'Cutting Off One's Own Flesh' Until When... Duty-Free Shops at a Crossroads

[Asia Economy Reporter Kim Yuri] Although the duty-free shop industry received an improved report card for the second quarter of this year, the outlook for the second half remains bleak. The industry is heavily reliant on Chinese daigou (personal shoppers), leading to fierce commission competition among them, resulting in a "cutting one's own flesh" scenario. Additionally, the persistent resurgence of COVID-19 makes it difficult to maintain optimism in the near term. The fact that the improvement in performance is still largely influenced by business restructuring and temporary reductions in airport store rent, which reduce fixed costs, is also a concern. Industry insiders are raising their voices, saying that fundamental problem-solving is necessary for duty-free shops to rebound as globally competitive players in the post-COVID era.

◆ Continued Concerns Despite Holding Up in Q2 Performance

According to the duty-free industry on the 25th, the three major duty-free shops?Lotte, Shilla, and Shinsegae?all turned a profit in the second quarter of this year. Hyundai Department Store Duty-Free reduced its operating loss by 10.3 billion KRW to 7.7 billion KRW. The main reason for the performance improvement was the temporary shift of Incheon Airport duty-free store rent to a revenue-based system, which provided a brief relief. However, the industry explains that this is only a temporary effect and not a healthy form of improvement that creates a virtuous cycle by increasing volume. There are also concerns that dependence on Chinese personal shoppers has increased further amid the COVID-19 situation. While the increase in sales in the second quarter was largely influenced by Chinese personal shoppers, competition among companies to attract them has intensified, pushing commission rates for these shoppers up to 30% during the same period.

An industry official said, "If sales cannot be generated even by raising commission rates for Chinese personal shoppers, various problems arise from the duty-free shops' perspective, such as weakened negotiation power with brands," adding, "Ultimately, the self-destructive competition is intensifying, but there is currently no alternative." Previously, Lotte Duty-Free and Shilla Duty-Free withdrew from Incheon Airport, and Shinsegae Duty-Free closed its Gangnam branch last month, weakening negotiation power based on scale.

◆ Duty-Free Industry Calls for Fundamental Change

The duty-free industry is making limited efforts to diversify its business. Lotte Duty-Free recently renewed its online platforms, including its website and mobile app, and became the first in the industry to venture into direct overseas product purchasing. LDF BUY sells local products purchased by Lotte Duty-Free's Australian branch to Korean customers. The plan is to expand product sourcing regions to countries where Lotte Duty-Free operates, such as Japan and Singapore, and diversify product categories. Through Lotte On, they sell about 20,000 stock duty-free items, including overseas luxury goods, at discounts of up to 80%. In the August event, the proportion of fast-delivery items, which are shipped immediately upon order, was increased to 70%.

Shilla Duty-Free recently partnered with Coupang to expand sales channels for stock duty-free items targeting domestic customers. Through Coupang's open market service, Marketplace, they offered about 2,000 products from over 100 brands. Last month, they also partnered with a competitor, a Chinese duty-free shop. They signed a strategic business agreement (MOU) with Hainan Haikou Duty-Free Shop (HTDF), which operates duty-free shops in Hainan Province, a Chinese duty-free zone, to promote duty-free shop operations in both countries. They plan to establish a joint venture and mutually cooperate on overall operations, including product sourcing, market development, human resource exchange, and joint product development.

Shinsegae Duty-Free is actively attracting new brands. It introduced Italy's "Valentino Beauty" to the Korean market, the first in the Asia-Pacific duty-free industry. An official store will open at the Myeongdong branch on the 2nd of next month. Additionally, they are expanding online sales of stock duty-free items through the official "SSG DUTYFREE" store on SSG.com.

However, the industry views that without structural changes, it will be difficult to secure global competitiveness given that the business environment is significantly different from the pre-COVID era. The industry continuously proposes changes such as revising the rent calculation method for airport duty-free shops, raising duty-free limits, and abolishing domestic purchase limits as alternatives, but the application of these measures remains uncertain.

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