The ripple effect from Hanwha Group’s planned closure of its Seoul duty free departure store is likely to intensify competition within an already crowded market vying for possible new licences.

However, it is as yet unclear whether the decision will have any residual impact on the Government’s approach to issuing further licences, TRBusiness gathers from conversations with South Korean duty free sources.

Hanwha Galleria Timeworld, the subsidiary of Hanwha Galleria, earlier this week announced it would end its Galleria Duty Free 63 business in Seoul this September.

EXIT ‘IMPACT’ SPLITS OPINION

“In the last couple of years, many were talking about the possibility of a closing decision by a couple of operators due to the increase in the number of downtown duty free licences and hardening market competition,” commented one source.

“In the long term, we will see a healthier and more competitive duty free market. I see this event as a normalisation of the travel retail market. Previously, retailers thought that duty free is a simple licence business. Now, they will focus more on the health of the business and operational capacity. It will take some time for total market re-organisation; it was a similar situation 20-30 years ago in Korea.”

The South Korean Government via the Korea Customs Service (KCS) will now have to decide on the next steps for Hanwha’s vacated Seoul duty free shop licence.

“The Government needs to see if it can transfer it or if there is another opportunity (to re-issue the licence),” said one source, who doesn’t expect the pullout to adversely affect the Government’s approach to the licence issue. “I don’t see much impact. There are a lot of companies; the market will grow.”

Another source was more unequivocal in their assessment: “Hanwha’s closure will definitely affect the government’s upcoming decision to issue more downtown licences; we are assuming that it is still figuring out how many and in what cities.”

TRBusiness understands the Government and KCS are in the midst of an internal process to decide on that outcome, with two or three new downtown licences rumoured to be under consideration.

The company opened its Galleria Duty Free 63 store, which offers rich views of the Han River and Seoul, in 2016 having soft-launched in December 2015.

Multiple news outlets have pointed to Group accumulated losses of over KRW100bn ($85.9m) since the outlet opened, as it grappled with a drop in Chinese visitors due to Beijing’s ban on group tours [although tensions between Beijing and Seoul over the US-supplied THAAD missile defence system appear to have cooled drastically since leaders from both sides met in November 2017, with arrivals volumes growing by a healthy 31.3% in February – Ed] while contending with heightened domestic competition.

Hanwha Galleria Timeworld was not immediately available to confirm this or provide comment when contacted by TRBusiness.

Separately, The Shilla Duty Free won a five-year duty free concession at Jeju International Airport in December 2017 where it took over from Hanwha Galleria after it discontinued its contract.

MARKET REMAINS BUOYANT

Leading duty free operators in South Korea are predicting sales of US$20bn across the market this year following strong Q1 growth.

A large share of those sales hinge on the proliferating daigou trade, although as noted earlier this year it appears that operators are yet to feel any noticeable dents in their incomes following the introduction of a new e-commerce law in January designed to regulate the business.

“A majority portion of sales comes from daigous – we assume that these will continue for a while,” said a source. “Those who do not have enough buying/merchandising power will continue to struggle. It can be any players next if they have not properly adapted to this distorted market.”

Stay close to TRBusiness for more on this developing story.

For a comprehensive South Korea market report, watch out for the May edition of TRBusiness. Click here to subscribe.