Ju Nam Kim, CEO, Lotte Duty Free.

Lotte Duty Free (Lotte) notched sales of KRW 5,489.3 billion/$4,203.2 million in full-year 2023, a decline of 11% on the circa $4,730 million recorded in last year’s TRBusiness Top 10 International Operators report.

However, the 2023 result was enough to consolidate the South Korean powerhouse travel retailer in fourth spot in the latest ranking.

Lotte Duty Free’s year-on-year sales decline is perhaps no surprise given the protracted challenges it faces. That the company recorded a surplus in its customer numbers in 2023 was not enough to offset what has been a testing time for the South Korean duty free market, shaken by inflationary pressures, exchange rate volatility, increasing competition and changes in consumption habits, including the continued paucity of high-spending Chinese shoppers.

In an exclusive interview with TRBusiness, Lotte Duty Free CEO Ju Nam Kim attributes the sales downturn to a combination of “internal and external” factors.

“The current global economic slowdown, including in China, is unlikely to improve consumer sentiment in the near term,” he made clear. Nonetheless, Kim is quick to point to the travel retailer’s stabilisation efforts, achieved by restructuring its sales functions and strengthening its marketing efforts to attract foreign tourists.

“We are trying to diversify our customers’ age groups and nationalities while also targeting our existing major customers, Chinese, to get through tough times,” he continued.

S. Korea’s pressure valve

Indeed, in 2024 the pressure valve in South Korea is showing little sign of easing. The situation has been compounded by tightened restrictions on daigou sales, with the Korea Customs Service (KCS) reinstating quantity sales limits from February this year, effectively stemming growth in South Korea-China bulk re-selling activity.

Among the restrictions is a prohibition on the shipment of products by freight cargo (air and sea), save for current inventory and carry-over products only. This follows an earlier move by the KCS to reduce commission fees on shuttle trader sales.

“There are many challenges facing the Korean duty free industry, including Korea Customs Service’s purchase quantity restrictions, changes in tourism patterns, and increasing competition in the global duty free industry,” described Kim.

“However, Lotte Duty Free, as a global leading travel retailer and Korea’s number one duty free operator, is striving to find a breakthrough based on our existing expertise and partnerships. Although the current high exchange rate and inflation continue, we are offering domestic and international customers greater benefits and duty free shopping experiences through exchange rate reward promotions and VIP invitation events.

“Lotte Duty Free is offering various benefits by introducing a new mileage system and a paid membership for 2030 customers in addition to existing grade benefits to attract the increasing number of outbound Korean travellers. In addition, in July last year, it became possible for Koreans to purchase liquor through online duty free stores.

“Lotte Duty Free also opened a specialised liquor online store, introduced the largest number of products in the Korea travel retail industry, and continuous growth in liquor sales is expected. Furthermore, in line with the changing travel trends for foreign customers, we are strengthening our mid- to low-priced product lineup and continue to introduce experiential content.

A decline in year-on-year sales owes much to the sharp downturn in South Korea’s travel retail environment. As a result, Lotte has identified profitability rather than external growth as a priority.

“In the short term, we are planning promotions and invitation events to attract Chinese group tourists and individual VIP customers. As a result, we have hosted more than 4,000 large Chinese incentive tourists since the pandemic in May. They purchased high-value items such as luxury brands and watches & jewellery.

“And we will continue to attract such high-quality groups. We also regularly invite VIP customers from overseas to attend private yacht parties, fan meetings, and other events to enhance customer satisfaction. In the medium to long term, we plan to discover tourists and shoppers from countries outside of China.”

In June this year, Lotte revealed an ‘emergency recovery plan’ aimed at streamlining the company’s operations and performance via workplace restructures and a reduction in executive salaries.

A voluntary retirement plan aligned to the restructuring, confirmed by this publication at the time of the announcement and applicable to all job roles, was supposed to be implemented in the second half of this year [though the quota of personnel was unspecified – Ed]. This is yet to be decided, TRBusiness has been told. What is expected is a downsizing of poor performing stores.

“Lotte Duty Free expects to improve profitability by reducing costs and increasing sales by maximising shopping convenience through resizing store areas at World Tower store,” confirmed Kim. “In the long term, we plan to continue our store improvement activities for low-efficiency stores at home and abroad.”

Notwithstanding the challenges on home turf, Lotte continues to pivot its marketing and merchandising efforts to meet shifting consumer demand. The clamour for more experiential shopper content has led Lotte to facelift its ‘LDF House’ concept to ‘Now in Myeong-dong’.

Opened in October 2023, LDF House is reportedly South Korea’s first duty free showroom, conceived as an international space to revitalise the attractiveness of South Korea’s renowned commercial district.The store combines English and Chinese popular characters in multi-lingual typography, reflecting the signage visible on the streets of Myeong-dong, together with an eclectic range of merchandise.

Kim noted: “Recently, tourism and consumption trends are focusing on experiential content. In response, Lotte Duty Free is preparing various experiential content to offer diverse experiences beyond shopping and is making efforts to link these experiences to our sales.

“Lotte Duty Free opened the first showroom in duty free industry, ‘Now in Myeong-dong’ to showcase various concepts using popular characters at home and abroad, such as Zanmang Loopy and Snoopy, giving tourists a differentiated experience. In conjunction with this, we provided special rewards and discount coupons that can be used at Lotte Duty Free to visitors of Now in Myeong-dong.”

 The economic slowdown has meant large quantities of high-end cosmetics and fashion purchases have dwindled versus the past, observes Lotte Duty Free, leading the push towards mid-range skus and duty free exclusive items.

Lotte is somewhat conspicuous by its absence at Incheon Airport having exited its concessions in July last year after decades of operation, as rivals The Shilla Duty Free, Shinsegae Duty Free and Hyundai Duty Free took the major spoils in the duty free tender.

However, Lotte remains a force at Gimpo, Gimhae and Jeju Airports in South Korea. At Gimpo, it began its liquor & tobacco concession in April this year, adding to the company’s existing P&C contract. It says it is implementing Korean tourism and duty free shopping experiences for foreign consumers such as VIP invitational events and fan meetings.

Furthermore, as the demand for overseas travel among Koreans continues to increase, the use of duty free stores is also becoming more active,” noted Kim.

“To provide better services, the customer lounge at the Myeong-dong main store was renovated and reopened last year, and VIP invitation events for Korean customers were held in collaboration with global brands such as Guerlain and Moët Hennessy.”

Singapore Changi Airport opened Lotte Duty Free’s W&S duplex store at Terminal 3 in December 2023.

Growing overseas market share

Abroad, there have been notable growth spots too. Lotte Duty Free runs 14 stores in six countries including Japan, Singapore, Vietnam and Australia and its overseas duty free sales grew by around 130% in 2023 versus 2022.

In a statement of intent, Lotte Duty Free fended off competition to secure major duty free tender victories at Brisbane (BNE) and Melbourne (MEL) International Airports in December 2023 and January 2024, respectively.

Both 10-year licences have already received impetus from restoring international passenger volumes; MEL for example reached 102% of its 2019 pax in early 2024, and Lotte has since introduced new points of sale including a store for JB Hi-Fi, Australia’s largest electronics retailer.

At BNE, Lotte began operations at the airport’s International Terminal in 2019 and under the contract renewal it will double its duty free store footprint, including in the arrivals and departure areas, to reflect the locality while improving customer experience elements by incorporating various digital technologies. Plans to reorganise the shop layouts are earmarked for the second half of 2024, it  is gathered.

“With the Brisbane Olympics scheduled for 2032, we are also planning to prepare by restructuring brands and renewing stores accordingly,” described Kim. “In the short term, we will strengthen our marketing activities and product lineup to retain global customers, including Chinese consumers who are the main customer base in the Oceania duty free market.”

Elsewhere, in January this year Lotte normalised its operations at Singapore Changi Airport. It captured the duty free wines & spirits concession in 2020, but Covid-19 delayed the full opening of all 19 of its stores.

Lotte confirms to TRBusiness an increase in its first-half 2024 revenue from overseas operations, among which sales at Changi Airport have risen by approximately +20% year-on-year. This trend is expected to continue through the remainder of the year.

Encouragingly, revenue from high-spending Chinese consumers have leaped over 40% versus the second half of 2023, with sales to Indonesian and Malaysian customers up by more  than 10%.

Stocking in excess of 430 labels, including whiskey, wine, Cognac, and more, Lotte’s Changi stores have introduced pop-up units and limited editions from various brands, including the House of Suntory, and Wildmoor (William Grant & Sons) many of which are Asia or global ‘firsts’.

Lotte Duty Free Snoopy merchandise at the ‘Now in Myeong-dong’ store.

“Lotte Duty Free leverages our operational know-how to offer products tailored to the regional characteristics and main customer group of each overseas store,” commented Kim. “Based on stable local partnerships, we plan to continuously strengthen our dominance in the duty free markets of various countries.

“Notably, Ginza store in Tokyo, Japan, opened a character specialty shop called ‘Ginza Friends’ this July, expanding its concept to attract a diverse range of international customers and multiple age groups, gaining popularity. The Changi Airport store in Singapore is leading the global liquor market by showcasing various pop-ups and limited-edition products through collaborations with renowned brands such as Diageo and Moët Hennessy. The Oceania region is also captivating customers through localization in various aspects, including product assortment and store design.”

Despite the challenging trading environment, Lotte Duty Free has not ruled out future concession bids should the right opportunity materialise and at a level where profitability can be secured.

This is an extended version of an article that featured originally in the TRBusiness Top 10 International Operators 2024. To view the article in the e-zine, click here.