UPDATED STORY – 8 JULY
The Shilla Duty Free told The Moodie Davitt Report today that while a final decision to extend its contract at Incheon Terminal 1 (see background below) has not yet been reached, negotiations between parent company Hotel Shilla and Incheon International Airport Corp (IIAC) were concluded favourably yesterday, writes Min Yong Jung* in Seoul.
A final decision by The Shilla Duty Free management on whether to extend the contract on a rolling monthly basis is imminent.
The new concession terms involve rent payments based on a percentage of revenue rather than minimum guarantees. Shilla also wishes to reserve its rights in terms of operational matters such as store opening hours. There is no fixed contract term and both parties will negotiate monthly on 1) the commission rate that determines rent, and 2) the extension of the monthly rolling contract.
IIAC is awaiting official documents from The Shilla Duty Free which it is is confident of receiving.
According to IIAC, SME travel retailer CityPlus has not yet outlined its intent and is still reviewing whether to extend under new terms offered. IIAC said that the temporary rolling contracts will run until the negative effects from COVID-19 are eased and a new tender can be conducted.
Contrary to Korean media reports that Shinsegae is waiting on the sidelines to negotiate improved terms for its concessions which expire in 2023, IIAC said that it has already implemented a relief package and sees no need to boost that offer.
7 July
SOUTH KOREA. Incheon International Airport Corporation (IIAC) has extended its Terminal 1 duty free contracts with Lotte Duty Free and is close to reaching a similar agreement with The Shilla Duty Free. These were due to expire in August but the retailers have been issued with monthly rolling extensions, writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung* in Seoul.
Crucially, following negotiations, IIAC has agreed to accept a percentage of sales rent formula, eliminating the mandatory minimum monthly guarantee payment for the duration of the contract term.
Senior executives from Korea’s leading travel retailers have met frequently with IIAC in recent months to discuss financial relief as revenues dropped sharply in the wake of plummeting passenger traffic.
IIAC had set a 7 July deadline for existing concessionaires to notify it with a decision about extending their current contracts.
With passenger traffic down by over -95% and losses stacking up due to mandatory minimum guarantees, concessionaires had expressed their intent to exit their existing contracts. Lotte and Shilla also withdrew their bids from the Incheon Airport T1 tender process in April, having been declared as preferred candidates for the new concessions that were due to begin in September. Both parties told The Moodie Davitt Report that the business was not financially viable.
Under the new terms, we can confirm, Lotte will also be able to make its own judgement on store operation hours and can reserve the right to exit from the contract during the extension period.
Although IIAC stated that The Shilla Duty Free had asked for further negotiations, Korean media reported this week that Shilla has also notified IIAC of its intent to continue, on a variable percentage of sales formula.
As reported, Hyundai Department Store Duty Free takes over the fashion spaces vacated by Shinsegae Duty Free as the latter’s term ends.
SM Duty Free may also exit its five-store T1 concession when its term expires in August. The move is in line with parent company Hana Tour’s decision to dissolve most of its duty free operations in South Korea.
*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.
Jung has a rich background in the travel retail channel and related consumer goods markets. Before joining The Moodie Davitt Report, he worked as an equity research analyst both on the buy and sell side of the finance industry at Kiwoom Asset Management and CLSA in Seoul. Jung is an arts graduate in International Affairs from George Washington University in the USA.
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
