The Duty-Free Industry That Was 'Blinging' Rebounds Faces Another Cold Shower from COVID-19

Domestic Sales and China-bound Revenue Drive
Three Consecutive Months of Sales Rebound Since May
Expectations Dashed by Resurgence
Q2 Deficit Twice That of Q1
"Doing All We Can, But Uncertain How Much Longer We Can Hold On"

[Asia Economy Reporter Cha Min-young] The duty-free industry, which hit rock bottom in April and began to recover, is sighing as concerns rise over a possible second pandemic of the novel coronavirus (COVID-19). Although sales have been boosted through domestic sales of excess inventory and sales to China since the worst performance in April, there are no signs of travel demand?the industry's upstream sector?reviving due to the resurgence of COVID-19.

Duty-Free Store Sales Increase for Three Consecutive Months

According to the Korea Duty Free Association on the 31st, total domestic duty-free store sales in July amounted to 1.2516 trillion won, an increase of about 138.6 billion won (12.5%) compared to June's 1.113 trillion won. In January this year, total domestic duty-free sales nearly reached 2.2476 trillion won. After the outbreak of COVID-19, sales halved to 1.1026 trillion won in February, then dropped to 1.0873 trillion won in March, and fell below the 1 trillion won mark in April to 986.7 billion won. Since then, although overseas travel remains difficult and consumer sentiment is subdued, sales barely recovered to the 1 trillion won level in May. The recovery trend has continued gradually over the past three months.

Foreign sales dominate overall sales. This month, foreign sales reached 1.2021 trillion won, an increase of 135.6 billion won from the previous month (1.0665 trillion won). The number of foreign customers also increased by about 2,100. This is attributed to the significant volume of Chinese "daigou" traders. With the allowance of third-country exports domestically, daigou traders have become more mobile and, buoyed by China's economic recovery, are increasing their purchases of duty-free products such as cosmetics.

The duty-free industry stated that their profit structure has significantly worsened compared to before. This is due to a sharp rise in commissions paid to daigou traders as part of marketing expenses. The industry's estimated average commission is 30-40% of sales, which is 20 percentage points higher than last year's average of 20%. With the number of daigou entering Korea decreasing, and competition among the existing top three duty-free stores?Lotte, Shilla, Shinsegae?plus Hyundai Department Store Duty Free, the daigou have become scarce. Since daigou must undergo a two-week self-quarantine when traveling between Korea and China, they must cover hotel stay costs and related opportunity costs. A duty-free industry official said, "When traveling between Korea and China, daigou must undergo a total two-week self-quarantine period, so we have to pay additional costs to attract them," adding, "For daigou with high purchase amounts, we sometimes cover not only commissions but also accommodation and other stay expenses."

Concerns Over a Second Pandemic

Greater concern is growing over the worsening COVID-19 situation and the increasing fear of a second pandemic. The duty-free industry is increasingly predicting a tough second half of the year. The United Nations World Tourism Organization (UNWTO) forecasts that if global travel restrictions continue until December, the total number of overseas tourists this year will decrease by 78% compared to the previous year. In April and May, global traveler numbers dropped by 97% and 98%, respectively, compared to last year. According to FnGuide, the securities industry expects Hotel Shilla to record consolidated sales of 3.1921 trillion won this year, a 44.2% decrease compared to the same period last year. Operating losses are also expected to turn to a deficit of 178.8 billion won compared to last year.

The duty-free industry, which posted poor results in the second quarter, also has a bleak outlook for the third quarter. In fact, the combined second-quarter sales of Hotel Shilla, Shinsegae DF, and Hotel Lotte totaled only 1.5427 trillion won. Operating losses reached 363.3 billion won, double the first quarter's deficit of 167.3 billion won. The third quarter, typically the peak travel season, has not escaped the impact of COVID-19, dashing hopes for a rebound. A senior official at a major duty-free store said, "With growing concerns over the spread of COVID-19, we have internally judged that the possibility of losses in the second half has already increased," adding, "We are making every effort to reduce costs through shift work and leave, but since sales are not occurring, it is daunting to think about how long we must endure this situation." Another official from a major duty-free store said, "Unless COVID-19 is controlled not only domestically but globally, the duty-free business will struggle to recover," and added, "Even if a vaccine is developed in the first half of next year, it will take more time for people to regain psychological confidence and start traveling again."

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