SOUTH KOREA. Duty free was to the fore as Hyundai Department Store (HDS) posted a +14.0% year-on-year increase in gross sales to KRW1,586 billion (US$1.3 billion) in the second quarter of 2019.
With the main department store business growing by just +0.5% year-on-year, the main revenue driver was the new Hyundai Department Store Duty Free operation in the company’s Coex branch in Gangnam.
HDS’s new duty free store opened on 1 November 2018, two years after being awarded the licence by Korea Customs Service. HDS’s gross duty free sales in the quarter reached KRW194 billion (US$159 million), with average daily sales of KRW1.9 billion (US$1.6 million) – higher than rival Shinsegae Duty Free’s Gangnam store, which, as reported, grossed KRW1.36 billion (US$1.1 million) daily in the same period.
The results show strong top-line momentum from the first quarter. As reported, Hyundai Department Store Duty Free posted KRW157 billion (US$132 million) in gross sales for the first quarter with average daily sales of KRW1.4 billion (US$1.18 million) in January, KRW1.5 billion (US$1.26 million) in February, and KRW1.8 billion (US$1.52 million) in March.
However, Hyundai Department Store’s consolidated operating profit declined -32.7% year-on-year to KRW51 billion (US$41.7 million) due to heavy losses from the new duty free business, This was despite the profitability improvement of the core department store operations (see tables below).
HDS’s duty free operations recorded a loss of KRW19 billion (US$15.5 million) in Q2, whereas Shinsegae was able to maintain a positive operating profit of KRW17 billion (US$13.9 million).
Source: Hyundai Department Store
The main difference between HDS’s and Shinsegae’s duty free operations is that the latter also has a store in the key tourist area (and daigou magnet) of Myeong-dong, Seoul. There, Shinsegae generates positive operating profits that offset losses from other businesses. Like HDS’s Gangnam store, Shinsegae’s Gangnam store is so far operating at a loss. For both companies, growing scale in the duty free business is seen as imperative to improving profitability.
The increase in 2Q sales at the HDS Gangnam store was the main reason behind the improvement in operating profit compared to 1Q19 where operating losses reached KRW24 billion (US$19.6 million).
Source: Hyundai Department Store, Moodie Davitt Business Intelligence Unit
HDS announced a capital injection of KRW20 billion (US$16.3 million) into their duty free business on 8 August, bringing total funding to KRW250 billion (US$204.3 million) to date.
HDS’s market share of South Korea’s total travel retail market in the first half of the year is estimated to be around 2%. With just one store in operation, HDS needs to continue investing to grow scale and lower losses. HDS is considered a frontrunner in the race for additional downtown duty free licences in Seoul and the upcoming Incheon Airport Terminal 1 retail tender in November.
Potential sites for new downtown duty free business include HDS Sinchon, Hyundai City Outlets Dongdaemun and a new store in Yeouido currently under construction.
With competitors less aggressive in opening new stores and smaller companies less inclined to apply for new Seoul licences following Hanwha Galleria’s decision in April to exit the sector, HDS is well-positioned to expand its downtown presence when applications are called for in November.
