South Korea offers -20% relief deal to large duty free retailers amid -90% pax slump; “Absolutely not enough,” says one leading player

SOUTH KOREA. The government announced today that it will offer large and medium-sized duty free retailers a -20% Minimum Annual Guarantee cut for a maximum six months (from March to August inclusive) due to the COVID-19 outbreak’s impact on air travel and retail spending. Small retailers will have their rents reduced by 50% (up from the previously stated 25%).

The relief measures were announced by Minister of Economy and Finance Nam-ki Hong before markets opened this morning.

One leading retailer slammed the relief packaging, noting: “Absolutely, it is not good enough – a 20% reduction on Minimum Annual Guarantee with a pax decrease of 90%.”

Another was more muted, observing, “We appreciate the government’s decision to ease the industry’s difficulties caused by the spread of COVID-19. We will continue to do what we can do to overcome this crisis.”

Korea’s ‘big three’ – Lotte Duty Free, The Shilla Duty Free and Shinsegae Duty Free – had been lobbying intensely to get concession relief in the wake of plummeting traffic over the past two months.

While total Korean duty free sales fell by -40.5% in February, the average spend per person (ASP) by foreigners actually rose, suggesting heavy spending by certain daigou groups. Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit (Click to enlarge)
Sales to Koreans plummeted across both downtown and airport stores in February. Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit (Click to enlarge)
This graphic from Korea Centers for Disease Control and Prevention illustrates the alarming spike in COVID-19 cases from late March. The government and national health authorities have fought impressively since then to contain the disease. Click to enlarge.

One leading player told The Moodie Davitt Report that usual monthly sales of all retailers combined at Incheon International Airport are approximately KRW200 billion (US$162 million) while the concession fee burden is about KRW80 billion (US$65 million). However, due to the COVID-19 outbreak, sales declined to KRW40 billion (US$32.5 million) in March but the rent burden remained the same. While the government’s measures announced today ease the operators’ losses, business conditions are deteriorating further.

Collective daily sales at Incheon International Airport for the big three – Lotte, Shilla and Shinsegae – reached just KRW100 million (US$81,000) on 1 April, much reduced from KRW6 –7 billion (US$5=6 million) the big three usually gross each day between them.

The Ministry of Economy and Finance announced that commercial revenue at Incheon declined by -44% year-on-year in February and fell further in March (March 1-15) to -78%. A reliable source told the Moodie Davitt Report that airport sales collapsed -90% year-on-year for the full month of March.

The crisis is hitting SMEs such as SM Duty Free even harder (as mentioned, only the small retailers CityPlus and Grand Duty Free received the earlier relief package), as they lack the financial liquidity of their larger rivals. According to ChosunBiz – a prominent Korean media platform – March sales grossed by small and medium-sized retailers at Incheon amounted to KRW1.8 billion (US$1.5 million) while rent (without factoring in the -20% cut) due to IIAC (KRW4.6 billion/US$3.7 million) was more than double what they were making in sales.

Only two operators are classified as small businesses – City Plus and Grand Duty Free. The others (SM Duty Free, Entas and etc) are ranked as medium-sized enterprises.

According to ChosunBiz, several smaller operators (SM Duty Free, Grand Duty Free and others) failed to pay February’s concession fee (payment deferrals began March 2020) due to IIAC in March.

SM Duty Free, wwich recently announced plans to scale down its duty free operations in Korea by discontinuing the Incheon Airport Terminal 1 licence when it expires in August and exiting from the downtown duty free market in September 2020, grossed KRW550 million (US$446,000) in March. However it needed to pay IIAC KRW1.48 billion (US$1.2 million) in rent. An SM Duty Free representative told ChosunBiz that a 20% cut in rent was simply not enough.

Chinese visitors, critical to the country’s duty free sector (the world’s largest) collapsed by -77% year-on-year in February to 104,086 according to Korea Tourism Organization, representing just 15.2% of total arrivals, compared with 37.7% a year earlier. Conversely, Japanese arrivals eased just -0.9% to 211,199, propelling the nationality to a 30.8% share of a much smaller base. However March arrivals will be much worse, in fact dire.

Departures by Koreans also plummeted (-60.0%) in February with a much sharper drop set to be reported for March.

Selected visitor arrivals figures for February show the collapse of the inbound Chinese market. March figures will be much worse. Source: Korean Tourism Organization (Click to enlarge)

As reported, daily passenger traffic Incheon International Airport fell to 60,348 on 1 March and by 24 March had collapsed to an astonishing new low of 9,316. Elsewhere, duty free stores at Gimpo, Gimhae and Jeju airports have closed, while larger downtown duty free stores have decreased their operating hours to lower costs.

South Korea’s duty free sales declined by -40.5% year-on-year in February to KRW1,102.6 billion (US$923.4 million). Sales to foreigners (principally Chinese, and down -35% year-on-year to US$815.1 million) outperformed sales to locals (-63.8% year-on-year to US$108.3 million).

Downtown duty free stores fared better than airports, buoyed by both resellers and online sales. Sales in the downtown channel declined by -38.4% compared to February 2019, whereas sales at airports were down -52.3% for the month.

According to industry checks conducted this week by The Moodie Davitt Report, business continued to deteriorate further in March. Airport sales declined by more than -90% and downtown duty free by about -50% depending on location. Several large operators have reported improving conditions at select downtown duty free stores by major daigou operators but the positive sentiment is not shared industry-wide.

In a note, one leading analyst estimated that the rent reduction announced today could boost Shinsegae Group’s consolidated operating profit by 1.6% to 9.8% depending on the length of the cut. Shinsegae pays roughly KW36 billion (US$29.4 million) per month in rent at Incheon International Airport terminals 1 and 2.

Shinsegae Duty Free operates across both terminals at Incheon International Airport. The relief measures, though hardly sufficient given the collapse in passenger numbers, will alleviate some pressure.

 

Food & Beverage The Magazine eZine