SOUTH KOREA. Shinsegae Duty Free yesterday posted a +35.8% year-on-year rise in third-quarter net sales to KRW786.8 billion (US$657 million). But enhanced downtown competition between major retailers and an increase in Incheon International Airport concession fees resulted in operating margin continuing to be squeezed, writes Senior Retail and Commercial Analyst Min Yong Jung.

The travel retailer’s main downtown stores in Myeong-dong (+30% YoY) and Gangnam (opened July 2018, +93% YoY), both in Seoul, reported stellar top-line growth rates.

Gangnam style: Shinsegae Duty Free’s newest store is posting strong top-line growth but profitability is a much harder proposition

The flagship Myeong-dong department store and duty free business continue to anchor the group’s business [Photo: Martin Moodie]

While operating profit improved from KRW -3.2 billion in 3Q18 (US$3 million) to KRW 10.7 billion (US$8.9 million), it should be noted that the loss in Q3 2018 factored in costs associated with new store openings in Gangnam (July 2018) and Incheon International Airport Terminal 1 (August 2018).

Operating profits for Shinsegae’s duty free business are being hurt by the growing scale of large-scale daigou resellers groups, which are increasing their bargaining power and demanding higher commissions from retailers.

The operating profit margin for Shinsegae’s duty free business deteriorated from 2.3% in Q2 2019 to 1.4% in Q3 2019. The Moodie Davitt Business Intelligence Unit estimates that losses in the airport concessions are continuing to mount.

Incheon a double-edged sword

The inability to effectively improve profitability at Incheon International Airport is a headache for Shinsegae, which, like other major duty free retailers, will be vying for new concessions in the upcoming anchor store tenders scheduled for December.

Shinsegae Duty Free already enjoys a strong presence at Incheon International but will be seeking to boost its position in the forthcoming tenders

In contrast to the lack of interest for downtown duty free licences being tendered this week, the Incheon T1 tenders are expected to be strongly contested.

Five concessions (covering liquor & tobacco, perfumes & cosmetics and general merchandise) will be up for grabs in the December contest, three currently operated by Shilla Duty Free, one by Lotte Duty Free and one by Shinsegae Duty Free. These concessions 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.

Shilla’s blockbuster perfume and cosmetics concession is expected to draw the most aggressive interest with rivals eager to break the Hotel Shilla subsidiary’s dominant position in the category at three of the biggest airports in Asia (Incheon, Hong Kong International and Singapore Changi).

These two floor plans illustrate the vast retail footprint at Incheon International Airport T1. Several of the key contracts are up for grabs in coming weeks.

Luxury shines in department stores

Powered by a 33% year-on-year surge in luxury sales, profit growth in the department store business helped offset the duty free losses.

Groupwide, Shinsegae reported a +8.7% year-on-year increase in consolidated sales to KRW2,385.4 billion (US$1.991 billion) while operating profit grew +36.6% year-on-year to KRW95.9 billion (US$80 million). The result was ahead of market expectations and a surprise following Hotel Shilla’s below consensus result reported earlier in late October.

Shinsegae’s luxury category grew +33%, much stronger than total same store sales growth of +4.6% and higher than the -1.7% year-on-year decline in Korea’s total department store sales reported by the Ministry of Trade Industry and Energy.

Overall sales in department stores continue to be depressed by lowered consumer sentiment but the luxury category has outperformed the sector, driven by a growing preference for luxury foreign brands among Korean consumers. Shinsegae has benefitted from this trend and geared its strategy towards opening landmark mega-department stores that feature the highest availability of luxury goods.

Lines outside of luxury stores in department stores around Korea are common with local consumers eager to open their wallets