How Korea’s travel retail pie is developing a very different flavour |
SOUTH KOREA. Lotte Duty Free today reported a -99.25% collapse in 2017 operating profits to just KRW2.5 billion (US$2.38 million) on sales of KRW5,453.9 billion (US$5.18 billion), down just -0.02%. The results exclude Lotte’s downtown and airport businesses in Busan.
Lotte blamed the slump in operating profits on high Incheon International Airport concession fees and the fall-out from the THAAD anti-missile system dispute between South Korea and China.
The company posted a KW192.5 billion (US$182.2 million) operating loss for its Incheon and Seoul Gimpo airport operations.
“With the THAAD crisis, Chinese tourists have lost interest [in visiting South Korea], and operating profit has hit a record low due to increased rents and high concession fees at Incheon International Airport,” the company said.
The company also bemoaned an increase in the proportion of “mass-purchasing customers”. This was a reference to the rocketing daigou (shuttle trader) business that helped drive a sharp rise in Korea’s duty free market last year but badly eroded profitability due to skyrocketing travel group commission rates. More critically, retailers have been offering heavy discounts to daigou shoppers as well as incurring heavy promotion costs.
“The current method of calculating concession fees based on sales has the problem that even if operating profit decreases, concession fees increase as sales rise” – Lotte Duty Free
Lotte Duty Free Shop said that its monthly concession fees at Incheon Airport rose +55% to KRW62 billion (US$58.9 million) from September 2017 (the beginning of year three of its contract). Monthly fees were KRW40 billion (US$38 million) in the second year.
In connection with this situation, the company (as reported) attempted several times to renegotiate a rent adjustment with Incheon International Airport Corporation, but failed to reach a consensus. In 2017, Lotte’s sales at Incheon International Airport sales reached KW1.1 trillion (US$1,045,000,000) but the annual concession fees reached KRW580 billion, over half of sales.
The change in concession fees had a major influence on earnings deterioration, the company said.
Lotte Duty Free’s concession fees in 2017 rose by +1,254% increase from the KW2.6 billion paid in 2016.
“The current method of calculating concession fees based on sales has the problem that even if operating profit decreases, concession fees increase as sales rise,” the company said.
The government is examining this issue as part of a review of the country’s duty free industry, the company said. Results are expected to be released later this year.
Lotte Duty Free said it expects to improve profitability this year by stabilising its business. “Based on improved profitability structure through the withdrawal from Incheon Airport [T1 -Ed], the company intends to strengthen its competitiveness in downtown duty free shops and to expand online duty free shop marketing,” it said.
“In addition, by actively attracting Southeast Asian and other national customers, we plan to reduce the impact of external factors by diluting our reliance on Chinese customers.”
