shilla Duty Free does not have direct access to local channels as it lacks domestic retail operations. Therefore, it would not surprise if Shilla was to sell its inventory to other local partners in a wholesale deal or utilise ecommerce as the big three (Lotte, Shinsegae and Hyundai) account for 95% of Korea’s department store market.

(Top to bottom) Shinsegae, Lotte and Hyundai all benefit from having department stores (pictured) to sell through excess inventory. Picture credit: Korea To Do

Department stores, home shopping and ecommerce are expected to be the main channels for the distribution of unsold duty free products. Because the relief measures are limited to unsold inventory held by each operator for more than six months (a period that pre-dates the COVID-19 virus outbreak), the main categories that are affected are fashion & accessories, watches, jewellery and other luxury items. Cosmetics, the bread and butter for duty free operators in Korea, are sold with a much faster stock turn rate and the best-selling cosmetics items sell out – mostly to daigou – within days not months.

Assuming the duty free industry is able to sell 20% of unsold inventory, KCS estimates that this will translate to around KRW160 billion (US$132 million) in revenue. KCS agreed to the duty free industry’s request due to COVID-19 having driven an unprecedented collapse in visitors to the country (March arrivals declined by -93% year-on-year) and a recognition that the industry is in dire need of government assistance.

Daigou stimulus measures

Another key area that will be affected by this week’s announcement is sales to daigou, the anchor of Korean duty free.

As early as February, KCS had already implemented measures that aided the reseller trade. Due to COVID-19’s impact, KCS accepted measures requested by the duty free industry to abolish purchase limit restrictions and deregulate constraints regarding departure gate pickup counters.

The latter allowed duty free retailers to ship any purchases from daigou operators via air cargo (Express Mail Service/EMS is apparently too expensive) to their required destination (usually Hong Kong for onwards movement to the Mainland). This meant that daigou operators and agencies were no longer required to carry their purchases back in luggage but could receive their items via logistics solutions supplied by each retailer.

What were until recently familiar scenes of personal daigou traders repacking goods at Incheon International Airport (above) and Gimhae International Airport in Busan (below), have been replaced by air cargo shipments by organised reseller groups.

Boost but not boom?

While the new measures allow daigou operators an easier solution to purchase items from duty free retailers, this does not necessarily mean Korea’s duty free sales will suddenly return to normalised levels.

Because the relief measures apply only to unsold inventory held by each operator for over six months, this rules out the hottest products that daigou operators most request from Korean duty free retailers.

At present, daigou operators are stocking up for the major shopping event 6.18 (ecommerce giant JD.com’s shopping festival, the second-largest in China after Alibaba’s Singles Day, 11.11. Last year 6.18 generated record revenues of US$29.2 billion) and so cosmetics purchases are of course taking place. But expert sources say the larger reseller groups are much more cautious because of COVID-19 and their purchases are focused on the most popular products that they are confident of selling on. In order to convince daigou traders to buy other unsold cosmetics inventory each retailer would have to offers heavy discounts and promotions.

Deregulation in February which allowed the use of departure gate pickup has allowed daigou to ship goods directly to Hong Kong from Korea’s airports without having to actually travel – making it possible for daigou to purchase goods from Korea with relative ease. This was the predominant reason that Korea’s downtown duty free sales to foreigners stabilised in March, and in fact increased 11% month-on-month.

KCS noted during its press briefing that the retailers’ request was reviewed and approved by the KCS Administrative Support Committee (comprising a mix of government and civil members). The six-month limit was in order to limit the impact on the local retail market. But demand is likely to be heavy and in order to meet customer expectations to purchase goods previously restricted for purchase while travelling, KCS has requested active cooperation from retailers and suppliers.

Timing uncertain

However, while the duty free industry welcomed the KCS approval of their request to sell into alternative Korean channels, leading retailers are unsure of when the actual sales will take place. The key issue is setting after-tax prices and the industry must coordinate with the Customs Valuation and Classification Institute of KCS.

Most of the Korean population takes a long holiday from 30 April to 5 May and according to a leading duty free retailer, the implementation of the new measures could take months. This, alas, would rule out the opportunity for Korean operators to sell excess stock for 6.18.

Large corporate daigou dominate reseller sector

Large corporate daigou represented around 20% of Korean duty free sales before the implementation of China’s revamped ecommerce law on 1 January 2019 but this leapt to around 40% last year as big reseller groups scaled their orders to pay for taxes and added costs.

The share represented by these large groups has soared during the COVID-19 crisis to some 90%, with one leading retailer stating that only daigou are buying right now in Korean duty free.

Big corporate daigou, who are usually based in Hong Kong, place their orders with duty free retailers directly through an agency based in Korea. At present Korean duty free retailers are facilitating the trade by arranging the logistics of large daigou traders from Incheon International Airport departure gates or downtown duty free stores.

Sales to daigou operators who are not restricted by purchase volume limits are “going through the roof”, according to one well-placed source. However, profits to large corporate daigou are much lower for Korean travel retailers with rebates for some brands and SKUs as high as 50%. Rebates to smaller daigou, classified as ‘small guests’ by the Korean market, range from 10-15%.

*Note: Korean national Min Yong Jung, formerly based in London and since this month in Seoul, is Senior Retail and Commercial Analyst at The Moodie Davitt Report. His appointment in June 2019 was the first of its kind in travel retail media. It marked the creation of the Moodie Davitt Business Intelligence Unit, a new division designed to provide a previously unseen level of research and analysis for the travel retail channel.

Jung has a rich background in the travel retail channel and related consumer goods markets. Before joining The Moodie Davitt Report, he worked as an equity research analyst both on the buy and sell side of the finance industry at Kiwoom Asset Management and CLSA in Seoul. Jung is an arts graduate in International Affairs from George Washington University in the USA.

Do you have research needs related to the Korean and Asia Pacific travel retail and luxury markets? Min Yong Jung can be contacted at minyong@moodiedavittreport.com