Shinsegae ‘to reduce gap with Lotte/Shilla in 2020’

By Luke Barras-hill |

PandC-Shinsegae-Incheon

Shinsegae Duty Free Cosmetics & Perfumes store located at Incheon International Airport Terminal 1 east side.

Shinsegae Duty Free is projecting sales growth of more than 10% in 2020 as it seeks to entrench its number three position in an overheated Korean duty free market while narrowing the gulf with Lotte Duty Free and The Shilla Duty Free.

While Shinsegae Duty Free is not due to officially release its full-year 2019 figures until sometime in Q1, TRBusiness has learned it is eyeing total sales of close to US$4bn – equating to a dramatic 40% year-on-year uplift on revenue of roughly US$2.75bn in 2018.

The estimated return includes US$2bn from its flagship Myeongdong store and US$500m from its Gangnam operation, both situated in downtown Seoul.

Should those results materialise, it would mean Shinsegae Duty Free would in theory nestle in at number seven in the TRBusiness Top 10 International Operators ranking [based on 2018 figures], outpacing DFS Group (US$3.62bn).

[It is worth pointing out though that Shinsegae Duty Free’s current designation as a Korea-only duty free operator means it is not currently included in the Top 10 International Operators ranking – Ed].

‘MAJOR PLAYER’ STATUS

Notwithstanding this, Shinsegae Duty Free would still have a great deal of ground to make up on Lotte Duty Free and Shilla Duty Free [revenues totalled US$6.7bn and US$5.3bn, respectively, in 2018 according to the Top 10 International Operators – Ed].

During a recent interview in Seoul, Hong Seok Ho, Senior Vice President, Shinsegae Duty Free Merchandising Division praised a ‘meaningful’ 2019, earmarking among other factors the net effect of key contract gains at Incheon International Airport Terminal 1 where Shinsegae Duty Free snared Lotte Duty Free’s non-liquor & tobacco concessions in 2018.

Myeongdong-Shinsegae-DF

Shinsegae Duty Free store in Myeongdong remains a major draw for Chinese customers.

According to Shinsegae Duty Free, it now accounts for around 50% of Incheon Airport’s concession share – no doubt fuelled by the aformentioned acquisition of Lotte Duty Free’s former Terminal 1 lots – although that landscape could well change as new contract commencements at Terminal 1 beckon in September (see below).

“This year we are targeting securing the good position of number three operator in Korea and closing the gap with Shilla and Lotte,” commented Hong.

“We are really competitive in this market and showing Lotte and Shilla we are not newcomers, but major players in this duty free market in Korea.”

Seok-Ho-Hong

Hong Seok Ho, Senior Vice President, Shinsegae Duty Free Merchandising Division.

Hong says the growth rate at Shinsegae Duty Free’s department store located in the fashionable, up-market area of Gangnam, is above that of Myeongdong, but points out that the stores’ ‘characteristics’ are decidedly different.

“Myeongdong is mainly for the Chinese customers, but we see a lot of Korean customers in the Gangnam stores,” he explained. “At Gangnam we see a lot of opportunities to communicate with Korean customers because the Korean customer portion is much higher than the Myeongdong store.”

While admitting the Incheon Airport operation has been ‘tough’ financially – retailers previously faced near-extinguished Chinese passenger volumes in the wake of THAAD, prompting calls for rent reductions, and had to adjust as Korean Air and Sky Team carriers shifted to the new Terminal 2 –  it remains a stronghold for Shinsegae Duty Free.

“It is a key position for us to have our shop at Incheon Airport because it is the number one airport in the world [in duty free revenues].”

Chinese arrivals to South Korea grew by 25% in November, according to the most recent data provided by the Korea Tourism Organization, as the resurgence seemingly persists – something confirmed to TRBusiness by Incheon International Airport Corporation (IIAC) Director of Concessions Planning Team Dong-Ik Shin last year.

Asked if the THAAD impact on the travel retailer’s operations had now been mitigated, Hong said: “If you look at the number of Chinese passengers coming to Korea it has obviously dropped compared with before THAAD.

“But we’ve seen a gradual growth of Chinese tourists coming to Korea and I think it is almost 70-80% of what we used to have. Meanwhile, their average basket size has grown. In terms of sales, we don’t see much decrease.

“Eventually, we are looking at overseas operations as well. It is key for Shinsegae to have major experience operating in international level airports. It is also important to have experience of fashion, liquor & tobacco and cosmetics at the airport. Without experience in Incheon Airport, we cannot try overseas airport concessions. It is a must for us to gain experience in international level operations.”

Speculation Shinsegae Duty Free is looking to enter Jeju Island via a hotel operation has been rife for some time, with the Korea Times reporting in February last year plans for a Shinsegae Chosun Hotel on the island, where powerhouses Lotte and Shilla are already fixtures.

Busan-DF-Shinsegae

The Busan shopping complex located in the thriving Centum City tourist area has faced challenges.

Addressing the rumours directly, Shinesegae Duty Free told TRBusiness: “If a firm acquires a duty free license in Korea, it has to open a store within a year. The Korea Customs Service (KCS) has not decided on the tender for new duty free licences including the one in Jeju in 2020. We are only preparing in advance in case of an opening of new duty free licenses in Jeju. Nothing is fixed.

“Duty free operations are a licensed business, you cannot decide when and where, but you have to be prepared when you get chances,” admitted Hong. “Gaining experience at this time is important for our next step.”

On home soil, the frenzy of licence issuances witnessed in recent years has tempered of late, with Hyundai Department Store Group emerging as the sole bidder in the most recent round.

Shinsegae-generic-image

As reported, Lotte Duty Free shared its reasons for not competing for three available licences in Seoul in an exclusive interview.

Hyundai Department Store Group will take over Doosan Corporation’s Doota Duty Free shop in a KRW61.9bn conditional acquisition.

“I think it is nonsense to have more duty free shops in Seoul downtown; the size of the total Korean duty free market is growing 20-30% every year so the government may think if the market is growing it makes sense – actually, the fact is it doesn’t work like that,” commented Hong.

He states that an initial indication shared with this publication last year that put South Korean duty free industry market growth in the region of +14% to US$20bn still stands.

INCHEON TENDER: NOTHING RULED OUT

In the immediate future, Shinsegae Duty Free, like Lotte Duty Free and The Shilla Duty Free, is preparing to defend important concessions at Incheon Airport Terminal 1. TRBusiness understands from sources that the highly vaunted tender is due to release in the coming week.

A total of eight concessions spread over 8,749sq m of space are up for grabs. Current leases are due to expire in August, with the new contracts expected to begin on 1 September and run until 31 August (click here for more detail).

IIAC will tender one concession each for Shinsegae Duty Free (DF7) and Lotte Duty Free (DF3) and three for The Shilla Duty Free (DF2, DF4 and DF6).

Airstar-Ave-pax

Passengers breeze through the premium shopping walkway at Incheon Airport’s Airstar Avenue (pictured) and (below) The Shilla Duty Free’s P&C shop.

The Shilla Duty Free’s P&C lots (DF2) in particular have been the subject of intense speculation within Korean media in recent months on the anticipated ferociousness of bids for these prime positions.

Asked directly about its strategy for the tender, Hong confirms Shinsegae Duty Free would vie for every available concession.

“We don’t have a specific target i.e only cosmetics or liquor and tobacco,” he commented. “We are applying for every concession.”

Incheon’s concession mix and pax exposure is a veritable feast for any incumbent retailer, as the airport’s full-year 2019 results released this week attest.

On a recent visit to the airport in December, TRBusiness gained a critical visual update on some of the key concession ‘battlegrounds’, which will no doubt attract fierce competition when IIAC finally issues the RFP.

The west side of the terminal houses (among others) anchor perfumes & cosmetics and fashion shops for Shilla, in addition to smaller units for Shinsegae Duty Free and Grand Duty Free [the last’s units are not part of the T1 bid – Ed]. Additionally, SME City Duty Free runs fashion, sunglasses, souvenirs, food, liquor & tobacco and cosmetics shops.

Shilla-PandC-Incheon

The east side welcomes passengers to the illustrious luxury precinct, Airstar Avenue, which houses a number of important high-end fashion boutiques such as Fendi, Celine, Moncler and Balenciaga – all operated by Shinsegae Duty Free and part of the T1 bid mix.

Units from Gucci, Omega, Burberry, Bottega, Montblanc, Ferragamo and the flagship Louis Vuitton store, operated by Shinsegae Duty Free, remain outside the bid as they are tied to the relinquished Lotte Duty Free concession contract.

Shinsegae Duty Free also runs perfumes & cosmetics shops at the east side, also won as part of the surrendered Lotte contract.

Lotte Duty Free operates its remaining liquor & tobacco and packaged food outlets in the area. Packaged food outlets run by SM Duty Free in addition to cosmetics, fashion & accessories, liquor & tobacco, plus a range of other standalone shops are a staple of the east side offer.

Separately, Grand Duty Free and Entas Duty Free operate one shop each in area.

“Obviously the Incheon Airport concession bidding is the priority,” Hong continued when asked where the travel retailer’s immediate priorities lie for the coming months.

“It’s been opening after opening for four or five years now, so it is time to secure those existing stores to be more competitive, looking at services we are providing to Korean and Chinese customers, and diversifying our customers – not only focusing on the Chinese but other nationalities like the Japanese. This year there will be more stress on operational excellency.”

See the January issue of TRBusiness, available soon, for more from Shinsegae Duty Free’s Hong Seok Ho.

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