SOUTH KOREA. An extraordinary impasse between Incheon International Airport Corporation (IIAC) and its anchor tenants The Shilla Duty Free and Shinsegae Duty Free is looming following the airport company’s refusal to take part in an Incheon District court-led arbitration over rental fee reductions requested by the two retailers.
As reported, the two retailers asked the Incheon District Court for -40% fee reductions relating to their Terminal 1 and Terminal 2 cosmetics, perfume, liquor and tobacco stores. At an initial hearing the court appointed advisory firm Samil PwC to assess ‘fair market rent levels’.
A second hearing is set for 14 August but IIAC confirmed today (4 August) to The Moodie Davitt Report it will not take part.
“The rent structure was clearly outlined in the original request for proposals, and both retailers agreed to the terms,” a spokesperson confirmed to us, echoing earlier comments made to Maeil Business, the influential Korean media title that broke the story.
Participating in any court-led arbitration could open the door to “legal complications,” IIAC said, noting rent reductions are only permitted under certain conditions set under national contract and lease laws.
A change in business conditions (in this case high rents undermined by soft Chinese spending -Editor) does not constitute grounds for any such reductions, IIAC confirmed to The Moodie Davitt Report.
A Shinsegae Duty Free spokesperson told us, “While Incheon International Airport Corporation has publicly stated that rent reductions are not an option, we would like to clarify that both Shinsegae and Shilla Duty Free remain committed to attending the upcoming second adjustment meeting regarding rental fees.
“We believe this continued engagement is important as we work together to find constructive solutions in a challenging business environment.”
The Shilla Duty Free declined to comment given the mediation process being underway but an informed source close to the situation told The Moodie Davitt Report, “We hope Incheon International Airport Corporation will come to the table for discussions, and that a mutually beneficial outcome can be reached between it and the duty-free operators.”
Both retailers have eight years remaining on their concessions. Legal representatives for the companies described their respective fees as “unsustainable due to mounting losses” to Maeil Business. “If mediation fails, we will exit the airport entirely,” they said in a joint statement.
In that case, each retailer would pay a stiff penalty (roughly US$137 million, according to one reliable Korean source’s estimate) for such a premature exit.
Each retailer, Maeil Business said, pays around KRW30 billion (US$21.8 million) per month in rent, while incurring monthly losses of KRW5-6 billion (US$3.6-4.3 million) due to depressed sales.
Is Lotte Duty Free poised for action?As reported, Lotte Duty Free (through Hotel Lotte and Busan Lotte Hotel, the respective parents of its Gimpo and Gimhae airport operations) is embroiled in its own legal challenge over airport rent fees. But the company insists the scenario is very different to that of Shinsegae and Shilla at Incheon Airport. Lotte Duty Free is optimistic the Seoul High Court will rule in its favour regarding a refund of airport rent fees paid to Korea Airports Corporation in the pandemic-ravaged months of March to August 2020. The company told us in late May, “It is important to clarify that our case is fundamentally different from the recent rent adjustment claims filed by The Shilla Duty Free and Shinsegae Duty Free. “In Lotte Duty Free’s case, operations were entirely suspended due to the government-mandated closure of international terminals, making business activity impossible.” Even before its cautious 2023 bid (see table) Lotte Duty Free had already exited its Incheon Terminal 1 cosmetics, fashion and leathergoods contracts on 31 July 2018, citing “the burden of rent increases” following the sharp downturn in Chinese tourists in 2017 amid the THAAD dispute with China. It was replaced by Shinsegae Duty Free. Lotte Duty Free would certainly welcome a rebid and the opportunity to re-enter Incheon at a sustainable price. Equally as certainly, it would not simply stand back and accept any rent reduction for its rivals. |
Given the impasse, mediation appears destined to fail and the prospect of both retailers exiting their contracts is becoming ever more likely.
IAAC finds itself, to quote an English idiom, caught between a rock and a hard place (translated locally as 진퇴양난: 이러지도 저러지도 못하는 상황).
Not only does it insist the rental terms were legitimately agreed through a transparent open international tender and cannot be retrospectively adjusted but it is also aware that any such reduction would likely prompt a legal challenge from competing firms which bid more conservatively than Shilla and Shinsegae, notably Lotte Duty Free.
The Korean travel retail powerhouse has been out of Incheon International Airport altogether since its lowball bid on the 2023 mega-tender. That approach was based on a cautious view of existing and future market conditions and the potentially punitive cost of doing business at Incheon. Why should its rivals benefit from being less prudent, Lotte Duty Free may – and almost certainly will – ask?
South Korea’s duty-free market, the world’s largest, finds itself in disarray. While the downtown sector has experienced most of the pain in recent years (see table of recent closures), the malaise appears to be spreading. ✈
Downtown duty-free closures in South Korea over recent years2016 WalkerHill Duty Free (SK Networks), Seoul, May 2019 Hanwha Galleria Duty Free, Seoul, September 2020 Doota Duty Free (Doosan Corp), Seoul, April SM Duty Free – Seoul, September Entas (Kyung Bok Kung) Paradise Complex, Yeongjong Island, Incheon, November 2021 Shinsegae Duty Free, Gangnam, Seoul, July 2022 Lotte Duty Free COEX, Seoul, September 2025 Shinsegae Duty Free, Busan, January Hyundai Duty Free Dongdaemun, Seoul – July Source: ©Moodie Davitt Research Also read: Guest editorial – The past, present and future of the South Korean duty-free industry |
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