Korean duty free: A special report Look out for Martin Moodie’s comprehensive on location round-up from the world’s biggest duty free market in the May 2019 edition of The Moodie Davitt Report. It includes interviews with: • Lotte Duty Free CEO Kap Lee |
SOUTH KOREA. Shinsegae has reported a 39% year-on-year increase in net sales in the first quarter of 2019, with sales at its duty free business surging 107%.
The company’s operating profit declined 2.9% to KRW110 billion (US$93.2 million) but this result was ahead of the market expectation of KRW98 billion (US$83 million).
Analysts had also expected the duty free business to be loss making, with new store openings at Gangnam (in July 2018) and at Incheon International Airport Terminal 1 (in August 2018) weighing on the bottom line.
But better-than-expected sales at Shinsegae’s Myeong-dong store and improved performance at the new stores meant that the duty free business posted its first positive operating profit since the second quarter of 2018.
Shinsegae was able to outperform the market by successfully growing its Myeong-dong store and winning tenders for new licences issued by the Korean government.
Average daily sales have increased at all of the company’s stores compared to the fourth quarter of 2018: KRW6.2 billion (US$5.26 million) compared to KRW5.4 billion (US$4.58 million) at Myeong-dong; KRW1.3 billion (US$1.1 million) compared to KRW1.1 billion (US$932,750) at Gangnam; and KRW2 billion (US$1.67 million) compared to KRW1.8 billion (US$1.53 million) at Incheon.
Shinsegae Duty Free continues to increase market share, and it is targeting gross sales of KRW4 trillion (US$3.39 billion) this year, over 30% higher than in 2018.
The positive operating profit of Shinsegae’s duty free business in the first quarter of this year was also a surprise as its new stores in Gangnam and Incheon Airport Terminal 1 were heavily loss making in previous quarters. While profitability and exact sales by store are no longer available [Shinsegae announced it would not divulge this information as from the first quarter of 2019], industry experts noted that the company spent less on commission rates and stayed away from competing aggressively against Lotte and Hyundai in Gangnam.
For the profitability of Shinsegae’s duty free business to improve, the company must safeguard operating profit margins at its cash cow Myeong-dong store (where first quarter sales growth was 20.4%) and refrain from aggressive spend in its new stores.
Shinsegae’s duty free business was ahead in terms of profitability and the target for the company is to generate positive profits from its new stores in the second half of this year.
Shinsegae Duty Free results, along with those of Shinsegae International (fashion & cosmetics), covered for an 18.9% year-on-year sales drop in the company’s department store business. The fall was largely attributable to Lotte acquiring Shinsegae’s Incheon branch. Shinsegae International sales were up 20.2% in the quarter.