Korean duty free rivalry heats up amid impending Incheon tender and focus on global expansion

SOUTH KOREA. Intense competition between the two Korean powerhouses Lotte Duty Free and The Shilla Duty Free is certain to intensify this year as the arch-rivals seek to extend their Korean airport presence and their global footprints. Both face formidable additional competition in the shape of market number three Shinsegae Duty Free and ambitious newcomer Hyundai Duty Free.

“3Sixty was a super smart move by Shilla. It will help them compete aggressively outside Korea and eases the reliance on a single large but potentially vulnerable source market.”

As reported, the two leading players in the world’s biggest duty free market will be vying for new concessions in the upcoming anchor store tenders at Incheon International Airport Terminal due to be released in the coming days. These are for eight concessions where current terms expire in August 2020.

Among five of the concessions dedicated to large corporations, Shilla will seek to defend three (DF2, DF4 and DF6). Lotte and Shinsegae currently have one concession each and will be eyeing the chance to gain at the expense of Shilla in a key location, while defending their own turf.

All eyes will be on DF2 as the Incheon T1 concessions are brought to market in coming days

The cosmetics & perfumes concession (DF2) is expected to be especially hotly contested. Shilla currently operates Asia’s key travel retail category at Incheon, Changi and Hong Kong airports, giving it a hugely powerful position across three of Asia’s biggest locations. Lotte Duty Free is sure to push hard to regain its presence in this category (which it exited at T1 in February 2018 citing heavy losses due mainly to onerous concession fees).

Beauty is in the eyes (and pockets) of the beholder: The top ten grossing brands in Korea’s duty free market and change in brand sales ranking for early 2019 underline why the main Incheon International Airport cosmetics & fragrances concession will be so intensely fought over this year  (Source: Korea Customs Service, Moodie Davitt Business Intelligence Unit) 

Will Shilla’s 3Sixty Duty Free acquisition and Lotte’s impending IPO push the number one to more M&A activity?

Both companies are still overwhelmingly reliant on the Korean duty free market, which in turn is heavily (many would say overly) dependent on one sector – daigou resellers. The Moodie Davitt Business Intelligence Unit estimates that 48% of Korean duty free’s sales are from resellers who mostly bring their goods back into China to sell. The total size of the Korean duty free reseller sector is larger than the 2018 China duty free market.

Lotte Duty Free, the Korean and world number one, is determined to climb one place higher and is particularly buoyant in its 40th anniversary year having come off a record year in sales. With a likely public offering under its belt, Lotte will be an altogether more formidable proposition internationally.

Spurred by their own rivalry and domestic market concerns, and with aggressive additional competition from Shinsegae Duty Free and Hyundai Duty Free downtown and on-airport, the two giants are eyeing further international opportunities.

Last October’s announcement that Hotel Shilla, parent company of The Shilla Duty Free, was subscribing to 44% of the share capital of 3Sixty Holding LLC, parent company of 3Sixty Duty Free & More (formerly DFASS Group) is widely seen in Korean investment and industry circles – including brand partners – as a game changer.

The rivalry for global supremacy is heating up

At the time of the deal (which is still to close), Shilla Travel Retail President Ingyu Han talked of the investment as “another important pillar of our development strategy”. He noted that Shilla and 3Sixty aimed to develop the business in the Americas (heavily influenced in certain key locations by Asian travellers) and to leverage each other’s digital competencies to lead the omnichannel disruption of travel retail.

“It was a super smart move by Shilla,” one leading analyst told The Moodie Davitt Report. “It will help Shilla compete aggressively outside Korea and eases its reliance on a single large but potentially vulnerable source market. It could even drive Shilla into second place in the world travel retailer’s rankings if the combination with 3Sixty delivers anticipated levels of new business.”

“Besides the sales volumes involved in the 3Sixty Deal, such an acquisition also changes the way vendors perceive what was always perceived – outside beauty – as a very Korean rather than international company,” noted one leading brand executive.

Korean market duty free sales in November (up +34.3% year-on-year) shown by total revenue and breakdown between locals and foreigners. Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

The record-setting month surprised market participants and observers. Many predicted slowing duty free sales growth due to the rumoured investigation of a large-scale daigou for tax evasion. A fight between the bulls and bears resulted in Korean beauty giant Amorepacific’s share price trending sideways since topping KRW 210,000 on 7 November, reflecting investment community uncertainty over whether the duty free channel will continue to grow.

How politics can affect tourism and travel retail: Selected visitor arrivals for November (above) and for January-November (below) underline the sharp recent fall in Japanese visitors as a result of the worsening dispute between the two countries. But Chinese travel to South Korea, so key to travel retail, continues to recover as bi-lateral relations improve. Source: Korea Tourism Organization

Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit
Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit
Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

Lotte will be no less aggressive. The Korean and world number one is determined to climb one place higher and is particularly buoyant in its 40th anniversary year having come off a record year in sales. How will it achieve that? Concession gains (difficult anyway) won’t be enough. Look to the company’s successful acquisition of JR/Duty Free in Australia at the end of 2018 as a pointer of things to come. Rumours persist that Lotte, too, is looking outside its home region with the Americas a possible target as well as within Asia.

To fuel further M&A activity, Lotte Group will be focused on a likely 2020 IPO. A recent top-level management reshuffle included the appointment of Bong-chul Lee as Vice Chief of the Hotel & Service Business Unit. Lee’s appointment is seen widely as a green light to restart Hotel Lotte’s much-delayed IPO. With a public offering under its belt, Lotte will be an altogether more formidable proposition internationally.

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