Entas Duty Free is relishing the possibility of being able to sell tobacco products at its Seoul Incheon Airport Terminal 2 arrivals store from next year.
Since securing one of the two inaugural arrivals duty free contracts at the airport in March — SM Duty Free secured the two-store Terminal 1 contract — Entas has been in regular dialogue with Incheon International Airport Corporation (IIAC) and the South Korean government (Ministry of Economy and Finance).
The topic of discussion has been the possibility of eventually being able to sell tobacco in its 326sq m arrivals shop.
POTENTIAL SALES BOOST?
Currently, the store, which opened on 31 May and is in the midst of a trial period, retails all major product categories except tobacco under a $600 allowance ceiling.
For one reason or another, TRBusiness can confirm the store is underperforming from a sales perspective. But the inclusion of tobacco, widely regarded as a key footfall driver in DF&TR environments, would surely boost sales within other product segments. This would lead to satisfactory overall revenue at the very least.
Regarding the possible inclusion of tobacco items, there may well be light at the end of the tunnel following a statement released by the South Korean Ministry of Economy and Finance earlier this week.
This was issued in response to suggestions from the media that the government had agreed to allow arrivals duty free tobacco sales.
According to the statement seen by TRBusiness, the government is contemplating various ways of improving the arrivals duty free experience for passengers.
“The system will be reviewed, taking into account the degree of congestion in the arrival hall and the current customer and quarantine functions,” read the statement.
However, it emphasises that any possible improvements or modifications including the ‘allowance of cigarette sales’ has not been decided.
While the move is by no means certain, the tone of the statement and fact it even mentions the possibility of allowing tobacco in arrivals, suggests this might be at the forefront of the government’s thinking.
David Yu, CEO, Entas Duty Free told TRBusiness: “From the very beginning, we have been asking Incheon International Airport Corporation and the South Korean government to include tobacco in arrivals duty free.This is because there was no reason to exclude it in the first place.”
Reacting to the statement issued by the government earlier this week, Yu remarked: “We welcome the government’s initiative to review the arrivals duty free situation. The government has made a very cautious decision and is due to present its findings in November or December.
“It is important to point out that the issues raised have come from the government and not the [arrival] operators.”
FURTHER ARRIVALS TENDERS ‘ON THE HORIZON’
With tenders for further South Korean arrivals stores set to be issued next year, according one industry source and new openings scheduled for 2023, the arrivals duty free tobacco issue will surely be addressed sooner rather than later.
“The government’s findings towards the end of the year will address this issue and most likely result in the inclusion of tobacco products in South Korean arrivals stores at Incheon Airport and elsewhere. In short, we believe tobacco will be for sale in South Korean arrivals stores next year.”
The implementation of the tobacco category will certainly generate more traffic in-store, according to Yu. “This will create synergies with other categories. It is not just about tobacco sales.”
He added: “Next to liquor, the price differential between duty free tobacco products and those on the local market is among the highest.”
Shortly before the closure of bids in March for the Incheon arrivals contracts, IIAC told TRBusiness it was expecting first year sales of at least KRW100bn in its new Terminal 1 and Terminal 2 arrivals shops.
With the Entas Duty Free arrivals business underperforming at present and SM Duty Free seemingly experiencing similar struggles, would IIAC welcome and even help facilitate the introduction of tobacco on arrival?
An airport spokesperson told TRBusiness: “[Tobacco arrival sales] has not been determined yet. Incheon airport can follow revisions of the law. We do not have a preference.”
The spokesperson also confirms the ‘lower than expected’ arrivals sales, but is remaining calm. “Regarding the sales in arrivals duty free, it has only been three months since the stores opened. We are watching their performance rather than evaluating.
“We believe arrivals sales will change with the settlement of the arrivals duty free system in Korea as time goes by.“
The arrivals business in Korea may be limited to small and medium-sized enterprises, but the country’s major travel retail players have their own opinions on the importance of the tobacco category in terms of overall sales.
In conversation with TRBusiness, a representative from one leading Korean travel retailer said: “Due to the slowdown in sales at the arrival duty free stores, it seems that the operators have made recommendation to the government to allow cigarette sales.”
THE INFLIGHT FACTOR
If tobacco was to be introduced on arrival in South Korea, it is unlikely to have a profound impact on total sales and would not be welcomed by everyone, according to the representative. “Arrivals duty free competes with inflight duty free. Some people also believe the introduction of tobacco in arrivals, could adversely affect duty free tobacco sales in departures.”
Offering further insight into the performance of the Entas Duty Free arrivals store, Yu does not directly link the sales slowdown to the unavailability of tobacco products.
He explained: “Around 95% of our arrivals customer base is Korean. We estimated the demand for cosmetics from the Korean consumer to be much higher.
“Korean consumers are quickly shifting to online shopping. This is not to mention the access they have to inflight and departures duty free cosmetics.”
With the likes of Korean Air and Asiana Airlines aggressively promoting their inflight businesses, one would think the inflight retail sector is Entas Duty Free’s main competitor. This, however, does not appear to be the case.
“Our main competitor is not inflight sales. With most of our customers being Korean, we are actually competing with the local market a bit. Obviously, there is some overlap with inflight, but the range of categories available is limited,” Yu commented.
He added: “The majority of our customers are Korean travellers wanting to make the most of a final opportunity for duty free purchases before having access to the local market.
“There is a very strong incentive for customers to make last-minute purchases and obtain the benefit of duty free prices.”
COMMENT: ANDREW PENTOL, SENIOR EDITOR
The potential inclusion of tobacco products in new and existing South Korean arrivals stores will provide a much needed boost for current South Korean arrivals operators, Entas Duty Free and SM Duty Free. It would also benefit other retailers in the future.
Tobacco remains a key footfall driver into duty free shops, arrivals and departures. According to a 2018 study from Swiss research agency m1nd-set, 89% of tobacco buyers pre-plan their purchases.
Gemma Bateson, Corporate Affairs and Communication Director, Japan Tobacco International told TRBusiness: “Tobacco is a basket builder. The tobacco buyer spends on average $69 in the tobacco category. However, their overall basket spend on average is $155. This means an additional spend of $86 across other categories (Source: NPD Group 2018 Segmentation Study). Tobacco continues to drive cross-category purchase and benefit the total store turnover.”
David Yu, CEO Entas Duty Free is confident duty free tobacco sales will soon be permitted in South Korean arrivals stores. But with duty free tobacco under constant threat and scrutiny from the various authorities, it is difficult to predict.
Aside the sensitive nature of the category, the introduction of tobacco on arrival in South Korea will be welcomed by most, but not all — airlines such as Korean Air, for example might have something to say about this.
In addition to the availability of tobacco products, an increase of the $600 allowance ceiling would not go amiss either. Could the government increase the allowance on completion of its review of the current South Korean arrivals system?
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