SOUTH KOREA. Hotel Shilla posted a -42% year-on-year decline in Q3 travel retail sales to KRW771 billion (US$678.3 million). Operating performance for the travel retail arm turned from a KRW45.1 billion profit (US$39.7 million at today’s exchange rates) in Q3 2019 to a KRW14.2 billion (US$12.5 million) loss this quarter.
However the results represented a sharp improvement on Q2 2020 when sales fell -64% year-on-year to KRW439.2 billion (US$368 million) and operating losses plunged to KRW47.4 billion (US$39.7 million) for the division – compared with a profit of KRW69.8 billion (US$58.5 million) in Q2 2019.
Overseas sales at Hong Kong International and Changi airports, both devastated by the COVID-19 pandemic, fell -76% year-on-year to KRW63.8 billion (US$56.1 million). However (see key take-outs panel below), the offshore business turned to profit, driven by increased ecommerce sales, heightened promotional activity, and landlord and government relief programmes.
Revenue in downtown and airport stores decreased by -23% and -77% year-on-year, respectively. The downturn business was dominated by sales to large daigou traders. The airport business continues to be devastated by the country’s severe curbs on incoming visitors.
| Key takeouts: Shilla outperforms peers in Korea, while offshore business posts surprise profit Hotel Shilla’s domestic duty free business outperformed its peers in both downtown and airport stores during Q3, writes Min Yong Jung in Seoul*. In downtown duty free, the return of SG (small guests) daigous, enhanced domestic channel duty paid business, and an increase in third-party sales helped boost revenue – Shilla’s -23% year-on-year sales decline bettered a market-wide downtown duty free sales fall of -27%.  In domestic airport stores, the perfume and cosmetics category was less impacted by COVID-19 compared to total airport duty free – Shilla’s 77% year-on-year sales decline, though weighty, was better than the disastrous -91% slump in airport duty free turnover. Despite the growth in SG daigou – who provide higher profitability compared to major guests (MG) and third-party exports – Hotel Shilla’s commission rate increased to 16.1% of sales in Q3 2020. That is the highest rate recorded since Q1 2017 when competition between the three largest duty free retailers peaked as existing market leaders Lotte Duty Free and Hotel Shilla acted to counter newcomer Shinsegae’s increased market share.  CIMB’s analyst Ho Jun Lim, who covers Korea’s consumer sector, said that SG account for as much as 20% of Shilla’s total daigou sales, much higher than competitors Lotte Duty Free and Shinsegae Duty Free. Both Lotte and Shinsegae confirmed to The Moodie Davitt Report that while sales to SG daigou had increased, their share was much lower than at The Shilla Duty Free. Hotel Shilla is also much more active in third-party exports compared to its peers. According to National Assembly Member Kyungho Choo, total third-party exports grossed KRW586.5 billion (US$498.3 million) in the quarter. The surprisingly large volumes pushed through via third-party sales abroad has resulted in Korea Customs Service (KCS) setting a clear year-end deadline on the extension for such exports.  The biggest surprise from Hotel Shilla’s Q3 results came from the performance of its overseas airport stores at Hong Kong International and Changi airports. Revenues, though modest, increased by more than +500% quarter-on-quarter, driven by enhanced ecommerce activity and the partial opening of stores in both airports. Operating result turned from a deficit in Q2 2020 (OPM -10.8%) to the first operating profit since the COVID-19 crisis began. An industry expert comments that support measures at Changi Airport (reduced landlord fees and a labour expense subsidy) helped results in the last quarter. The Shilla Duty Free’s Changi Airport sales have shown much stronger recovery vs. stricken passenger traffic (YoY % passenger traffic performance: July -98.5%, August -98.6%, September -98.4%). That growth came from a sharp increase in sales on Changi Airport Group’s iShopChangi ecommerce channel and raised promotions. In related news, Hotel Shilla has announced a delay in the construction of the ‘Hanok’ themed hotel in Seoul. Further construction works which would have resulted in duty free retail floor space increasing by as much as twofold has been put on hold until August 2021 due to COVID-19. Completion, which was due on March 2023, is now postponed until May 2024. *Note: Korean national Min Yong Jung, formerly based in London and now in Seoul, is Senior Retail and Commercial Analyst at The Moodie Davitt Report. His appointment in June 2019 was the first of its kind in travel retail media. It marked the creation of the Moodie Davitt Business Intelligence Unit, a new division designed to provide a previously unseen level of research and analysis for the travel retail channel. Do you have research needs related to the Korean and Asia Pacific travel retail and luxury markets? Min Yong Jung can be contacted at minyong@moodiedavittreport.com |
