Lotte feels THAAD impact; operating profits slump

By Andrew Pentol |

Lotte

Lotte resigned three out of its four Seoul Incheon Airport T1 DF concessions in February,

Lotte Duty Free has attributed “record low” 2017 operating profits of KRW2.5bn ($2.4m) on sales of KRW5.45tn ($5.2bn) to the strong adverse impact of the THAAD missile crisis.

The results published today (2 April) exclude its Busan downtown and airport businesses.

The announcement of the decreased operating profits follows the so-called thawing of relations between the two countries following a summit meeting last November with Chinese President Xi Jinping.

Recent Korean media reports suggest we could see finally see tangible evidence of the improved relations between the two countries, with China set to end retaliatory measures over South Korea’s deployment of THAAD.

This among other elements could see the normalisation of Chinese group tourism to South Korea following last year’s ban due to the THAAD issue.

TRBusiness is seeking reaction to this important news from Lotte, which reported its first loss in 14 years in 2017 and Shilla Duty Free, companies severely impacted by the lack of arriving Chinese consumers and will bring you more in due course.

Moon-to-go

South Korean President Moon Jae-in (left) and Chinese President Xi Jinping ahead of their apparently successful summit at the Crown Plaza Da Nang in Da Nang, Vietnam, on November 11 2017.

CHINESE ARRIVALS

In November 2017, Chinese arrivals to Korea dropped -42.1% to 299,247 year-on-year according to figures from the Korea Tourism Organisation.

The improvement continued in December (-37.9% to 332,474), but in January (-46.% to 305,127) and February 2018 (-41.5% to 345,341) the figures increased showing an element of inconsistency.

Results in general, however, towards the end of 2017 and start of 2018 may have significantly improved on the period April to July, for example, (April -66.6%, May -64.1%, June -66.4% and July -69.3%), but uncertainty clearly still remains.

A Lotte statement said: “With this sad crisis, Chinese tourists have lost interest [in visiting South Korea] and operating profits have hit a record low due to increased rent and concession fees at Incheon International Airport.”

According to the company, its monthly rental fee increased 55% to KRW62bn from September 2017, the start of the third year of its contract at the airport.

Rent in the second year amounted to KRW40bn.

THAAD-big-2

Could things finally be set to return to normal following the debilitating impact of THAAD on the Korean DF&TR industry?

As reported by TRBusiness back in 2017, Lotte had been desperate for an adjustment or reduction of the minimum DF guarantees on products in its shops.

Sales at Seoul Incheon Airport last year amounted to KRW1.1tn, but Lotte paid KRW58bn in rent, according to the company.

An agreement was unable to be reached and in February the company revealed it would relinquish three of its four Terminal 1 concessions.

In early March, the terms of the withdrawal were ratified by Incheon International Airport Corporation (IIAC) and Lotte learnt the cancellation would take effect from 7 July.

But in a further twist, Lotte told TRBusiness it would “strongly consider” submitting new bids for the concessions, with IIAC announcing its intention to re-tender the licences.

The change in concession fees had a major impact on earnings deterioration, according to the company.

Lotte indicated it paid KRW35.2bn in fees, an increase of +1,254% from the KRW2.6bn equivalent in 2016.

The operator said: “The current method of calculating concession fees based on sales means even if operating profit decreases, concession fees increase as sales surge.”

Currently system is being reviewed by the government as part of an examination of the Korean DF&TR industry. Its findings are expected to be released later this year.

Lotte added: “This year, Lotte is expected to improve profitability by stabilising its business.

“The company intends to strengthen its competitiveness in terms of its downtown operations and expand the marketing of its online duty free shop following the withdrawal from Incheon Airport.”

OVERSEAS EXPANSION

LotteDanang

Lotte Duty Free Shop CEO Jang Seon-wook at Danang Airport in late October 2017.

Additionally, it is looking to limit reliance on Chinese customers by attracting further Korean and southeast Asian customers and expanding its overseas business.

Sales from its overseas operations grew 45% in 2017 to KRW140bn.

Lotte said performance was led by its Da Nang Airport business in Vietnam and downtown Tokyo Ginza operation which grew 150% on the previous year.

Further airport openings in Vietnam’s major cities (Nha Trang, Ho Chi Minh and Hanoi) as well as in other countries might well be in the pipeline.

 

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