South Korea’s second largest travel retailer, Hotel Shilla, has agreed to buy a 44% stake in US-based inflight duty free retailer, DFASS Group for $104.8m as part of a broad strategic partnership to enable it to become a global leader in the DF&TR channel. Shilla has also confirmed it has a future call option to acquire a majority holding in DFASS, according to Hotel Shilla’s investment department.

In a statement, Shilla says it will collaborate with DFASS – which supplies DF&TR goods to over 30 carriers including Air Canada, Singapore Airlines, Hong Kong Airlines, Hawaiian and Avianca – “to develop new and existing duty free concessions, expand inflight concession services and strengthen distribution agreements with brand owners”.

The news comes on the back of the weekend TRBusiness breaking story that American Airlines has ceased selling duty free merchandise on selected international flights due to a contractual disagreement between the carrier and its concessionaire DFASS. That news followed a similar move by Delta Airlines which decided to drop its inflight duty free programme in August last year after also failing to agree on terms with DFASS.

Shilla has been seeking to increase its weight in the global marketplace for a while by diversifying out of its home market. A major step in that direction took place last November when the retailer started its beauty operations at Singapore Changi Airport.

The DFASS minority holding is costing Shilla $104,829,908 (based on today’s exchange rate  [23.3.2015-Ed] and will enable Shilla to expand its global footprint in the United States, Latin America, the Caribbean, Africa, the Middle East and South East Asia. The retailer will also be able to diversify its business to include master distributor agreements.

[This is the second minority shareholding taken by Shilla Duty Free in another travel retailer, following the $54.7m it paid for its 19.9% stake in South Korea’s Dongwha Duty Free operation in Seoul-Ed].

SUPPLY CHAIN INTEGRATION

As might be expected of a move on this scale, the two companies plan to reduce costs by integrating key functions across their global concessions and supply chains. This includes purchasing and certain administration functions in order to generate synergies and enhance gross margins.

“The partnership also provides a strong platform to jointly develop new concessions in target markets, as well as to expand the scope of existing concessions,” says Shilla whose revenue in 2014 was KRW 2,909 ($2.69bn). Of that, approximately 84.3% or KRW 2,452 ($2.27bn) came from the DF&TR business.

Boojin Lee, President and CEO of Shilla, comments: “The investment is consistent with our strategy of profitable growth and broadening of the duty free business, the largest segment of Shilla’s business.

“The strategic partnership will enable both companies to diversify the value chain and generate synergies to enhance overall revenue and profitability. The alliance will also strengthen each company’s concession portfolio, inflight retail business, airport retail, and distribution agreements with brand owners. We are excited about the partnership, especially on the back of the recent concession extension at the Incheon Airport.”

‘A FORMIDABLE DEVELOPMENT VEHICLE’

Benny Klepach, Chairman and CEO of DFASS, adds: “I’m personally delighted to be working with Shilla. Both of our companies have unique skill sets and capabilities, and the combination of these will maximise our existing businesses and provide a formidable development vehicle for the future.”

Hotel Shilla, the hospitality arm of the Samsung Group, operates in three areas: hotels, duty free, and lifestyle/leisure. Shilla currently operates five shops in Korea, in downtown Seoul, downtown Jeju, Incheon International Airport, Gimpo International, Daegu International and two locations overseas: Singapore’s Changi and Macau International.

As well as its inflight business DFASS, founded in 1987, also operates over 35 duty free/duty paid shops across the US, Latin America, and the Caribbean and has distribution agreements with various luxury brand owners for liquor, beauty, and watches.

Note: The aforementioned shareholding in Travel Retail Group Holdings, LLC (DFASS) is being acquired by Samsung Hospitality America Inc and the Shilla Travel Retail Group. For more details (in Korean language only), visit: http://www.hotelshilla.net/kr/ir/public_info.jsp