South Korean travel retail stakeholders are expecting a consolidation of the country’s small and medium-sized enterprise (SME) operators, who were facing huge pressure before the outbreak of the coronavirus (Covid-19).

In the first quarter of 2020, South Korea’s leading duty free operators had to reduce their downtown and airport store opening hours due to a lack of customers.

Already suffering from the disappearance of high spending Chinese customers from stores, operators’ woes were compounded by a dramatic increase in domestic Covid-19 cases in February.

One leading South Korean duty free operator told TRBusiness inside the May issue that Q1 revenue had fallen by 25% year on year, while total March downtown and airport sales (including online purchases) were more than 60% lower year-on-year.

SME operators have also been hit hard, especially as many of them rely heavily on airport shop sales. An SME operator told TRBusiness that the company’s March sales were 90% down at Incheon  International Airport.

SM DUTY FREE SWITCHES FOCUS

The failure of some small and medium-sized enterprise (SME) operators to meet sales targets at their downtown stores had already weakened financial positions before the coronavirus outbreak.

In March, SM Duty Free announced its decision to close its Seoul Insadong store at the end of September 2020 and said it would also be returning its downtown duty free licence. It blamed severe competition in the downtown duty free market and high concession fees at Incheon International Airport  for causing financial difficulties.

News of SM Duty Free’s downtown store closure followed soon after the company announced its decision to withdraw bids for Incheon Airport’s DF8 and DF9 ‘All Items’ licences as part of the Terminal 1 tender.

The announcement effectively signals SM’s resignation from operating the DF9 concession it currently holds until 31 August.

SM Duty Free will instead focus on its other Incheon Airport operations; two T2 mixed category shops and two T1  arrivals duty free outlets.

MAG REDUCTIONS ISSUED BY INCHEON AIRPORT

“The DF8 and DF9 MAG was too high, so SM Duty Free dropped out in protest,” commented an informed source.

“When the Covid-19 crisis escalated, operators asked Incheon International Airport Corporation (IIAC) to reduce their MAG to a reasonable level. SME companies asked for a 70% to 90% reduction to reflect the reduction in sales.”

The source continued: “Incheon Airport’s small operators, City Plus Duty Free and Grand Duty Free, have been given a 50% MAG reduction for six months; medium and large operators have been given a 20% MAG reduction.

“Companies with revenue over US$200 million annually are considered medium enterprises, so SM Duty Free and Entas Duty Free only got a 20% reduction.”

The operator’s withdrawal from the bidding was rather fortuitous for Grand Duty Free as its bid for the DF9 licence was successful. This was certainly helped by the 50% MAG discount it received on its T1 perfume and cosmetics store.

RECORD 2019 FOR SOUTH KOREA’S TRAVEL RETAIL INDUSTRY

SM Duty Free is the second SME operator to announce its withdrawal from the Seoul downtown duty free market during the past 12 months.

Last year, City Plus Duty Free, which trades as City Duty Free, was forced to close its downtown store in western Seoul’s Shinchon district and returned its licence following legal problems with the shopping centre landlord.

The South Korean duty free industry’s current predicament is in total contrast to this same period last year, which ended with another year of record sales.

The country’s total duty free sales rose by 24.4% to KRW25 trillion/$21.44 billion in 2019, according to industry figures.

Total monthly duty free sales averaged an estimated KRW2.1tn in 2019, which at average 2019 exchanges rate is about $1.8bn per month.

Downtown duty free store sales reached $18.26bn, up 25% year-on-year and accounted for 85% of South Korea’s total airport and downtown duty free sales (not including inflight duty free).

To read the entire South Korea report, see p50-77 of the May issue, online now.