SOUTH KOREA. Incheon International Airport Corp is in a major row with Korea Customs Service over how the winners of the forthcoming duty free tender at the new Terminal 2 will be chosen, The Moodie Davitt Report can confirm.

“It is totally nonsense,” said a source who asked to remain anonymous, in response to a bombshell Korea Customs Service announcement this week that it will be creating a licensing committee to evaluate the T2 bids. The committee will work on a similar basis to those that assess rival candidates for downtown duty free shops.

The move has caused a major headache for IIAC, which has been forced to delay the publication of the tender that had been slated initially for November or December last year.

Historically the IIAC, like most airports around the world, has been the sole evaluator of the respective bids. To The Moodie Davitt Report’s knowledge, there is no precedent for a national customs agency being the ultimate assessor of a duty free tender.

After communicating its dissatisfaction with the current airport tender system to the IIAC in recent weeks, Korea Customs Service (KCS) today issued a statement saying that the changes to the process were designed to “normalise” the process.

The KCS claimed that the current tender evaluation model was only permitted because it was established before Incheon International Airport’s opening in 2001, when the IIAC needed high returns from duty free to pay for airport infrastructure.

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The Korea Customs Service announcement obtained by The Moodie Davitt Report, refers to recent media coverage about the Incheon T2 tender and insists that it should be the arbiter of the bidding process, taking into account a wider set of evaluation critera

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(Top to bottom) The key protagonists in the tender are likely to include Korea’s ‘big three’ Lotte, Shinsegae and Shilla

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Korea Customs Service’s evaluation criteria for downtown duty free licences looks very different from that traditionally adopted by Incheon International Airport Corporation. Source: KDB Daewoo Securities Research; Korea Customs Service

“[The current model used by Incheon Airport] does not align with the goals of current customs law, which focuses on public benefits such as the development of the tourism industry, giving back corporate profits to the community, and mutual growth between large and small companies,” The Korea Herald quoted the KCS as saying [The Moodie Davitt Report is currently translating the KCS statement].

Sources confirmed to The Moodie Davitt Report the IIAC’s deep concern over the proposed changes. Clearly if the KCS decides the evaluation criteria, it could be a game-changer in terms of financial returns to the airport.

“I strongly believe that the whole Korean duty free industry, which was largely structured and developed by the efforts of a few private companies such as Lotte and Shilla, has suffered more than enough. This is just too painful to see.” – Regina Hahm, Mirae Asset Daewoo

Regina Hahm, Equity Analyst (Cosmetics, Hotel & Leisure, Fashion) at Mirae Asset Daewoo, and one of the country’s most astute observers of the duty free sector, hit out at the KCS move. She told The Moodie Davitt Report: “The KCS is critically misunderstanding the basic differential between downtown and airport retailing – i.e. that downtown duty free is not a normal channel that we can easily find outside of Korea.

“An airport is a wholly different place from the downtown shop where everyone is a potential consumer of duty free products. That is not the case in an airport.

“The way they [KCS] have been regulating the [downtown] market is already far from globally accepted practice. They definitely don’t have such a right at airports, as the IIAC itself is the landlord and should find ways to best manage the site.

“It is economically sensible for the airport to find the best operators to generate maximum sales from the potential customers as they have to subsidise other important operations at the airports for the benefit of the whole country.”

She continued: “KCS has suggested that the bidding process at the airport should be revised (they used the term, ‘improved’, actually – a nonsense) for it to meet the existing regulations, while not interfering in the inherent contract terms between the airport and concessionaires.

“KCS also stated that the area granted to SMEs should be expanded at T2, and for the whole airport to have more than 30% of the retail area devoted to SME operations, as it is for downtown market (i.e. allocating 30% of licenses to SMEs).”

Ms Hahm concluded: “I strongly believe that the whole Korean duty free industry, which was largely structured and developed by the efforts of a few private companies such as Lotte and Shilla, has suffered more than enough. This is just too painful to see.”

As reported, bidding for the five-year contracts was originally due to close by mid-February 2017 with awards expected to be announced by the end of the same month.

That tight timeline recognises that the first phase of the ambitious T2 development will open next October, with ultimate project completion in 2023.

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New duty free rules for a new terminal?

The key categories (perfumes & cosmetics, around 40% of current sales), liquor & tobacco (almost 35%) and fashion & other products (circa 25%) will each be tendered on a still unpublished formula. It is unlikely that a single retailer will win multiple categories due to monopoly sensitivities. Having three or four main retailers is likely, with at least one small & medium enterprise (SME) retailer in place too.

The tender (as reported previously) will be open to international and local players, though it is uncertain whether any offshore players will contend. Local/international joint ventures are not permitted by law as only individual entities are allowed to bid.

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