The curious tale of Korean duty free – July sales tumble -39% but sales per foreign customer soar +1,575% to US$14,275

SOUTH KOREA. The twin faces of Korean duty free 2020-style are laid bare by remarkable market statistics for July which show total sales falling -39% year-on-year but average sales to foreign customers rocketing +1,575% to US$14,275, writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung*.

While total sales to foreign visitors alone tumbled -29.2% year-on-year, the surge in the average transaction to these shoppers – driven entirely by the daigou channel – kept the market in reasonable shape given the grave impact of the COVID-19 crisis (see panel at foot of story).

ASP per foreign national shopper shot up from US$852 in July 2019 to US$14,275 one year later. Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit. Click to enlarge.

Despite the turmoil, the duty free market continued to improve in July, growing +13% month-on-month (now a closely watched indicator) to US$1,043.9 million, slightly up on June’s +11% month-on-month increase. While total revenues were down -39% compared to July 2019, the month-on-month improvement continues to offer grounds for cautious optimism.

Selected visitor arrivals by nationality for June (above) and the first half (below) show how adversely Chinese and Japanese travel to the Republic has been affected. Source: Korea Tourism Organization, Click to enlarge.

Large daigou groups drive spending

Foreigners – mostly major corporate resellers – remain the lifeblood of Korea’s duty free market. Sales to foreign nationals in July increased +14% month-on-month to US$1,002.7 million. While this was a -29.2% decline year-on-year, the July annual comparative rate is the best since the country’s COVID-19 outbreak in February (January +21%, February -35%, March -46.4%, Apr -45.8%, May -45.9%, June -35.2%).

Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit. Click to enlarge

Koreans are still not travelling, however, because of COVID-19 and a +7% month-on-month improvement in sales is not material given that foreigners now account for 96% of Korean duty free sales. In January, before the outbreak, that figure was 16% with foreign customers accounting for 84%.

Korea Tourism Organization figures reveal the disastrous impact that COVID-19 has had on outbound travel. Click to enlarge.

Sales to Koreans in July declined by- 86% year-on-year to US$41.2 million. For any turnaround in the situation, quarantine measures will need to be relaxed, flights to resume and – longer-term – an efficient vaccine and treatment made widely available.

Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit

Chinese consumers are therefore all that is keeping the Korean duty free market – the world’s biggest – functioning. In that context, consumer appetite in China looks promising, at least in one vital area. China’s retail sales of cosmetics – the pivotal Korean duty free category – grew +14% year-on-year in June, much higher than overall retail sales which remained sluggish at -1.1% year-on-year.

Not surprisingly, brands that are performing well in China are also prospering in Korean duty free. We believe that brand managers faced with the choice of allocating best-selling products between Korea and China have largely allocated more products to China – where daigou activity, though prevalent, is more balanced with non-daigou trade.

Source: Korea Duty Free Association, Moodie Davitt Business Intelligence Unit. Click to enlarge all charts.

*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

Second wave dampens earlier optimism

South Korea was initially hit hard by the pandemic, at one point ranking only behind China in case numbers. Thanks to strict control measures, however, the outbreak was quickly confined. But over recent weeks the country has suffered a serious second wave.

While the 248 new cases reported today is the lowest total since 18 August, the situation remains of great concern to the authorities. Korea Centers for Disease Control and Prevention (KCDC) warns that the number of untraced new infections likely remains high and may result in wider spread of the virus.

KCDC Director Jung Eun-Kyeong warned last week that if the current trend continues there could be as many as 800 to 2,000 new cases per day.

KCDC raised the social distancing guidance to level 2.5 in the Seoul Metropolitan Area last week. This means that while social distancing guidance Level 2 is in effect, other, tougher restrictions have been imposed – restaurants and cafes must close earlier, for example. So the city with the most Starbucks in the world – according to Travel Trivia – no longer allows coffee to be consumed in-store or sold beyond 9pm.

However, the enhanced social distancing measures – even if bumped up to the maximum Level 3 which would see many economic and social activities suspended – should not hold back the Korean duty free market’s slow recovery. Under Level 3, no more than ten people can gather in indoor or outdoor venues. But because of the minimal number of people required to service the trade in Korea’s downtown duty free stores, we expect limited impact to duty free sales.

The government advises that under Level 3 restrictions, department stores, restaurants, hotels, hair salons and other low-risk businesses can continue to operate but with some restrictions such as limited opening hours.

Food & Beverage The Magazine eZine