On location in S. Korea: outlook in face of Covid-19

By David Hayes and Charlotte Turner |

Entas Duty Free Incheon T1 Liquor and tobacco leadSouth Korea’s duty free industry is prepared for a large drop in sales this year after 322 new Covid-19 cases were reported yesterday (Thursday 5 March), lifting the number of confirmed coronavirus cases to 6,088, according to the Korea Center for Disease Control and Prevention (KCDC). David Hayes reports from South Korea.

 

So far, 41 people, most of whom already had underlying medical conditions, have died from Covid-19 in South Korea, after eight new deaths were reported yesterday.

 

About 60% of confirmed cases have been linked to a branch of the Shincheonji Church of Jesus sect in the southeastern city of Daegu, KCDC Director General Jeong Eun Kyeong earlier told reporters at a press conference on Wednesday (4 March).

 

Virus tests on members of the 210,000-strong Shincheonji sect who show symptoms have been completed, according to Jeong. In addition about 9,000 Shincheonji members who have shown no symptoms are under self-isolation.

 

As of Thursday afternoon, some 4,327 confirmed cases had been reported in Daegu, located 300 kilometres southeast of Seoul, while 861 cases had been reported in neighbouring North Gyeongsang.

 

Myeongdong shopping district Tour information employees Feb 2020

Tour guides in the Myeongdong shopping district remain upbeat during a difficult time for South Korea.

80% FALL IN CHINESE VISITORS

Elsewhere, the number of confirmed cases in Seoul rose by four to 103 on Thursday, while the number of Covid-19 cases in Busan in the southeast is 93.

 

The rapid spread of Covid-19 in South Korea over the past two weeks (since 20 February) has left South Korea’s duty free industry reeling from a double whammy.

 

Chinese visitor arrival numbers have plunged since the Chinese Government banned outbound group tour departures.

 

According to South Korea’s Ministry of Economy and Finance, the number of arriving Chinese visitors in the last two weeks of February fell by about 80% compared with the same period last year while the number arriving during the whole was down about 70% compared with last year.

 

Now South Korea’s travel retail market has received a second blow following a dramatic increase in domestic coronavirus cases.

 

Since news broke on 20 February about the likely mass spread of the Covid-19 virus among Shincheonji members, the startling increase in cases reported in Daegu and North Gyeonggi has caused foreign visitors from countries other than China to cancel plans to visit Seoul and other cities.

 

ENFORCED TRAVEL RESTRICTIONS

South Korean businessmen and leisure travellers also are cancelling their overseas travel reservations to avoid possible infection, contributing further to the current duty free sales slump.

 

Even those wanting to travel abroad are being forced to change their plans as more countries and territories announce entry restrictions on travellers arriving from South Korea.

 

As of Wednesday 4 March, some 94 countries and regions had introduced or are planning to implement entry restrictions on visitors from South Korea, an increase of eight from a day earlier.

Incheon Airport T1 general Feb 2020

According to South Korea’s Ministry of Economy and Finance, the number of arriving Chinese visitors in the last two weeks of February fell by about 80% compared with the same period last year.

Currently 37 countries and regions are barring (or plan to bar) the entry of foreign travellers who have visited South Korea in the past two weeks. In addition, 54 countries and regions, including 14 provinces and cities in China, have prepared or are carrying out quarantine programmes or recommendations for them for travellers who have visited South Korea recently.

 

IMPACT TO AIRLINES

Countries and territories banning the entry of foreign travellers who have visited South Korea in the last 14 days include: Singapore, Hong Kong, India, Nauru and others.

 

For the moment, Japan, Vietnam, the Philippines, Fiji, the Maldives and some other countries are confining their entry ban only to travellers who have visited Daegu, North Gyeonggi and the surrounding area.

SM Duty Free Incheon T1 Feb 2020

In spite of last year’s sales growth, duty free operators’ profitability did not improve as a large share of the 2019 revenue increase was taken up by sales to Chinese daigou wholesaler traders who receive large discount incentives from duty free stores.

Among other countries’ responses, the United States has issued an advisory note advising against all but urgent travel to the whole of South Korea, while the United Kingdom and others have advised against all but urgent travel to Daegu and North Gyeonggi Province.

 

Airlines also have been impacted by South Korea’s rapid increase in confirmed Covid-19 cases. Many carriers have reduced or totally suspended all flight services to Seoul and other Korean cities after earlier switching to use smaller planes and cutting flights due to the drop in Chinese passenger numbers since January.

 

Cathay Pacific on 1 March, for example, temporarily suspended all flights between Hong Kong and Seoul for four weeks to 28 March after previously suspending services to Busan and Jeju following a sudden fall in passenger reservations.

 

MODIFIED OPENING HOURS

As reported, South Korean duty free operators have responded to the sudden drop in foreign visitor numbers since the end of January by reducing store opening hours and introducing new promotions to attract dwindling customer numbers.

 

Lotte Duty Free, for example, has reduced store opening hours at its Sogong flagship store in Seoul to 09:30 to 18:30 daily and has modified opening times at other downtown stores.

 

Signs in the Sogong store elevator lobby warn customers that shop staff will take their temperature and those found to have a temperature above 37.5 degrees Celsius will not be permitted to enter the store.

Incheon Airport T1 Louis Vuitton

Incheon Airport’s famous Louis Vuitton store in Terminal 1 will no doubt see a significant drop in sales in 2020.

To reduce shop running costs, Shinsegae Duty Free on 1 March announced new opening times from 11:00 to 18:00 daily for its Seoul Myeongdong and Gangnam, and Busan downtown stores.

 

Elsewhere in Seoul, Hyundai Duty Free’s opening times at its Gangnam store are 09:30 to 18:00 daily.

 

SME OPERATORS

Among small and medium operators, SM Duty Free announced in February the closure of its Seoul downtown store at weekends and has reduced weekday opening times to 10:00 to 19:00 daily.

 

Other SME operators also have modified their downtown store opening times.

 

SM Duty Free downtown shop notice Feb 2020

SM Duty Free announced in February the closure of its Seoul downtown store at weekends and has reduced weekday opening times to 10:00 to 19:00 daily.

All duty free operators have been hard hit by the recent drop in customer numbers and sales, along with most of South Korea’s domestic retailers.

 

Last week, (28 March) the government pledged a stimulus package worth more than KRW20tn (US$17tn) to help alleviate the Covid-19 impact on South Korea’s economy.

 

This monetary booster covers support to ease small and medium enterprises’ financial difficulties, including SME operators running the country’s downtown and airport duty free shops.

 

SME companies renting business premises from state-run enterprises will have their rent reduced by 20% to 35% for six months or the monthly rental fee deferred if a sales-based rental fee agreement is in operation, according to the Ministry of Economy and Finance.

 

The promised assistance will benefit SME operators running duty free shops at Incheon International Airport and at airports under Korea Airports Corporation.

 

On Wednesday (4 March), the government announced a supplementary budget of KRW11.7tn ($9.8bn) to help mitigate the impact of the coronavirus.

FATE OF ‘THE BIG THREE’?

The government support package also will assist the country’s SME downtown duty free operators pay their shop rental fees. Landlords renting business premises to small and medium companies will receive the equivalent of 50% in corporate and income tax reductions of the rent reduction they extend to small business tenants.

 

In Seoul, landlords owning property in the capital’s famous Namdaemun Market adjacent to Myeongdong shopping district have agreed to cut rents by 20% for about 2,000 market traders under the ‘Good-hearted landlord campaign’, while other landlords in Seoul are reported to have reduced rents by up to 30% since the government programme was announced.

 

South Korea’s ‘big three’ duty free operators are also looking for concession fee reductions as they battle to cope with reduced customer footfall and plummeting sales.

 

Lotte, Shilla and Shinsegae are believed to be involved in talks with Incheon International Airport Corporation (IIAC) over requests for reduced concession fees though no official announcement has been made.

 

“There has been a 60% passenger fall at Incheon Airport but the big three have not received a licensee fee reduction, so it’s a disaster for them as they have high concession fees. If Incheon Airport does not reduce it will be a big problem for them,” commented a duty free industry source in Seoul.

 

Lotte Duty Free main store Feb 2020

Lotte Duty Free has reduced store opening hours at its Sogong flagship store in Seoul to 09:30 to 18:30 daily and has modified opening times at other downtown stores.

While reduced airport and downtown shop rentals will help operators to some extent, South Korea’s duty free industry nonetheless is facing a large loss of revenue this year.

 

DUTY FREE OUTLOOK FOR 2020

According to industry estimates, in-store and online sales currently are running at about 20% of their previous level since Chinese visitor numbers plunged at the start of February.

 

South Korea’s total duty free sales rose by around 30% in 2019 in KRW terms, according to industry estimates, totalling around KRW 25 trillion last year, and up from KRW 19 trillion (US$17.2bn) the previous year.

 

Total monthly duty free sales averaged an estimated KRW 2.1 trillion in 2019 which at current exchanges rate (US$1.00 = KRW 1,185) is about US$1.77bn per month.

 

Perfume and cosmetics are estimated to have accounted for about 60% of South Korea’s total sales last year followed by fashion and general merchandise representing about 20%, liquor and tobacco around 10%, watches and jewellery 7% to 8%, and electronics the remaining share of revenue.

 

In spite of last year’s sales growth, however, duty free operators’ profitability did not improve as a large share of the 2019 revenue increase was taken up by sales to Chinese daigou wholesaler traders who receive large discount incentives from duty free stores.

 

“Operators fear there could be big redundancies as they are losing a lot of money now,” the source said.

 

PERFUME & COSMETICS HARDEST HIT?

“Last year operators did not make big profits, unlike cosmetics companies Amore Pacific and LG who made huge profits; but not the operators as they give big discounts to daigou traders and cosmetics brands have not increased margins for operators.

 

“Because of Covid-19 there is no chance to improve business for another three to four months. Operators fear there will be a move to redundancies and layoffs, and to reduce their operation size.”

 

If total duty free sales remain at the current level until the end of June (about 80% below their monthly average in 2019), South Korea’s duty free industry could suffer revenue losses in the region of KRW 6 to 8 trillion (US$4.2 to $5.6bn) in addition to lost sales recorded in February.

Myeongdong shopping district Feb 2020

In Seoul, landlords owning property in the capital’s famous Namdaemun Market adjacent to Myeongdong shopping district have agreed to cut rents by 20% for about 2,000 market traders under the ‘Good-hearted landlord campaign’, while other landlords in Seoul are reported to have reduced rents by up to 30% since the government programme was announced.

All duty free categories have been hit by the fall in demand. South Korean cosmetics companies supplying duty free operators are among those who have been hardest hit by the recent overall reduction in duty free sales.

 

Many local cosmetics brands were already losing duty free market share to international brands before the original Covid-19 coronavirus outbreak began in Wuhan in China’s Hubei Province last December.

 

This trend is expected to continue once the coronavirus crisis has passed and daily life around the world starts returning to normal.

 

“South Korea cosmetics brands are worst hit,” confirmed the source. “They lost sales before the coronavirus outbreak began. Now there are fewer daigou traders to carry their goods, so they are losing more sales.”

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