Last Year's Sales 90% Dependent on Chinese Daigou... The Dark Side of Duty-Free Shops Amid COVID-19

Sharp Decline in Visitors Due to COVID-19
Chinese Daigou Sustains Duty-Free Shops
Sales Structure Concentrated on Daigou
Cosmetics Sales Share Soars
Profits Plummet as Daigou Commissions Rise

[Asia Economy Reporter Lim Hye-seon] It has been revealed that the sales proportion by Chinese "bottari-sang" (daigou) in the domestic duty-free market has exceeded 90%. Due to the impact of the coronavirus (COVID-19), overseas visitors to Korea sharply declined, and daigou have essentially kept the duty-free shops afloat.

According to the duty-free industry on the 12th, domestic duty-free store sales from January to November last year amounted to 14.321 trillion KRW, a 42% decrease compared to the same period the previous year. Including December sales, it is expected to reach 16 trillion KRW. Although the number of foreign customers dropped by 85% compared to the previous year, the scale of sales decline was relatively smaller. By country, China accounted for 93-95% of sales, followed by Korea at 3% and Japan at about 1%.

Over the past four years, the sales share of China in the duty-free market has increased annually. According to Lotte Duty Free, China's sales share was only 66% in 2017 but sharply rose each year to 82% in 2019 and closed at 93% last year.

In 2017, China imposed the Hallyu ban (restrictions on Korean Wave) as retaliation for the deployment of THAAD (Terminal High Altitude Area Defense). Group tourists (Youkers), who accounted for most of China's sales, stopped visiting. The void left by Youkers was filled by daigou. As the online trading market developed in China, the number of Weishang (mobile sellers) increased, and daigou who received orders from them began visiting Korean duty-free shops. Korean duty-free companies benefited from daigou, setting record-high sales every year. Consequently, companies' dependence on daigou increased further. In 2019, daigou sales accounted for about 80% of total sales. Last year, it soared to the 90% range. A duty-free industry official explained, "Last year's duty-free company sales were essentially daigou sales."

Due to sales concentrated on daigou, the proportion of cosmetics sales in the domestic duty-free market has also soared. The cosmetics share, which was around 50% in 2015, rose to 68% in 2019. According to KB Securities analysis, cosmetics sales in duty-free stores last year were expected to decrease by 10% compared to the previous year. The sales share of cosmetics in total duty-free sales reached 94%. Non-cosmetics sales are estimated to have plummeted by 89%. The price of cosmetics at Korean duty-free shops is more than 40% cheaper than local prices.

Profitability of companies has deteriorated. Lotte Duty Free's operating profit margin, which was 9.9% in 2014, entered negative territory last year (January to November) due to losses. Shilla Duty Free and Shinsegae Duty Free faced similar situations, recording cumulative losses of 110.7 billion KRW and 89.8 billion KRW, respectively. Duty-free shops pay a referral commission (based on purchased product sales) to Chinese travel agencies for bringing in daigou customers. Daigou are given direct product discounts. The total commission rate, including referral commissions and product discounts, rose from 35-38% in early last year to 43-46% after September. This structure inevitably reduces profits even when duty-free shops sell products.

The sales structure concentrated on daigou reveals the vulnerability of Korea's duty-free industry. An industry official said, "Selling 1 million KRW worth of goods and returning 460,000 KRW means that half of the sales were used as costs to attract daigou," adding, "The Chinese government is promoting duty-free policies while intensively cracking down on daigou." He continued, "If daigou visits suddenly decrease in the currently distorted duty-free market, the profits of duty-free companies will plummet."

Heads of domestic duty-free companies have called for profit improvement and structural reform this year. Yoo Shin-yeol, CEO of Shinsegae Duty Free, urged employees, "Take this as an opportunity to reestablish the essence of the business and focus on improving operational efficiency." Lee Gap, CEO of Lotte Duty Free, also told employees, "We need to look five years ahead" and asked them to actively explore overseas markets. Lotte Duty Free plans to open additional stores this year, starting with Kansai Airport Duty Free in Japan, followed by stores in downtown Da Nang and Hanoi in Vietnam, and downtown Sydney in Australia. There are also opinions that the government should actively support the industry, such as allowing 'third-party returns,' to help the industry improve its structure.

Professor Lee Hoon of Hanyang University said, "The tourism distribution industry requires experience, know-how, business history, and domestic and international networks, so once it collapses, it takes a lot of time and cost to recover," adding, "The government should actively support the maintenance of the duty-free industry ecosystem (personnel and structure)."

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