The perfect storm: The Shilla Duty Free declines to defend Incheon T1 beauty contract; contract “not financially viable” as COVID-19 crisis deepens

Concession fee structures “not sustainable”

Commenting on the lack of bidders for the key beauty concession, one leading travel retailer (not Shilla) told The Moodie Davitt Report: “The DF2 no-show does not come to me as a surprise.

“There are two factors at play here: 1) Duty free operators are more conscious about the bottom line (their previous priority was on market share rather than profitability); and 2) IIAC’s greed. IIAC’s concession fee structures are not sustainable, and they know this.

“DF2’s last year revenue of KRW340 billion will be reduced by -50% this year. Despite the reduction in traffic and sales, the MAG remained at KRW116.1 billion. IIAC simply points out that the operator can make up the loss when the market recovers. IIAC is not interested in forming a long term sustainable goal of providing the best services for the travellers.”

In the interest of balance and fair comment, The Moodie Davitt Report has sought reaction to this criticism from IIAC.

SOUTH KOREA. The Shilla Duty Free’s shock decision not to bid for either the Incheon International Airport Terminal 1 perfumes & cosmetics concession (DF2) or the DF6 fashion & accessories contract was because the retailer believed the bid terms were “not financially viable”, The Moodie Davitt Report can confirm.

In what had been widely touted as the blue-chip concession among those on offer from Incheon International Airport Corporation (IIAC), no retailers tabled an offer for DF2 when bids closed yesterday, The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung writes. 

DF2 will now need to be re-tendered. So will DF6 as it did not attract the required two bidders, with only Hyundai Department Store Duty Free tabling an offer. 

The shock news, broken yesterday by specialist Korean media title TRNDF.com and confirmed by The Moodie Davitt Report, means that IIAC is back to square one on the P&C bid at a time of great crisis in South Korea. The COVID-19 outbreak has accelerated alarmingly in recent days, with 256 new confirmed cases reported yesterday, bringing the total to 2,022 (see official statistics below).

Bidders (and non-bidders) for the major Incheon International Airport Terminal 1 concessions

DF2: No bidders (will have to be retendered)
DF3: The Shilla Duty Free, Lotte Duty Free
DF4: The Shilla Duty Free, Lotte Duty Free
DF6: Hyundai Department Store Duty Free (will have to retendered as only one bidder)
DF7: The Shilla Duty Free, Lotte Duty Free, Shinsegae Duty Free, Hyundai Department Store Duty Free

Source: Moodie Davitt Business Intelligence Unit

The T1 concessions, particularly DF2, were expected to be heavily defended by the incumbents (listed above)
Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit
The breakdown of tender packages by category, number of stores and minimum bid level (click to enlarge)

The crisis mounts in South Korea, home to the world’s biggest duty free market, according to Korea Centers for Disease Control and Prevention (Click to enlarge)
According to the Ministry of Justice, Chinese arrivals to South Korea fell -72.8% year-on-year from 1-24 February as the COVID-19 crisis escalated

The contracts for SMEs attracted strong interest. DF8 and DF9 drew bids from City Plus, Grand Duty Free and SM Duty Free; while DF10 attracted Busan Duty Free, Entas Duty Free and Grand Duty Free.

Burdensome guarantees + COVID-19 crisis create perfect storm

The root of the no-show lies with the high minimum annual guarantee (MAG) of KRW116.1 billion (US$95.79 million), which proved way too much of a risk for bidders.

As reported, four companies yesterday presented their business and financial proposals for the duty free concessions for large companies at T1. 

The Shilla Duty Free has long viewed its Incheon International Airport perfumes & cosmetics stronghold (it also runs T2) as key to its ‘triple axis’ of beauty contracts (Incheon, Hong Kong and Changi airports). Its decision not to bid on the T1 concession as structured speaks volumes for the exposure such a contract represents at a deeply troubled time for the country. [Picture: The Shilla Duty Free]

As reported, Hyundai Department Store Duty Free joined ‘big three’ South Korean retailers – Lotte Duty Free, Shilla Duty Free and Shinsegae Duty Free – in presenting its proposals.

DF6 (Fashion & miscellaneous) will also need to be re-tendered after only Hyundai Duty Free submitted a bid, with IIAC stipulating that a concession tender may be aborted and re-tendered if there is fewer than two bidders.

The only concession that received bids from all four companies was DF7 (fashion & misecellaneous). For DF3  and DF4 (both liquor, tobacco & food), bids were table by Lotte Duty Free and Shilla Duty Free.

Incheon International Airport, the world’s largest in terms of duty free sales, must now reevaluate its options at a time of deep uncertainty in the country and within its travel retail sector.

In 2017 the tender for DF3 (fashion & accessories) at Terminal 2 was aborted six times and re-tendered with amended terms before being awarded to Shinsegae Duty Free.

This year’s tender marks the first occasion for an aborted bid by large companies at Terminal 1. The only previous instance of an aborted bid at Terminal 1 was in 2015 for small & medium sized companies. On that occasion, the tender for DF11 was aborted four times before finally being awarded to musical instrument manufacturing company Samick Corporation.

NOTE TO AIRPORT OPERATORS: The Moodie Davitt Report is the industry’s most popular channel for launching commercial proposals and for publishing the results. If you wish to promote an Expression of Interest, Request for Proposals or full tender process for any sector of airport revenues, simply e-mail Martin Moodie at Martin@MoodieDavittReport.com.

We have a variety of options that will ensure you reach the widest, most high-quality concessionaire/retailer/operator base in the industry – globally and immediately.

Similarly The Moodie Davitt Report is the only international business intelligence service and industry media to cover all airport consumer services, revenue-generating and otherwise. We embrace all airport non-aeronautical revenues, including duty free and other retail, food & beverage, property, passenger lounges, hotels, car parking, hospital and other medical facilities, the Internet, advertising and related revenue streams.

Please send relevant material, including images, to Martin Moodie at Martin@MoodieDavittReport.com for instant, quality global coverage.

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