Incheon International Airport reported record sales of $2.1bn (+4.1%) in 2017.

Lotte Duty Free has decided to surrender three of its four concessions at Incheon International Airport Terminal 1 as the airport authority prepares to re-tender the licences, TRBusiness can confirm.

In a letter sent to Incheon International Airport Corporation (IIAC) today, Lotte has provided notice to withdraw its DF1 (P&C), DF5 (Leathergoods & fashion) and DF8 (All items) leases won in a competitive tender in 2015.

However, it will continue to operate its Liquor & Tobacco concession [DF3], which it won alongside the others on a five-year term in 2015, ‘despite the deficit in order to minimise the damage of IIAC and the inconvenience of passengers’.

The South Korean retailer says the ‘burden of rent increases’ coupled with plunging Chinese tourist volumes due to THAAD and the extension of further government permits for four additional downtown duty free store licences factored into the decision to withdraw.

A Lotte source told TRBusiness this morning (UK GMT) that the THAAD impact was ‘the most influential reason’ for its pullout, in addition to the aforementioned downtown competition and a wider rise in illicit Chinese ‘daigou’ trading, which has eschewed its target customer mix.

“The number of Chinese was down, but the structure of duty free is broken down as most of the visitors are not ‘normal customers’,” the source commented.

Beijing’s move to restrict Chinese tour groups to South Korea in light of the US-supplied THAAD anti-missile system crisis has been ‘the most influential reason’ for the contract withdrawal, says a source.

IIAC MOVES SWIFTLY…

In an official document seen by TRBusiness at the time this report was filed, IIAC has confirmed it is proceeding with the process to select a follow-up business operator for Lotte’s vacated lots in a bid to ‘minimise passenger inconvenience and disruption to the airport operation’.

IIAC has yet to formally respond to TRBusiness‘ requests for comment, but noted Lotte Duty Free’s average concession win rate was over 220% compared to the winning bid rates of the other operators [Lotte Duty Free, Shilla Duty Free, Shinsegae Duty Free, Entas Duty Free, City Plus and SME Duty Free] at the time it moved decisively to snap up the four concessions in 2015.

The operation of Lotte’s concessions will be decided through a competitive bidding process, with IIAC adding that it would ‘supplement the related contract procedure’ to prevent future problems arising from a tenant ending its obligations in the middle of the contract period.

EARLIER WITHDRAWAL SIGNS…

Lotte says that its branches at Incheon International Airport have already posted losses of KRW200bn ($184m) since 2016.

If the contracts were to continue for the duration of the term (2015-2020) they would accrue losses of KRW1.4tn, says the retailer.

Once acceptance of the notice of the contract termination is accepted by IIAC in March, Lotte will operate for a further 120 days before ceasing its operations.

Lotte Duty Free will continue to operate its Liquor & Tobacco concession at Incheon T1, but has decided to exit its DF1 (P&C), DF5 (Leathergoods & fashion) and DF8 (All items) lots due to a perfect storm of high rental payments, plummeting Chinese visitors related to THAAD and the government’s move to authorise further downtown duty free licences.

It says it will plan to re-assign about 100 of its workers to other areas including at Terminal 2 and downtown branches after internal discussions. A meeting in March will finalise the reassignment plan by May.

The move will come as a shock to some given the more encouraging recent signs that tensions between Beijing and Seoul regarding the THAAD anti-missile crisis appeared to be cooling, raising prospects of a revival of Chinese tour groups to South Korea.

However, Lotte had signalled to TRBusiness in September that it was ‘seriously’ considering pulling its ‘entire operation’ due to the combination of the THAAD impact [which led to a decimation in Chinese tourism to South Korea over a sustained period last year] matched with the ‘high’ rentals it claims were already in place.

At the time of the tender in 2015, Lotte says it had calculated rent based on an estimated 50% year-on-year increase in Chinese tourism sales – a forecast hampered by a slicing of those numbers from 8m in 2016 to 4.4m in 2017, it says.

Having formally applied for rent relief in September, Lotte filed an ‘unfair trade practice report’ to South Korea’s Fair Trade Commission (FTC) accusing IIAC of creating conditions that ‘disadvantage’ the duty free operator.

The move followed three previously unsuccessful attempts by Lotte to attempt to renegotiate its contracts.

Lotte sealed the Liquor, Tobacco and Packaged Foods (DF2) contract covering eight stores over 1,407sq m of space at the new Terminal 2 last year with a winning bid of KRW84bn ($74m).

It remains unclear at this stage if this latest decision to exit several of its contracts at Terminal 1 will have any bearing on Lotte’s contracts at Terminal 2.

For the time being, the Lotte source says today’s move will allow it to focus on reinforcing its downtown business and expanding its foreign business while ‘diversifying our target customers’.

Stay close to TRBusiness for further updates…