Duty-Free Industry Struggles with Malignant Inventory Solutions... Experts Say "Review Needed in Crisis Situation"

Blocked Duty-Free Sales Channels Due to COVID-19 Impact
'Difficult Inventory' Piling Up in Logistics Warehouses
Request to Customs for Domestic Sales or Allowing Duplicate Daigong Exports
Experts Diagnose "Agreement on Necessity"

[Asia Economy reporters Minyoung Cha and Seungjin Lee] As the domestic duty-free industry, which has seen customers vanish due to the novel coronavirus disease (COVID-19) crisis, has requested help from the Korea Customs Service to handle so-called 'malignant inventory,' measures are being considered to reimpose taxes on duty-free goods for domestic distribution or to allow duplicate export considering quarantine periods upon foreign arrivals. If the Customs Service partially accepts these measures, it is expected to relieve the duty-free industry's difficulties.

◆Blocked sales channels, overloaded logistics warehouses= According to the distribution industry and the Customs Service on the 23rd, the Customs Service is reviewing the domestic and international distribution plans for imported duty-free inventory proposed by the Korea Duty Free Shop Association. Results are expected as early as next week. Since imported duty-free goods are purchased 100% upfront, if sales to travelers are difficult, they accumulate as hard-to-handle inventory at duty-free shops. With the COVID-19 crisis overlapping, some logistics centers have been operating at 150% capacity compared to their inventory acceptance capability since this month, causing overload.

The first plan is to sell fashion products and other inventory that have remained unsold for over three years, stored in each duty-free shop's logistics center within the Incheon bonded area, to domestic consumers after going through customs clearance again. The main possible distribution channels are downtown duty-free shops, department stores, and outlets. Downtown duty-free shops have a high possibility of use as a duty-free shop's own channel, but mixing with existing duty-free goods could confuse consumers, making it difficult. Department stores or outlets often have different suppliers than duty-free shops, requiring internal stakeholder coordination. For these reasons, standalone small outlets in suburban areas are considered an alternative.

The second plan is to allow duplicate export of duty-free goods purchased by overseas consumers such as 'Daigong' (Chinese peddlers) through international mail, extending beyond imported fashion products to include cosmetics. Since COVID-19, Daigongs have been stuck for about four weeks in total?two weeks in Korea and two weeks in China. Therefore, an exception clause would allow them to send goods multiple times in advance via air cargo, sea freight, or international mail. Although there are concerns about illegal domestic distribution, the duty-free industry believes that checking shipping invoices would suffice.

If special sales measures are realized, they are expected to greatly help reduce malignant inventory. Total inventory assets (products and goods in transit), including unsold inventory at the four major duty-free shops, are approaching 3 trillion KRW. As of the end of 2019, the inventory assets of the four shops amounted to 2.5506 trillion KRW. In 2019, Lotte Duty Free, Korea's top duty-free shop, had the largest inventory at 1.0731 trillion KRW, followed by Hotel Shilla (720.9 billion KRW), Shinsegae DF (636.9 billion KRW), and Hyundai Department Store Duty Free (119.7 billion KRW). According to duty-free companies, inventories have increased by about 20-30% even after COVID-19, reaching a total of 3 trillion KRW.

◆Experts: Domestic distribution is OK, overseas duplicate export is 'too much'= Experts have mixed reactions to the possibility of the Customs Service accepting the industry's request. They responded positively regarding domestic distribution, as it would relieve the duty-free industry's difficulties and is expected to stimulate consumer sentiment. On the other hand, the overwhelming view is that overseas duplicate export could cause more side effects.

Professor Yongjin Kim of Sogang University's Department of Business Administration, who chairs the Duty-Free Shop Licensing Committee, said, "Since the duty-free industry is currently in a desperate crisis, the Customs Service seems to be viewing the industry's request somewhat positively," adding, "If duty-free goods are distributed to the market, it will likely target seasonal items such as clothing." Professor Hoon Park of the Taxation Department at the University of Seoul also said, "Considering the current situation of the duty-free industry, there seems to be a need for market distribution of inventory products," adding, "If duty-free goods are released into the market, the duty-free industry can handle inventory, and consumers can benefit from price reductions due to the increased absolute number of products." However, he cautiously noted that companies already in the general market might suffer damage.

Regarding the allowance of duplicate export by overseas consumers, they were negative. Professor Kim said, "Allowing Daigongs and other overseas consumers to purchase duty-free goods and immediately export them overseas seems difficult because it is hard to monitor whether the goods are re-imported into the country." Professor Park also said, "It seems undesirable as it favors some peddlers rather than actual duty-free goods end-users."

A Customs Service official said, "There are various legal issues, so it seems difficult to conduct a review quickly," adding, "We are reviewing all industry demands, including domestic distribution of duty-free inventory and allowing overseas consumers to purchase duty-free goods directly."

This content was produced with the assistance of AI translation services.