Doosan Group has pulled off a stunning coup in picking up the licence held by Lotte Duty Free at Lotte World Tower – picture of Doosan Tower courtesy of Chosun.com

SOUTH KOREA. Korea Customs Service has just announced the results of the contest for four crucial downtown duty free licences in Seoul and Busan. And they are packed with shocks with big victories for Shinsegae Duty Free and Doosan Group and devastating disappointments for Lotte Duty Free and SK Networks (WalkerHill Duty Free). The results are set to fundamentally transform the make-up of South Korea’s duty free market, the world’s largest.

After 26 years of operation, WalkerHill Duty Free has lost its Seoul licence to Shinsegae Duty Free, which also retained its licence in Busan ahead of a challenge from Fashion Group Hyungji.

WalkerHill Duty Free sales were around KW263 billion in 2014 (US$228 million) and were targeted (pre-MERS crisis) to reach KW380 billion in 2015, with an ambitious refurbishment slated for the final quarter.

In the biggest surprise of all, Lotte Duty Free has lost its lucrative Lotte World Tower licence, picked up by powerful newcomer Doosan Group. Lotte Duty Free maintained its flagship store licence in Sogong-dong.

The Moodie Report estimates Lotte World Tower’s annualised duty free revenues in 2014 at around KW485 billion (US$420 million). World Tower is Lotte’s second-largest location by sales after Sogong, and the third-largest site in Korea (The Shilla Duty Free’s Jangchung operation ranking second).

The loss to Doosan is a severe blow, not just in revenue terms but also in relation to parent company Hotel Lotte Co’s touted 2016 IPO.

However, in a statement reported by Yonhap News today, Lotte said it will keep working on the IPO preparation. “We accept the result and will continue to make efforts to list Hotel Lotte without a hitch,” Lotte said.

It later reiterated that message in a statement issued to The Moodie Report. “First of all, we modestly accept the result and express our gratitude for all the support and encouragement,” it said.

“We, especially, feel sorry and thank all our employees for your endeavours and efforts for the last 35 years, which have contributed to being a world class duty free shop. Also, we thank the examiners who spent lots of time to make a decision.”

The company continued: “We will do all our best to operate the stores better by figuring out our weaknesses, complement them for the future ahead and become the world’s number one duty free company.

“Also, we will try our best for our employees and partnership companies who have established trust with us not to be influenced badly by the result.”

LOTTE IPO TO PROCEED

The company concluded, “Last but not least, we will do our best to vitalise the economy and tourism by bringing in foreign tourists, and promoting co-existence with SMEs and CSR [Corporate Social Responsibility] as we’ve promised. Also, we will proceed with the IPO and become a company that is supported in Korea. Please give us your interest, and support us to be the world’s number one duty free shop.”

Lotte, the pioneer of Korea’s travel retail business, had made duty free a centrepiece of its grandly ambitious Lotte World Tower, the extraordinary retail and entertainment complex in Seoul that opened last October. The retailer opened close to 11,000sq m of space there, making it the largest duty free store (in space terms) in Korea, the second-largest in Asia (after China Duty Free Group’s Haitang Bay complex) and the third-largest in the world (after T Galleria Hawaii by DFS). That duty free business has effectively just been wiped out by a licence expiry that historically would have been a bureaucratic formality to renew.

WALKERHILL SADNESS

WalkerHill Senior Vice President/Head of Duty Free Division Mikyong Vicky Kwon expressed her sadness at the result to The Moodie Report, noting that the company would now see how it could “strategically redefine the store”. Ms Kwon said she expected WalkerHill Duty Free to trade for around six months during a transition period [before Shinsegae Duty Free opens elsewhere in Seoul].

But there was much more positive news for Shinsegae Duty Free, whose MD Merchandising Team Director Seok-Ho Hong told The Moodie Report: “We’re really very, very happy. Shinsegae has been waiting for this moment for 30 years.”

He said the retailer plans to open its new Seoul duty free store within six months. It will be sited very near to the Shinsegae department store in Myeongdong, an area of Seoul that is hugely popular with tourists, he said.

As revealed by The Moodie Report, Shinsegae Duty Free will also now relocate its flagship downtown store in Busan early next year to the spectacular new Shinsegae Centum City.

DOOSAN TO DRIVE DONGDAEMUN TOURISM

Doosan’s announcement in September that it was entering the fray came as a big surprise to the Korean travel retail industry, given the chaebol’s traditional focus on heavy industry. Now it has pulled off a stunning coup by gaining the licence held for so long by Lotte Duty Free. The retailer will site its first duty free store in the Doosan Tower shopping mall (in front of Dongdaemun Design Plaza), again a popular area for tourists.

Before plunging headlong into the machinery and heavy industry sectors in the mid-90s, Doosan was associated with several fast-moving consumer goods brands such as OB Beer, Kentucky Fried Chicken and Burger King. It was attracted to the duty free sector by the huge growth in Korean duty free industry sales and profits in recent years, driven by a sustained boom in Chinese tourism.

In early November Doosan signed a memorandum of understanding (MOU) with 26 major tour agencies in Beijing and Shanghai to attract more Chinese tourists to Korea in anticipation of a successful licence bid.

“Dongdaemun has grown to be a major Korean tourism attraction, visited by 7.1 million foreigners every year,” said Doosan Tower CEO Yongman Cho at the time. “Doosan Corporation is making an all-out effort to win the license to open duty free stores in Dongdaemun, and we will try our best to make Dongdaemun a more attractive place to visit among foreign tourists by developing more tourism content and programs such as K-Style Town and night market programmes in affiliation with other businesses in the district.”

Doosan claimed that about 13 million additional tourists will visit Dongdaemun in the next five years if it won a duty free licence. It can now put that claim to the test.

STUNNED REACTION TO LICENCE RESULTS

There has been a stunned reaction in Korean travel retail and investment circles, particularly to Doosan’s victory at the expense of Lotte.

In a note to clients, KDB Daewoo Securities Co Equity Analyst (Cosmetics, Hotels & Leisure, Fashion) Regina Hahm said: “The overall results inevitably boost risks to the Korean duty free market, the single largest market in the world. Lotte’s inherent competitiveness should weaken due to the serious loss of economies of scale.

“They needed to keep the two existing licenses as the burden for rent expenses at Incheon Airport will grow remarkably in coming years. Their overall profitability will deteriorate, and with the unrivalled leader being hurt, the Korean duty free market’s efficient pricing system compared to nearby countries might not be sustainable.

“Shinsegae is potentially able to structure a site competitive enough to make up SK Networks’ business, but they will be fighting against Lotte in the Myeongdong area. That area is already fully filled up with tourists”¦ the imbalance of our tourism infrastructure will be exacerbated.”

Shinsegae Duty Free MD Merchandising Team Director Seok-Ho Hong: “We’re really very, very happy. Shinsegae has been waiting for this moment for 30 years.” Besides opening a new store in Myeongdong, Seoul, Shinsegae will also relocate its acclaimed Busan duty free shop to the spectacular new Shinsegae Centum City. See floorplan and mock-ups below.

COMMENT: It is hard to overstate what shock waves today’s results are sending through Korean travel retail circles, writes Martin Moodie.

Between them, the Lotte World Tower and WalkerHill Duty Free businesses were worth US$648 million in 2014. That huge collective slice of business has just changed into Doosan Group’s and Shinsegae Duty Free’s hands respectively following the government’s introduction of a competitive bidding process (not based on a financial offer) in 2013 rather than the semi-automatic renewal system of the past.

Downtown duty free in Korea now takes on some of the most unfortunate hallmarks of the airport bidding system. From now on, every downtown duty free retailer knows they must fight to retain their business every five years, a seemingly nonsensical approach to a sector that demands heavy and long-term investment policies. Buoyed by popular anti-chaebol sentiment however, the government has opted for fragmentation and the heavy hand of legislation. Whether it has done the industry (and Korean and foreign travellers) a service will be debated long and hard in coming days and months.

While many observers, including rival travel retail media, stated confidently that all existing retailers would keep their duty free licences, The Moodie Report has said all along that Lotte Duty Free, in particular, faced the battle of its life to retain at least one of its two glamour Seoul locations.

In our 27 August story which broke the news of the licence contest, we wrote: “To anyone outside South Korea it would seem inconceivable, almost preposterous, that a retailer as powerful, professional and influential as Lotte could face the loss of either of its blue-chip Seoul licences (it has a third unexpired licence at the Coex Centre).

“One is the biggest downtown duty free door in the world, the second is an acclaimed new store into which huge investment has just been poured as part of the extraordinary Lotte World Tower development.

“But these are changing times in the country with mounting anti-chaebol political and popular sentiment and resentment of Lotte in some quarters due to its perceived strong Japanese links.

“Usually the renewal is a piece of cake,” one senior industry source told The Moodie Report in Seoul. “But this time even Lotte is afraid.”

That fear turned out to be entirely justified.

BACKGROUND: The licences are currently held by Lotte Duty Free at Sogong-dong, Jung-gu, Seoul and the Lotte World Mall, also in the Korean capital; WalkerHill Duty Free in Seoul; and Shinsegae Duty Free (formerly Paradise Duty Free) in Busan. They all expire in late 2015 as follows:

WalkerHill Duty Free: 16 November
Shinsegae Busan: 15 December
Lotte main store: 22 December
Lotte World: 31 December

(Above) This graphic shows the proposed floor plan and flow for Shinsegae Duty Free’s new Busan store while below we feature the various category and service departments

Shinsegae Duty Free, formerly Paradise Duty Free, in Busan is the flagship travel retail location for the department store giant. Now it has secured a vital new Seoul licence.

The long-established WalkerHill Duty Free in Seoul has invested millions in an ambitious refurbishment which was due to complete later this year but still had to mount a defence of its licence. Today’s news will come as a desperate disappointment.

(Above and below) Hordes of Chinese shoppers pack the Korean skincare department of Lotte Duty Free’s flagship store in downtown Seoul, a licence successfully retained. Last year 20% of all Chinese arrivals to Korea were generated by Lotte travel and tour operations.

(Above and below) Lotte World Mall’s duty free licence is key to attracting more Chinese tourists to the spectacular new Lotte World Tower. Now that licence has been won by industry newcomer, the formidably powerful Doosan Group.