Incheon International Airport Corporation (IIAC) has cautioned against ‘excessive’ overbidding for its new-to-market duty free and travel retail concessions following the issuance of last week’s request for proposals.
Interested, qualified parties will be digesting the terms and weighing up financial and business submissions for seven concession packages that each boast a 10-year term (no extensions) at Incheon International Airport’s Terminals 1 and 2, ahead of an important briefing* by IIAC due to take place on Thursday 12 January.
The deadline for bid proposals is 22 February.
Financial terms have changed, with concessionaires required to pay a monthly rent calculated by multiplying the number of monthly passengers by a fee per passenger.
Should the percentage rent, which equals the sum of half-yearly sales by merchandise multiplied by the percentage fee (see table below), exceed the sum of monthly rent paid during the corresponding period, the concessionaire is obliged to pay IIAC the difference. IIAC expects prospective bidders to submit offers above the minimum rent per passenger.
In exclusive comments shared with TRBusiness, Sung-Bin Im, Director Duty Free Management Team, IIAC, said: “We expect the winning bidders to provide sufficient suggestions to fit the items requested by IIAC in the request for proposals.
“In particular, regarding the bidding price, we don’t want an excessively high bid in order to succeed in bidding right away because it could obviously make it difficult to sustain the business.”
‘The basis of the rent per passenger takes into account the operation of a smart duty free service and potential changes in revenue and conditions,’ notes IIAC in the RFP documents seen by TRBusiness.
The airport operator states that the estimated price of the rent per passenger will not be adjusted, despite any future changes in the number of passengers, airline services and terminal operations.
“We suffered the rigidity of the fixed MAG scheme during this pandemic,” continues Sung-Bin Im. “Rent per passenger is a method to adjust the rent immediately in case of abrupt environmental change and alleviate uncertainty.
“It clarifies the respective roles between airports in charge of attracting international passengers and tenants in charge of creating sales from them.
“On not taking the percentage fee, it’s a decision to get a level of sales volume in accordance with the passenger numbers, considering the distinctiveness of the Korean duty free market in which airport duty free sales and downtown duty free sales are in a mutually conflicting relationship.”
As a reminder, bidders are eyeing a total of 77 stores spanning more than 24,000sq m of commercial space.
Of the seven contracts on the table, five are available to general enterprises (20,892sq m) and two for SMEs (3,280sq m).
In an important clarification, Sung-Bin Im updates TRBusiness that the DF8 and DF9 licences (all items) allocated to SMEs are restricted to local bids only and are therefore not open to international companies.
Consortium or joint contracts for the concessions packages are not permitted and the same party will not be awarded for more than one concession in the same group.
Tender ‘will redefine duty free at Incheon’
In the RFP, IIAC reminds readers of the shock to the airport’s ecosystem following the collapse of its passenger traffic volumes and associated duty free sales by 95% in 2020 in the wake of the Covid-19 crisis.
Now, almost two years later, passenger demand is climbing back – pax volumes reached 39% of 2019’s share in October 2022 – and IIAC views the duty free tender as a ‘rebound opportunity’ through its diverse range of tender packages and the conditions attached to them.
“During the pandemic, we experienced serious disruption and business risk not seen in decades,” commented Sung-Bin Im. “Until now, we are facing a level of uncertainty, so we focused on how to decrease it when we set the tender terms.“I believe that this tender will redefine the duty free business of Incheon Airport and duty free operators in a post-pandemic future. Recently, we are on the trajectory of passenger recovery, a little bit later than European airports, recording more than 120,000 passengers on a daily basis.
“It’s more than 60% of the number of the pre-Covid-19 period. In addition, China lifted its quarantine regulation [which] has been very critical to Incheon’s duty free sales.”
Duplex tenants ‘can capture high-end luxury market’
In determining the successful proposer, IIAC will evaluate the business and financial proposals weighted on a 60% and 40% basis, respectively, before shortlisting qualified proposers.
The Korea Customs Service will then examine the selected proposers selected by IIAC and notify the landlord of the awarded tenants before contracts are awarded and signed. The new duty free concessions are expected to begin on 1 July.
At Terminal 2, a process is underway to extend the existing contracts within a period of up to six months permitted under South Korean law through 30 June.
The existing contracts currently held by Lotte Duty Free (liquor, tobacco and packaged food); The Shilla Duty Free (P&C); and Shinsegae Duty Free (fashion & accessories) were due to expire on 17 January.
One aspect of sure-fire appeal to prospective bidders will be the potential to develop luxury boutiques housed within proposed duplex duty free stores at Terminal 2.
“The preference and the sales portion of high-end luxury boutiques keep increasing and customers of luxury boutiques expect more enhanced, delicate and fancy shopping experiences,” added Sung-Bin Im.
“We plan to develop iconic, huge landmark stores right in front of the departure halls to meet customer wants and market trends. The tenants have the opportunity to capture this strong high-end luxury market, boost their sales and strengthen their brand image with luxury brands in super-attractive locations in Terminal 2.”
Stay close to TRBusiness for more on this important story as it develops…
*IIAC will host a presentation of the tender on Thursday 12 January at 10am (local time) in the main auditorium on the first (1st) floor of West Hall.
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