South Korean duty free market slumps -23% in 2023 amid structural changes : Moodie Davitt Report

SOUTH KOREA. Duty free retail sales nationwide (excluding inflight retail) tumbled by -22.8% to KRW13.7 trillion (US$10.34 billion) last year according to the Korea Duty Free Association.

That came despite a +104% increase in customer numbers to 22,090,480, indicating a collapse in average transaction value, the result of the crackdown on daigou trading from early 2022.

That conclusion is underlined by the -32.4% year-on-year fall in sales to foreigners (mainly daigou business in 2022) despite a +285.4% increase in foreign customer numbers (see charts below).

Korean duty free shops, once known as the ‘goose that lays the golden eggs’, have been forced to worry about their survival due to a massive decline in sales and operating losses.
This is because the Chinese, who are the ‘big’ customers, are ignoring Korean duty free shops. Domestic duty free shops are trying to overcome the crisis by expanding overseas, but a dramatic turnaround is expected to be difficult for the time being. – Korea Economic Daily

What a tale this bar chart shows. The halcyon days of 2019 seem a long way off as the daigou channel that sustained the market through the pandemic rapidly erodes. All charts courtesy of Korea Duty Free Association. Click on graphics to enlarge.

How it has all gone badly wrong in the world’s biggest duty free market – The Korea Economic Daily

Some duty free retailers have to worry about disposing of large quantities of inventory they have built up in anticipation of an influx of daigou and Chinese group tourists.
There are even self-deprecatory comments in the industry such as, “I miss the Corona era when daigou merchants came to visit”.
The duty free retail industry predicted that a large number of Chinese package tourists would flock to the country last year. But the expectations were wrong. Due to the fact that Chinese travel agencies did not offer cheap Korean package products, Chinese people’s travel patterns changed from group tours to individual tours.
Instead of buying expensive brand products at duty free shops, individual tourists are shopping mainly for cheap products at large supermarkets and Daiso (a popular Korean KRW1,000 store (US$0.76) chain.
A travel industry official said, “Individual tourists enjoy visiting delicious restaurants and going to distribution stores that Koreans like to visit. They don’t seem to find a reason to spend at duty free shops.”
In the past, Korean duty free stores served as Korean cosmetics wholesalers for Chinese consumers. In 2019, when duty free shop sales were at their peak, the Chinese accounted for 80-90%, and they swept up Korean cosmetics in duty free.
As Amore Pacific’s Sulwhasoo and LGHousehold & Health Cares The History of Whoo gained sensational popularity in China, Chinese daigou flocked to Korean duty free stores to buy in bulk and then return to China to resell.
However, Chinese purchases of Korean cosmetics have decreased significantly since COVID-19. High-priced Korean cosmetics have been replaced by European and American brands such as Lancôme and Estée Lauder, while local Chinese brands such as Proya have emerged as mid- to low-priced cosmetics.
Korean cosmetics brands that swept the top rankings during large-scale shopping events in China, such as Single’s Day, were not even ranked in the top ten and were treated as ‘obsolete’ brands.
To lure Daigou, Korean duty free stores poured KRW3.8745 trillion – about 22% of 2021 sales – into customer fees, but even this did not work well.

Source: The Korea Economic Daily

Click on the image to read our report on Hotel Shilla’s heavy Q4 losses

Sales rose +13.2% month-on-month in December (over the typically low month of November) to KRW1,307,331,912,269 (US$983 million) on a +3.1% increase in customer numbers to 2,186,073.

Sales to foreigners, who generated 80.6% of all revenues, rose +14.4% in December to KRW1,053,825,953,886 (US$792.4 million) despite a -0.7% decrease in customer numbers to 641,873.

“This year we will experience more erosion of daigou sales but the conducted tourists from China will begin to increase from the upcoming spring holidays,” a leading Korean travel retail executive told The Moodie Davitt Report.

“Generally, industry stakeholder are very pessimistic about the recovery of sales back to previous level. As you saw, The Shilla Duty Free posted an operating loss for the second half of 2023 after turning a profit in the first half. This means the quality of sales are aggravated and the daigou sector is becoming less and less profitable as the retailers struggle to keep it at previous levels.

“It is also apparent that both the supply from brands and the demands from customers are getting less and less in terms of daigou and even for the individual [FIT] sales, spending per head by Chinese is currently much less than 2019 levels and the number of Chinese customers is still quite low.”

Travel retailers are doing everything they can to stimulate spending by Korean customers in the wake of the daigou-driven slump. **As reported**, Lotte Duty Free is running a seasonal campaign targeted at Koreans preparing to travel overseas in time for the busy Lunar New Year period.

All charts courtesy of Korea Duty Free Association. Click on graphics to enlarge.

Korean travel retailers are becoming increasingly imaginative in diversifying from their long-standing reliance on daigou resellers. Lotte Duty Free, for example, recently opened **a series of pop-up stores** as it continues to target Millennial and Gen Z, or MZ consumers.

Sales to Koreans were similar month-on-month due to the muted Korean economy and Korean Thanksgiving holidays having spilled over to early October, he noted.

Incheon International Airport sales are expected to show a more normalised recovery pattern in early 2024 in tandem with the post-construction opening of major stores under the new tenders awarded earlier this year. ✈

How it has all gone badly wrong in the world’s biggest duty free market – The Korea Economic Daily

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