Lotte Duty Free and The Shilla Duty Free are weighing up decisions to bid on the former’s vacated Incheon Terminal 1 concessions, as the airport today released two five-year contract options.

In an official request for proposal (RFP) document seen by TRBusiness, Incheon International Airport Corporation (IIAC) has amalgamated Lotte Duty Free’s previous perfumes and cosmetics lot (DF1) with ‘all items’ (DF8) as part of a revised DF1 lease.

Meanwhile, leather goods and fashion (DF5) will remain as a single package.

The new DF1 lot covers a total of 22 shops (perfumes & cosmetics 3; all items 19) across a total area of 6,091 sq m. The second DF5 tenancy covers four outlets over 1,814sq m.

Contracts will begin on 7 July, a day after Lotte Duty Free officially ceases its operations at T1.

BIDDING ‘NOT DECIDED’

Lotte and Shilla are assessing whether or not to mount bids for the concessions but official decisions will be made swiftly, TRBusiness can reveal in conversations with sources at both parties.

Interested retail operators will have 84 days from today to submit their financial and business proposals and – if selected – tend to the small matter of establishing their operations in time for the 7 July commencement date.

Shilla earlier this month accepted IIAC’s 27.9% T1 rent reduction offer in light of what it views as ‘positive political movements’ geared towards increasing Chinese inbound tourism, which has been decimated by the THAAD crisis.

“We are reviewing the tender and the profitability and feasibility of the contract itself,” a Shilla source confirmed to TRBusiness today. “A final decision hasn’t been made – but will be. Considering the time limit, it will be made quickly.”

A Lotte source said the retailer ‘would take a thorough and detailed look on the terms and analyse the feasibility of the concessions’.

Asked to comment on the makeup of packages and whether they extract maximum value from the business, The Shilla source added: “We respect IIAC’s decision. We understand the airport company has its issues – they need to sell DF8 (the previous ‘all goods’ contract operated by Lotte) to the operators.”

A South Korean industry source adds that the bidding is likely to attract strong operator interest due to the MAG terms decreasing by more than 30% on the new bidding round.

The fact that there is no limit on participation [operators can bid for one or both leases] will also be a draw.

“However, because the profitability of domestic duty free industry has deteriorated, most of the operators will not suggest bids on unfeasible levels,” the source added.

As revealed exclusively by TRBusiness, Lotte Duty Free had indicated it would ‘strongly consider’ submitting new proposals for the re-issued tender, but that any decision would not be made until further information was available.

This includes the length of the contract and it’s proposed structure, with the retailer stating that the current concourse location ‘is not popular’.

Lotte are reviewing the current documents issued today, with TRBusiness understanding it is not entirely satisfied with the new terms.

To reiterate, Lotte’s official contract termination date for the three concessions it surrendered, P&C (DF1), leathergoods and fashion (DF5) and all items (DF8) is 7 July, the date the new leases for DF1 and DF5 begin. It will operate as normal until that time.

IIAC was unavailable for further comment when contacted by TRBusiness

IIAC AND KCS TO DECIDE

In line with current rules, IIAC will notify the Korea Customs Service of two selected bids for each concession and negotiate with the potential successful proposer before awarding the concession.

A determination will be made on a weighted 60:40 balance based on business and financial proposals, respectively, before two operators are selected for the packages.

In the event of two or more proposers with equal total scores, the highest ranked score for the business proposal aspect of the calculation will be taken into account before IIAC selects a  ‘preferred proposer’.

According to the RFP document, minimum annual guarantees for DF1 and DF5 are set at KRW160,121,710,785 and KRW40,559,502,364, respectively.

Operators must make monthly payments equivalent to 1/12 of the minimum annual guarantee.

After the first year, the MAG will be revised based on a 50% rate of change in passenger levels. This will increase/decrease by no more than +9% [TRBusiness notes this is a particularly important aspect given the mounting volatility in visitors – particularly Chinese – owing to the current THAAD issue – Ed].

Should percentage rents exceed MAG on a semi-annual basis, the chosen operator(s) must pay the difference to IIAC by the following month.

Different operating zones can begin business, but each package will last for 60 months (five years) following the date of commencement.

JOINT BIDS ‘RULED OUT’

IIAC has ruled out a consortium or joint contract bid for the concessions, according to the documents.

Open to domestic or foreign bids, proposers must have a capital of KRW1bn or more.

Business presentation and tender proposals from interested parties will be heard on 24 May at IIAC’s offices.

A tender presentation is due to take place on 20 April, with applications to attend open until noon on 19 April.

Following this, a tender registration will take place on 23 May before the tender submission deadline of 24 May.