Jang Sun-wook, Lotte Duty Free Ceo.

Lotte Duty Free has confirmed that it is asking Incheon International Airport Corporation (IIAC) to adjust and/or reduce the minimum duty free guarantees on product categories within its shops – to avoid returning ‘all business licenses’ – according to Lotte Duty Free CEO Jang Sun-wook.

These licenses include four five-year concessions awarded in 2015 – estimated to have totalled nearly $1bn in sales at Incheon International Airport last year.

LOTTE SAYS IT SHOULD BE PAYING LESS…

Lotte says ‘due to unexpected changes in the management environment’ – principally the THAAD stand off with China – it is now asking IIAC to change the contract assessment criteria to reflect the ‘operating rate by item’ [i.e. performance] rather than work on minimum guarantee levels which were agreed when the operating environment was more favourable.

Ironically, this ‘request’ comes after a record sales year for Lotte Duty Free in 2016, where its total downtown and airport duty free sales within South Korea reached US$5.7bn – a huge +36% increase compared with 2015 – thanks to previous healthy growth in Chinese visitor numbers to Seoul.

Lotte Duty Free’s liquor and tobacco offer at Incheon International Airport.©. Click to enlarge.

This was highlighted last year by the fact that Lotte Duty Free’s main Seoul downtown Sogong store accounted for more than 40% of the company’s total revenue, generating sales of $2.7bn in 2016 – a rise of approximately +38% compared with 2015.

[However, any direct traffic comparison between 2016 and 2015 is hardly ‘like-for-like’, since 2015 tourism arrivals were very badly impacted by the MERS virus-Ed].

LOTTE’S INCHEON SALES WERE AROUND $1BN

By contrast, Lotte’s total airport duty free sales from its four five-year concessions awarded in 2015, totalled nearly $1bn at Incheon International Airport last year. However, numbers of Chinese passengers have fallen drastically following the imposition of ‘tourism sanctions’ by the Chinese Government, effectively preventing its citizens from visiting South Korea in organised tours.

These contracts include perfume and cosmetics, liquor and tobacco, the entire Incheon Airport concourse and the main terminal central departure area fashion concession that includes the Louis Vuitton boutique. Lotte is also the exclusive operator of 13 luxury brands in the central boutique area [see list of brands below-Ed].

The retailer also operates all 19 duty free shops in the Incheon Airport concourse terminal, which is connected to the main facility by a shuttle rail service.

Lotte Duty Free’s packaged food offer at Incheon International Airport. ©.

LOTTE OFFERS RENTAL REVISION PLAN…

Lotte Duty Free CEO Jang Sun-wook confirms that his letter sent to the IIAC yesterday is requesting a ‘rational adjustment’ to the terms and conditions. As such he says he wants to avoid ‘returning all business licenses’ at Incheon Airport.

In his statement this morning, he says that Lotte has offered the airport a plan to change the rent structure, which sets out amounts related to ‘operating rate’ [sales performance-Ed] for each item – ‘not the minimum guaranteed amount, considering the crisis situation in the duty free shop industry.’

Lotte said: “It is an attempt to negotiate with Incheon International Airport Corporation again and to avoid the worst case of the full withdrawal of Lotte Duty Free from Incheon Airport. The Lotte Duty Free Shop requested that the meeting schedule be returned within one week as the current situation is urgent.”

Jang Sun-wook says Lotte Duty Free Store, currently operating the largest area of ​​duty free shops at Incheon Airport, is expected to pay a total of approximately KW4.1 trillion won ($3.6bn) to Incheon International Airport Corporation regardless of market conditions from September 2015 to August 2020.

On this basis, Lotte claims that it would suffer a record deficit of more than KRW 200 billion (176.8m) this year and a minimum of KRW 1.4 trillion ($1.2bn) during the five-year contract period.

The US supplied THAAD missile defence system designed to protect South Korea has actually caused huge collateral damage – as the primary cause of Beijing’s decision to halt all organised Chinese tourist tour groups from visiting South Korea. Seoul’s ‘dependence on this nationality’ for revenues has also been badly exposed as a result.

According to the operating fee adjustment ratio requested by Lotte Duty Free, it would pay Incheon Airport Corporation an amount set by the sales performance with a ceiling rate of 35% – depending on the sales by product [See below].

NEW CATEGORY PERCENTAGES…

A Lotte Duty Free Shop official said, “Lotte Duty Free has been striving to satisfy travellers by offering shopping services that match the international reputation of Incheon International Airport. With rent [this] agreement, Lotte Duty Free will continue to cooperate with Incheon International Airport Corporation.”

Lotte has suggested the following ‘top rate’ rental payment ceilings per product category within its proposed revision of the current agreement with Incheon Airport. They are as follows: Perfume & Cosmetics 30%; Liquor (Whiskey/Brandy) 35%; Liquor (wine/champagne) 20%; Tobacco (imported) 35%; Tobacco (domestic) 25%; Clothing 20%; Leather 20%; Fashion Accessories 20%; Clocks 20%; Sunglasses 20%; Precious metals, silver 25%; Packaged Food (red ginseng, chocolate) 25%; Entertainment Toys/Baby Products 20%; and Craftwork 20%.

[The aforementioned 13 luxury branded boutiques operated exclusively by Lotte Duty Free in the central boutique area include Louis Vuitton, Prada, Cartier, Gucci, Bulgari, Omega, YSL, Bottega Veneta, Burberry, Salvatore Ferragamo, Tumi, Tiffany and Tumi-Ed].

(With addition background reporting by TRBusiness Asia Correspondent, David Hayes).