State-owned Korea Airports Corporation (KAC) will rerun tenders for duty free shops at Seoul Gimpo International Airport (GMP) and Busan Gimhae International Airport (PUS) after no bids were received for concession packages offered at the two gateways. They are the third and fourth busiest airports in the country respectively.

Large South Korean operators and newcomer SME (small and medium enterprise) duty free operators initially expressed strong interest to Travel Retail Business in the two airports’ concessions, but the high minimum annual guarantees that KAC has stipulated deterred all likely contenders from eventually bidding. This was also despite a promised significant increase in the airside shopping area at GMP of +72%.

“There will be an alternative bidding process for the Gimpo concessions as candidates did not come to the bid today,” says a source at Lotte Duty Free which operates the liquor, tobacco and other goods concession at Gimpo. “There will probably be new bidding in a month.”

In addition to the high MAG being asked for the Gimpo concessions, some previously interested operators were deterred by the short time allowed to prepare their bids and the weighting given to various criteria used to decide the awards.

“The MAG for Gimpo was more reasonable than for Gimhae, but 80% of the decision weighting is subjective judgement such as store design and operator experience, while 20% is the financial bid which favours the incumbent operator,” comments one SME duty free operator source.

“Also, KAC only gave details of the bid three weeks prior to the deadline for the design proposal. Incheon Airport gave bidders three months to prepare for their concession bids and there it was 60% subjective judgement weighting and 40% for the MAG bid.”

WIDE INITIAL INTEREST FADES

GMP’s two duty free concession tenders originally generated wide interest among South Korean duty free operators with several SME and large duty free operators telling Travel Retail Business they intended to bid for concessions along with the two incumbents – Lotte Duty Free and Shilla Duty Free.

Total duty free sales recorded at GMP were $140m in 2015, registering a small increase compared with the previous year. The rise was less than expected due to the impact of the MERS virus outbreak at the end of May 2015 on traffic at GMP. In 2015 the airport processed 23.2m passengers.

Shilla Duty Free, which operates the perfume, cosmetics and other goods concession at Gimpo, recorded slightly higher revenue in its two shops that total 400sq m in area than Lotte Duty Free which operates the liquor, tobacco and other products concession using a single 433sq m shop.

Interest among South Korea’s duty free operators in the new five-year Gimpo duty free concessions had risen during the past year due to the recent entry of new operators into the domestic duty free market amid forecasts of continuing duty free sales growth as more Chinese tourists visit South Korea.

600 SQUARE METRES OF EXTRA RETAIL

As part of efforts to increase duty free sales at Gimpo, KAC plans to increase the size of its duty free area by 600sq m for the new concessions by constructing two new shops, each 300sq m in area.

This will increase the total duty free shopping space in the airside departure area to 1,433sq m from 833sq m at present.

Space to construct the two new shops was previously used for a cinema and other landside facilities in Gimpo’s international terminal. Both concessions offered consisted of two shops each this time.

The perfume, cosmetics and other goods concession consists of a 400sq m and a 300sq m shop totalling 700sq m combined. The current 288sq m shop operated by Shilla Duty Free is due to be expanded to 400sq m in area for the new concession and the existing separate 112sq m shop will be closed and removed.

The liquor, tobacco and other goods concession, meanwhile, consists of a 433sq m and a 300sq m shop, totalling 733sq m in area.

GMP’s current concessions were due to expire on 12 May with new operators expected to take over their shops on 12 May. Given the latest no-bid scenario this timetable may be revised.

GIMHAE LOSSES DRAW A COOL RESPONSE  

Meanwhile, no bids are understood to have been received for the perfume, cosmetics and other goods concession at Busan Gimhae International. Incumbent operator Shinsegae Duty Free is paying a licence termination fee and returning the concession to KAC before the company’s official contract expires after suffering unacceptable losses in operating the airport store.

Shinsegae recorded sales worth about $100m at PUS in 2015, up about +11% compared with the previous year. However, the company’s high MAG payment contract plus slower than expected growth in passenger traffic, most of whom are local South Korean residents, resulted in Shinsegae incurring heavy losses through the life of the concession.

“There were no bids for Gimhae as the minimum annual guarantee (MAG) was too high,” commented an SME operator source. “The minimum rent of KRW40bn/$34.3m is too high for a location with a KRW100bn/$86m annual turnover. That’s a 40% minimum rental fee – that’s the minimum to bid, so there were no bidders for the package, it’s way above the profitable level. The second round of bidding for Gimhae will probably be within a month.”