Lotte’s Kap Lee eyes FITs and group tour comeback

By Luke Barras-hill |

Lotte Duty Free is considering opening new stores in countries with stringent quarantine rules such as Australia and Vietnam, South Korea’s powerhouse travel retailer has told TRBusiness.

In a recent in-depth interview with CEO Kap Lee, TRBusiness learned that Lotte Duty Free still managed to record KRW6,391 billion/$5,836 million in DF&TR revenue [Lotte Duty Free posted sales of $8.5bn in 2019 according to TRBusiness’ Top 10 International Operators 2020 – Ed] in 2020 despite a crippling year for global travel retail.

From February 2021 to May 2021, sales jumped by 20% year-on-year. 

Briefly reflect on the challenges of a Covid-stricken 2020 and how Lotte Duty Free has responded?

In spite of the unexpected situation caused by Covid-19, we have been introducing new ideas with resilient responses and innovation the industry has never seen. While securing domestic sales by selling off un-depleted stock through domestic channels and offerings on flights to nowhere, we are also presenting a new normal in the duty free industry through rapid digital transformation.

We are pioneering new sales channels by entering the live commerce market, securing potential customers through the online conversion of family concert, and expanding brand awareness.

There has been surging popularity for non-landing tourist flights in South Korea. Talk to us about the success of the initiative and what further incentives will you introduce to increase spending?

Kap Lee, CEO, Lotte Duty Free: “The travel retail industry inherently bears many risks. It is important that relevant economic actors including the government communicate quickly and respond flexibly to changes and come up with countermeasures together. Even after the pandemic ends, the industry and the government will work together to enhance the competitiveness of the Korean travel retail industry.”

Non-landing tourism flights have been one of our focuses in securing domestic sales. Some 1,400 passengers purchased from Lotte Duty Free in February, approximately two-and-a-half times higher than in December 2020 when non-landing tourist flights began.

February sales surged by 35% compared with the previous month, driven by heavy promotional activity held in association with all seven participating airlines [Korean Air, Asiana Airlines, Air Busan, Jeju Air, Air Seoul, T’way Air, and Jin Air]. Average sales per customer for Lotte Duty Free from no-destination flights were KRW1.2 million ($1,075), which is three times higher than Lotte’s average sale per customer in 2019.

We have introduced a range of marketing activities such as giving gifts to airline affiliates, upgrading the membership level of Lotte Duty Free Online Store, and hosting inflight prize draw events.

The surging popularity of non-landing flights in South Korea is paying dividends for Lotte Duty Free, with average sales per customer at KRW1.2 million – three times higher than its 2019 SPP metric.

Operational resilience in the form of cost-cutting measures and diluting existing inventory characterised 2020, but travel retailers continue to shift from damage limitation to preparedness ahead of the resumption of international travel. How would you characterise the way Lotte Duty Free is approaching business today?

Lotte Duty Free is planning to respond more flexibly and quickly to trend changes this year by accelerating digital transformation and business diversification. We are accelerating the digitalisation of offline stores starting from the opening of the Smart Store.

Opened at Lotte Duty Free main store in Seoul earlier last year, Smart Store is a hi-tech zone where you can meet beauty brands’ various services that combine cutting-edge technologies. We will soon introduce a mobile self-payment system and strengthen the AI-based customer experience at the stores. Stores will be opened at other Lotte’s downtown locations in South Korea and other countries.

In addition, we are pushing forward different projects to support best service for individual customers, introducing a customised product recommendation based on DDM (Data-Driven Marketing) utilising extensive big data.

As for our business diversification, we are expanding partnerships with local travel agencies in neighbouring countries, developing cruise packages and launching combined package products through collaboration with hotels, home shopping channels and travel agencies. These are our efforts to become a travel retailer rather than a mere duty free operator.

How has Lotte Duty Free performed this year in sales/growth terms, including at your Singapore Changi Airport operation?

Lotte Duty Free recorded a 20% year-on-year rise in sales from February to May of 2021. Changi Airport Store is still in partial operation.

How happy have you been with the level of relief you’ve received from the government and your airport partners, be it financial (rent/MAG suspensions, delayed or extended payment terms etc) and/or operational support and are there areas where you’d like to see improvements?

From permitting clearance of un-depleted stock through domestic channels to tax reduction for airport duty free shops, introducing non-landing tourism flights and a 50% reduction in patent fees, every one of these support measures has helped the industry significantly.

The South Korean travel retailer has boosted its brand equity and secured new customers through the online conversion of its popular Family Concert. The 31st Lotte Duty Free Concert held in May under the banner ‘Meet the green vibes, Greet the duty free life’ featured top Korean artists such as Super Junior-D&E, BTS, Twice, Itzy and Tomorrow by Together.

I would like to express my deep gratitude for the support for the duty free industry from various government ministries and the National Assembly. The travel retail industry inherently bears many risks. It is important that relevant economic actors including the government communicate quickly and respond flexibly to changes and come up with countermeasures together. Even after the pandemic ends, the industry and the government will work together to enhance the competitiveness of the Korean travel retail industry.

A two-part question: A) How reliant has Lotte Duty Free become on daigou shuttle traders, and b) in your view what does the continued repatriation of foreign spending by China mean for Lotte Duty Free’s locations and South Korea’s duty free market?

Encouragingly, the demand for Korean duty free goods is still high in China taking from the fact that daigous are active in the Korean market, even after the borders closed due to the pandemic. Currently due to the global pandemic, the Korean duty free market revolves around Chinese shuttle traders. However, once the pandemic lifts and people are free to travel overseas, [daigou] proportions will naturally decrease, while FITs [free independent travellers] will take centre place in the industry.

The L&T concession at Singapore Changi Airport commenced in June 2020. Lotte Duty Free runs 18 stores over an 8,000sq m footprint across all four terminals and says it is prioritising a Grand Opening.

Therefore, the ultimate goal of Lotte Duty Free is set to attract more FITs and group tourists by contributing to strengthening the competitiveness of Korean tourism. While we are strengthening our network of travel agencies that are widespread both at home and abroad, we are also securing potential customers using Hallyu (Korean Wave) content such as Family Concert, establishing live commerce, and consolidating elements such as data-driven marketing using extensive customer data. We also plan to proactively prepare for the post-pandemic era.

In 2019, online sales accounted for around 25% of Lotte’s total business. Describe the development of Lotte’s e-commerce business since then and what share of total sales do you expect it to occupy in the coming years?

After the pandemic, the business model of all retail industries quickly transformed from offline to online. E-commerce had been on the rise even before the pandemic, but its pace has accelerated, its scope has expanded and e-commerce has become deeply embedded in the daily lives of customers. Online sales accounted for 44% [of total revenue] in our 2020 annual performance. As online sales are growing continuously, it is expected to account for about 50% of total sales at the end of the pandemic. The e-commerce department of Lotte has doubled in size since I took office.

Lotte Duty Free has been focusing on the e-commerce business through reorganisation and online UI/UX improvements in recent years. We recently incorporated the FIT team into the e-commerce sector to prepare pre-emptively for the transition to online purchases of FITs. As such, we are laying the foundation to lead the global online duty free market.

Lotte Duty Free has experienced remarkable success using domestic customs clearance to offload duty free stock through downtown shops and Luxe Mall was created last year to this end. How has Luxe Mall performed in 2021 in sales and growth terms and do you have plans to increase sales to Korean customers?

The government’s support measures themselves have been great and helpful, but we have taken a step forward to fully engage with customers by adopting digital tools in effective ways. Last year, the Korean government has permitted duty free operators to sell their un-depleted stock that went through customs via domestic channels.

The first Lotte Duty Free Smart Store incorporating new digital technology launched in 2020. The company has plans to strengthen the AI-based customer experience and introduce a mobile self-payment system as it ramps up Smart Store rollouts at other Lotte Duty Free downtown locations in South Korea and elsewhere. In the long-term the plan is to expand the ratio of free independent traveller customers.

We had previously sold the excess stock online at one of Lotte’s subsidiary, Lotte Shopping’s platform called Lotte On. However, because the channel was not ours and we could only use the channel during certain periods of time, it caused inconvenience to customers. In December, we launched our own online outlet, LuxeMall. It features about 10,000 customs-cleared products from more than 100 international fashion brands including Salvatore Ferragamo, Valentino and Balenciaga.

Simple payment through services such as Payco and Naver Pay has also been activated to enhance customers’ convenience. LuxeMall has been very successful so far. Over the last three months, sales have surpassed Lotte On’s by +1,100%.

Lotte’s liquor & tobacco concession at Incheon Airport T1 ended earlier this year after the consecutive failure of bids for the new contracts. The operator has previously indicated that the terms of any future tender would adopt the middle ground between a fixed-based and percentage rent model. Indeed, many in the travel retail industry have said the MAG concession model is not fit for purpose and should change given the challenges of Covid-19. What is your view on this?

Incheon International Airport is one of the major Asian hub airports, and the duty free businesses located in the airport are proud to be part of the top-notch player in the industry. Although the business environment has become uncertain for duty free shops due to the pandemic, I think there is plenty of room for the duty free business and the Incheon International Airport Corporation to discuss and work together for win-win growth.

In a situation like this where prospects for the number of outbound travellers are uncertain, the biggest burden for duty free businesses is the fixed rental fee. Considering these difficulties, Incheon International Airport proposed several measures to reduce the stress of the business owners. However, the existing fixed rent fee still laid a heavy burden on business operation and many overseas airports are adopting variable rental rates such as PAX linkage or operating rates by sales total. If these methods could be applied appropriately, duty free businesses will participate in future bids more actively.

How do you view the landscape and fortunes of South Korea’s duty free market changing in the coming 12 months?

I believe that global tourism demand will begin to recover within this year. Vaccinations are being carried out without major problems in many countries around the globe and there have been some discussions on the systems that will bring about effective breakthroughs in the stagnant global tourism industry.

There are talks about introducing a vaccine passport, the travel bubble and area hotel quarantine to name a few. South Korea is the world’s top travel retail market and we are expecting to see a V-shaped recovery in the industry within this year. The status of infectious disease prevention and control and vaccine distribution in South Korea has been so successful and has been recognised worldwide.

Lotte Duty Free has achieved marked success by offloading surplus duty free inventory via permitted domestic channels. Pictured is sales activity at its Myeongdong main store in downtown Seoul.

In addition, the Korean government has formed a taskforce to accelerate the early recovery of international tourism and has been actively engaged in discussions on vaccine passports and travel bubbles. International tourists are expected to be able to visit South Korea starting from places like Seoul and Jeju within this year. Such a rebound is expected to commence in line with revenge consumption that has been suppressed. Lotte Duty Free made surplus in two consecutive quarters since last 4Q [2020]. Our operating profits will also get better as the pandemic fades.

What about *future business expansion –  is Lotte Duty Free targeting bids in new markets or other acquisitive activities and if so, in which countries/duty free channels?

Although the launching of the previously planned new stores were partially delayed due to the pandemic, we are planning to continue developing new overseas markets at the right time by considering the recovery time of each country. To this end, we are paying close attention to the recovery trend of the number of passengers from each country, the travel bubble implementation plan, and vaccination status.

In particular, we are considering opening new stores in countries with excellent quarantine performance, such as Australia and Vietnam, where international flights are expected to resume sooner than other places. Specifically, we are considering prioritising the grand opening of the Changi Airport Store, which is currently in partial operation, as well as new stores in Sydney downtown in Australia, Da Nang and Hanoi downtown in Vietnam.

Going forward, we will continue to establish different strategies from a mid-to-long-term perspective and take multi-faceted approaches to overseas expansion to pre-emptively respond to the post-pandemic era. Currently, we are operating 20 business sites in seven countries in the Asia Pacific region (South Korea, Japan, Vietnam, Australia, New Zealand, Guam, and Singapore).

Just like the acquisition case in Australia in 2018, we will continue to exert our efforts to hone our competitive edge by reviewing business expansion through M&As or opening new shops at new locations. We will help the duty free industry to take a leap forward together by collaborating with outstanding players in the global duty free industry across boundaries and barriers.

Kap Lee has revealed that sales at Lotte Duty Free’s online outlet Luxe Mall has surpassed that of Lotte On’s by over 1,000% in recent months.

How is Lotte Duty Free positioned moving into the coming months and what are your expectations for 2022?

Irrespective of the Covid-19 pandemic, FITs are very important in duty free stores. In order to improve business soundness and secure sales stability, our top priority is to expand the ratio of FITs gradually from a long-term perspective.

In particular, our focus is on implementing online-oriented strategies. First of all, we are revamping our app this year so that it can provide a differentiated customer experience including content-oriented product display and live commerce.

Many brands in duty free stores are also realising the importance of FITs and are seeking collaboration with our company. For example, we are preparing a dedicated pavilion for high-end brands for our online shop and app along with different services that can meet the needs of customers for boutique brands.

Chinese customers remain an important customer base that cannot be overlooked in the duty free industry. However, diversifying the customer base in terms of nationality for FITs is our major goal in the long run.

Accordingly, we plan to gradually expand our customer base with differentiated strategies tailored to the characteristics of customers by nationality. Currently, we are expanding business partnerships targeting Southeast Asian customers and providing simple payment services by introducing local payment platforms in each country for quick and easy checkout.

In August of last year, we opened an online shop in Vietnamese, laying the foundation to expand our customer base to Vietnamese customers. Since we are constantly striving to diversify the demographics of our customers, we have pre-emptively prepared a service base for each language. Thus, we are ready to actively attract international customers when the market normalises after the pandemic.

Is there a final message you’d like to share with TRBusiness readers?

I would like to offer a word of support to all those in the travel retail industry who are going through difficulties in the unprecedented challenges we face in the pandemic. As vaccinations are being undertaken around the globe and there are some talks about the travel bubbles and vaccine passports in some parts of the world, I would like to say that we can be optimistic that the spring is not far away for the travel retail industry.

Lastly, I would like to express my deep gratitude to all partners who have been supporting Lotte Duty Free in these challenging times for the duty free industry. We grew together with our partners over the years, overcoming numerous difficulties. The biggest factor for how Lotte Duty Free could sustain customer loyalty and become the leader in the industry over 40 years is the product competitiveness based on the trust from our partners.

If we continue to work together to develop products supporting each other in terms of capabilities and resources, we will be able to share the fruits of the greater growth that the future without Covid-19 will bring.

*Lotte Duty Free did not comment when asked by TRBusiness whether parent Hotel Lotte still intends to pursue a much-publicised IPO.

Extracts from this interview first appeared in the TRBusiness June e-zine, which can be viewed by clicking here.

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