SOUTH KOREA. Hyundai Department Store Duty Free was the only bidder for the latest downtown duty free licences that were open to large-scale conglomerates in Korea, writes Senior Retail and Commercial Analyst Min Yong Jung.
Leading Korean travel retailers, including Lotte Duty Free, The Shilla Duty Free and Shinsegae Duty Free decided not to take part. Today (6pm Korean time) was the deadline set by Korea Customs Service for submissions, after the bid process began on 11 November.
Unlike previous tenders that saw CEOs from large Korean conglomerates filing in at the last moment to submit their bids, this process saw the lowest levels of interest in the history of Korea’s downtown duty free store business. A separate bid for SME (small and medium sized businesses) licences is also running, on which we will bring you details soon.
Korea’s duty free market has grown to new sales highs in 2019 but the market has evolved to a point that it can no longer survive without the contribution of large scale daigou. In the absence of package tourists, sales to daigou resellers have grown sharply.
The Moodie Davitt Business Intelligence Unit estimates that 48% of Korea’s total duty free market serviced daigou demand in 2018. The dependence on resellers has grown in 2019, with package tours from China still suspended and spend by Korean nationals affected by the Japanese boycott campaign.
Each of the large scale resellers has strong ties with existing duty free operators (The Shilla Duty Free, Lotte Duty Free and Shinsegae Duty Free), and the provision of promotions and commissions has grown to a point where smaller players and new entrants struggle to compete. As a result, smaller companies and new entrants which in the past showed strong interest in acquiring duty free licences offered by Korea Customs Service have decided against entering the market.
Hyundai, on the other hand, is the second largest department store operator in Korea and has highlighted the duty free market as a channel for growth. Korea’s department store market is mature and with little space left to launch new stores, Hyundai Department Store needs to venture into new businesses. As reported, Hyundai’s bid is likely to see the company take over the operations of Doota Duty Free, providing a strategic base for the company to service resellers in the all-important Gangbuk area.
A review committee is scheduled to convene towards the end of November, comprising around 25 professors, lawyers and accountants, who will make their judgement in a one-day event. These are drawn from a pool of 98, chosen for two-year terms to be part of the review process.
Previous review committees spent three days reviewing bids but with this time Korea Customs Service expects a one-day event to be sufficient. Korea Customs Service is likely to confirm the result by 5 December, when the contract term of over 90% of the pool of 98 committee members will expire. The review committee members serve one term only.
Industry experts and market participants expressed concern that Hyundai’s presence in an area that can service resellers may increase competition and result in further increases in commission rates for daigou. Should Hyundai offer higher commission rates than its peers, daigou could respond by increasing their sales volume and channelling their purchases from the new store. While eating into the margin of duty free operators, growing demand may result in higher revenue potential for brands in Korea’s fast-growing duty free channel.
FOOTNOTE: Contrary to reports by a Korean media source that confirmed another bid by a consortium of small-medium sized duty free retailers (Dongwha Duty Free, SM Duty Free, Entas Duty Free and Top City Duty Free), Korea Customs Service confirmed to the Moodie Davitt Report that Hyundai Duty Free was the only bidder for the downtown duty free licences in this round.
The article stated that the consortium had bid for a downtown duty free licence using space at Grand WalkerHill Hotel, where SK Walker-Hill Duty Free used to operate. The location in question is situated next to the Paradise Walkerhill Casino and guarantees traffic from casino users, providing any duty free retailer in the area with high-spending customers. Industry experts interviewed by The Moodie Davitt Report confirmed that such a plan was in discussion but did not materialise into a formal bid.
