SOUTH KOREA. Duty free sales in South Korea – the world’s largest travel retail market – leapt by +23.7% year-on-year to a record US$21.32 billion (KRW24.86 trillion) in 2019.

Sales to foreigners (principally Chinese) increased by +30.9% year-on-year to US$17.84 billion (KRW20.81 trillion), which more than compensated for a decline in spend among Koreans. A combination of the Japan travel boycott and lower consumer sentiment resulted in duty free sales to Koreans declining by -3.5% to US$3.49 billion (KRW4.05 trillion).

The big question that retailers, brands and analysts are asking is how much the daigou market – not bound by traditional tourism sentiment rules – will be affected by the coronavirus crisis

Korean duty free sales 2015 to 2019 (click to enlarge) Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

The market was buoyed by daigou resellers purchasing in Korea and selling into the Chinese market, mainly in cosmetics.

A strong December performance capped off the year, with Korean duty free sales surging +36.5% year-on-year to US$1,942.5 million (KRW2,284.8 trillion) with foreigner sales up +46% year-on-year to US$1,655.4 million) the key contributor.

Korean duty free sales by month and split by foreigners and Koreans (click to enlarge); Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

Korea duty free market growth rate among Koreans and foreigners and average spend per person (click to enlarge); Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

Sales to foreigners broken down by traffic, sales and ASP growth (click to enlarge); Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

Looking forward, the spread of the coronavirus will weigh heavily on the market, which is overwhelmingly reliant on Chinese consumers. Cases of the coronavirus began to rise in number from the middle of January, forcing Lotte Duty Free to close its Jeju store and The Shilla Duty Free to shutter its Seoul and Jeju store in early February.

New cases of coronavirus confirmations in China started to climb sharply after mid-January. By the time news of the infection became widespread, resellers had done their pre-Lunar New Year business and were mostly back in their home cities and on holiday.

The big question that retailers, brands and analysts are asking is how much the daigou market – not bound by traditional tourism sentiment rules – will be affected by the coronavirus crisis.

Newly diagnosed cases of coronavirus by day in China (click to enlarge); Source: China National Health Commission

A Lotte Duty Free spokesman told The Moodie Davitt Report this week: “For the Lunar New Year break, Lotte Duty Free recorded a -30% year-on-year fall in average daily sales at our three Seoul downtown stores. Comparing to the same period in the previous week, Lotte posted a -30% fall as well.”

Analysts covering the market expect around +25% year-on-year growth in January, led by large downtown duty free stores, which are heavily dependent on resellers. However, that growth needs to be kept in perspective. Duty free sales grew by just +11% year-on-year in January 2019 with resellers spooked by the new China ecommerce law introduced on the first of that month and the low base effect for comparison purposes this year is important to note.

Duty free sales have picked up since then and grew by 26.8% year-on-year in H2 2019.

As noted, duty free sales to Koreans have been hit by a combination of the boycott Japan campaign (resulting in lowered outbound travel) and weakened consumer sentiment. Sales to Koreans dipped -1.0% year-on-year in December, an improvement from the -10.3% and -11.8% declines in months such as August and September. The improving trend is likely to be cut short, however, with outbound travel severely hit by the new coronavirus. Hana Tour and Mode Tour, large Korean travel operators, have reported that forward bookings are down by double digits and are deteriorating fast.

Forward bookings and change on year January to April, Hana Tour & Mode Tour (click to enlarge); Source: Company websites, Moodie Davitt Business Intelligence Unit