Duty-Free Shop Rent Reduction and Inventory Sales Provide Relief but...

Ministry of Land and Incheon Airport Corporation to Cut Rent by Up to 75%
Temporary Support with Duty-Free Stock Sales Starting This Month Raises Concerns

[Asia Economy Reporters Lim Hye-seon, Cha Min-young] Duty-free shops, whose sales plummeted due to the impact of the novel coronavirus infection (COVID-19), have laid the groundwork for survival through airport rent reductions and sales of duty-free inventory. However, since passenger demand has not yet recovered, these measures are only temporary, and concerns remain.

◆Up to 75% Rent Reduction, Sale of Duty-Free Inventory= On the 2nd, the Ministry of Land, Infrastructure and Transport, Incheon International Airport Corporation, and Korea Airports Corporation decided to reduce rents paid by large and medium-sized enterprises by up to 50%, depending on the passenger decline rate at each airport. For small and micro businesses, rent was reduced by up to 75%. For small and micro businesses at airports with suspended operations (such as Gimpo and Gimhae Airports), rent was waived 100%. To alleviate accumulated rent burdens, the reductions are applied retroactively to rents incurred since March. The rent reductions apply to duty-free shops, convenience stores, bookstores, pharmacies, and other tenants within the airports. The rent reductions will be applied for up to six months from March to August, until the number of passengers using the airports recovers to 60% of last year's level. However, at airports where the passenger decline rate is between 40% and less than 70%, the current rent reduction benefits of 20% for large and medium-sized enterprises and 50% for small and micro businesses will continue to apply.

Domestic sales of duty-free goods, a result of public-private cooperation between the Korea Customs Service and duty-free shops, will begin this month, one month earlier than the initially expected July. Assuming 20% of long-term inventory is sold, about 160 billion KRW in liquidity is expected to be secured. Shinsegae Duty-Free Shop will start pre-selling inventory items from 10 a.m. on the 3rd on the official online mall of Shinsegae International, 'SI Village.' The brands include four: 'Balenciaga,' 'Bottega Veneta,' 'Saint Laurent,' and 'Valentino.' Only the quantities confirmed through pre-orders will be actually cleared through customs and sold. Prices are set at 10-50% of department store regular prices.

Lotte Duty-Free Shop will sell products from about 10 brands at four Lotte Department Stores and outlets offline during the 'Korea Together Sale' from the 26th of this month to July 2nd. Separate overseas luxury brand sales events will be held mainly at department stores that do not currently carry luxury brands. The volume is about 20 billion KRW, focusing on accessories such as bags, shoes, and miscellaneous goods. Shilla Duty-Free Shop plans to start selling inventory items within this month. Hyundai Department Store Duty-Free Shop has not yet decided whether to sell inventory. Since it urgently needs to secure inventory and has a relatively short business history, it holds less inventory and thus has less inventory burden.

A duty-free industry official said, "Discussions are underway between the Korea Customs Service and the industry regarding depreciation issues and tax rate setting, considering the inventory aging by product category," adding, "Products sold by duty-free shops are likely to be new products within 6 to 12 months, to which the highest tax rate must be applied." Another industry official said, "Due to the short trend cycle of fashion inventory, selling quickly will reduce storage costs and help determine future business directions," expressing optimism.

◆The Immediate Crisis Has Been Averted, But= With this support, companies operating commercial facilities at airports will save a total of 400.8 billion KRW in rent, but concerns remain as the support is 'temporary.' In April, the number of international departing passengers at Incheon Airport dropped by 99% compared to the same period last year, causing the sales of the three duty-free shops to plummet by 80% to about 50 billion KRW. The three duty-free shops are expected to incur losses exceeding 100 billion KRW due to rent and fixed costs.

Duty-free shops are also completely revising their business plans. Shinsegae Duty-Free Shop has temporarily suspended plans to open a downtown duty-free shop in Jeju City. Since the government's issuance of new duty-free licenses has become uncertain, the risk of making large investments is considerable. Shinsegae Duty-Free Shop paid a cancellation fee of 2 billion KRW and decided to postpone the plan. Lotte and Shilla's downtown Jeju stores have also temporarily closed. A duty-free industry official said, "This measure will disappear from September," and lamented, "As COVID-19 is not ending and is prolonging, fundamental measures are urgently needed."

There are also fairness issues raised regarding Korea Airports Corporation. Since operations have been suspended, they introduced differentiated support measures between large corporations and small businesses. Small and micro businesses receive 100% rent waivers, while large corporations receive only 50%. A duty-free industry official argued, "It is unreasonable to require rent payments when commercial facilities are not operating at airports where flights have been completely suspended."

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