Shinsegae Duty Free sales slide -44% in Q3, but quarterly improvment noted and return to profit in Q4 predicted

SOUTH KOREA. Department store to duty free retailer Shinsegae posted weaker than expected third-quarter results to the end of September as operating profit missed market expectations by 16%, writes Min Yong Jung*. However all affiliates reported improved profits quarter-on-quarter and the duty free business is expected to return to profit from Q4.

Shinsegae Duty Free’s net sales slumped -44.4% year-on-year in Q3 2020 to KRW437 billion (US$393 million), with downtown sales declining by -25% and the hard-hit airport business down by -89%. The division recorded an operating loss of KRW21 billion (US$19 million) compared to KRW11 billion (US$10 million) operating profit in Q3 2019.

Shinsegae Department Store results for Q3 (above), showing improvements on Q2 even if sales and profits were down sharply year-on-year. Below, the duty free division performance and that of other affiliates (click to enlarge); Source: Shinsegae Department Store

Despite the sharp drop compared to last year, the division still noted an improvement in quarter-on-quarter performance with duty free sales climbing +18% versus Q2. Downtown duty free grew +17% compared to the previous quarter, driven by increases in purchasing by resellers, third party exports (monthly average sales of KRW14 billion) and domestic duty paid business. Airport duty free sales grew +43% compared to Q2.

Shinsegae’s Q3 duty free sales performance still lagged behind Korean duty free market growth (-35% year-on-year) and competitors Hotel Shilla (-27%) and Hyundai Duty Free (-26.5%).

Despite this, Shinsegae Duty Free’s downtown duty free store business showed encouraging signs, with sales growing quarter on quarter. Average daily sales in Q3 2020 were KRW6.1 billion (US$5.5 million) versus KRW5.1 billion (US$4.6 million) in Q2 2020, and profits improved.

Shinsegae Duty Free’s downtown business hit break-even point in Q2 2020. Shinsegae Duty Free no longer pays rent to parent company Shinsegae Department Store after property assets were transferred to Shinsegae Duty Free in April 2020, offering a favourable comparison with Q3 2019. Downtown store annual rent for Myeong-dong is estimated at KRW27 billion.

There were some encouraging signs in Q3 as average daily sales in the downtown duty free business hit KRW6.1 billion (US$5.5 million) compared to KRW5.1 billion (US$4.6 million) in Q2

Airport duty free rent obligations have proven a major burden for the company but relief measures from Incheon International Airport Corporation have offered assistance. Monthly rent expenses were cut by KRW28.7 billion (US$25.8 million) through a 50% discount for July and August and the start of a new rent payment scheme (percentage of sales rather than Minimum Annual Guarantee-based) in September.

Stabilising the duty free business and improving profitability

Shinsegae Duty Free also ended the operation of its Incheon International Airport Terminal 1 DF7 (fashion & accessories) concession from August, with Hyundai Duty Free taking over from 1 September.

As a result of the new percentage rent arrangement at Incheon and the exit from its loss-making DF7 concession, The Moodie Davitt Report estimates that the airport duty free business turned to profit in September. The improvement also lends weight to Shinsegae’s forecast for the overall duty free business to turn to profit in Q4.

Shinsegae Duty Free told The Moodie Davitt Report that the focus now is on stabilising the duty free business and improving profitability. The government’s relief measures have helped but the losses recorded in the first half of the year have dampened the mood for aggressive duty free expansion. Future plans to grow the business will require a comprehensive review of their sustainability and examination of synergies with existing operations.

At group level, consolidated sales fell -20.2% year-on-year to KRW1.92 trillion (US$1.7 billion) but operating profit plunged 74% year-on-year to KRW25 billion (US$22.5 million) from KRW96 billion (US$86.3 million) in the same period last year.

*Note: Korean national Min Yong Jung, formerly based in London and now 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.

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

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