Duty-Free Shop 4 Companies Show 'Smiles' in First Half, Expect 'Big Smiles' in Second Half

Q2 Sales Declined but Operating Profit Increased
Performance Growth Expected from Q4 with Return of Youke Visitors

The duty-free industry recorded solid performance in the second quarter by strengthening profitability. Although sales shrank due to reduced transactions with Taigong (itinerant traders), profits increased significantly as costs decreased. In the second half of the year, with the resumption of visits by Chinese group tourists (Youke) to Korea, the duty-free industry is expected to focus on attracting tourists.

China has lifted the restrictions on group tours to Korea for the first time in 6 years and 5 months, raising expectations that this will be a boon for the domestic travel, hotel, and duty-free industries. On the 11th, foreign tourists lined up in long queues to enter a duty-free shop in downtown Seoul. Photo by Kang Jin-hyung aymsdream@

Four Duty-Free Stores Post Operating Profit of 90 Billion KRW in Q2

According to the duty-free industry on the 14th, the total operating profit of four domestic duty-free stores was about 90 billion KRW, with all four recording meaningful operating profits and significantly improved profitability compared to the same period last year. Lowering the commission rates paid to Taigong and focusing on group tourists from other countries and individual free travelers led to this profitability improvement. However, sales declined across all four stores. The overall market size shrank as transactions with Taigong decreased during the process of lowering commission rates.

Commission fees are a type of brokerage fee that domestic duty-free stores pay to Taigong, who resell goods in China. During the COVID-19 period, competition among duty-free stores to attract Taigong intensified due to overseas travel restrictions, pushing commission fees close to 40%. However, since the second half of last year, the duty-free industry agreed to lower these fees, and in the first half of this year, commission fees dropped to the 20-30% range.

The duty-free store with the largest improvement in profitability was Hotel Shilla. Hotel Shilla recorded an operating profit of 43.2 billion KRW, marking a 192% growth compared to the same period last year, showing explosive growth. Reducing dependence on Taigong, which had high commission rates, and expanding marketing targeting individual free travelers proved effective. Strengthening promotions aimed at domestic travelers going abroad also had a positive impact on customer acquisition.

Lotte Duty Free, which only discloses half-year results, is estimated to have turned a profit in Q2 with an operating profit of 5.777 billion KRW. The total operating profit for the first half was 41.6 billion KRW. Sales amounted to 750 billion KRW in Q2, and 1.5042 trillion KRW for the first half, a sharp decline of about 40% compared to the first half of last year. Although sales decreased due to normalization of commission fees, actively attracting multinational tourists from Japan and Southeast Asia led to the turnaround to profitability. A Lotte Duty Free official analyzed, "Sales from domestic customers also increased significantly, improving profitability."

Shinsegae Duty Free, the duty-free division of Shinsegae, also saw sales decline but operating profit increase. Sales dropped 40% year-on-year to 486.1 billion KRW due to reduced transactions with Taigong, but profits rose 30% to 40.2 billion KRW. Hyundai Department Store Duty Free also succeeded in turning a profit, earning 800 million KRW. Sales plunged 66% to 194.2 billion KRW.

Duty-Free Stores Focus on China-Specific Brands and Promotions in Second Half

The duty-free industry is expected to launch aggressive marketing in the second half to attract Youke. This follows the Chinese government's lifting of the ban on issuing group visas to Korea after more than six years since March 2017, when it imposed retaliatory measures against the deployment of THAAD (Terminal High Altitude Area Defense). The duty-free industry anticipates that an increase in Chinese group tourists will not only expand sales but also reduce dependence on Taigong, greatly improving profitability.

Duty-free stores are already preparing products tailored for the return of Youke. Hotel Shilla, which operates Shilla Duty Free, is expanding Chinese customer-preferred brands and products at its downtown duty-free stores in Seoul and Jeju, securing dedicated interpreters, producing promotional materials, and inspecting facilities to enhance shopping convenience. At airport duty-free stores in Incheon and Gimpo Airports, special promotions focusing on luxury fashion and liquor are being prepared. Shilla Internet Duty Free plans to revamp its platform to suit Chinese user habits.

China has lifted the ban on group tours to Korea after 6 years and 5 months, raising expectations that this will be a boon for the domestic travel, hotel, and duty-free industries. On the 11th, foreign tourists including Chinese and Japanese were strolling the streets of Myeongdong, Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

Shinsegae Duty Free plans to captivate Youke by strengthening experiential content. They intend to install installation art and media art inside the duty-free stores to provide differentiated experiences unavailable at other duty-free stores while shopping. Brands favored by Chinese customers will also be rapidly introduced within the stores.

Lotte Duty Free envisions attracting customers by directly creating Korean travel package tours that include duty-free shopping courses. To improve service for Chinese customers, discount promotions linked with payment systems such as Alipay and UnionPay are also being prepared. Hyundai Department Store Duty Free plans to install dedicated desks for Chinese group tourists and foreign VIPs to enhance shopping convenience.

The full-scale performance improvement is expected to continue from the fourth quarter of this year through next year. A duty-free industry official explained, "It takes about two months from now for travel agencies to create tour products and recruit customers," adding, "Chinese tourists are expected to increase exponentially around the Mid-Autumn Festival holiday from September 29 to October 6." Another industry official said, "Many Chinese routes have not yet fully recovered, so even if group tours resume, some tourists may not be able to enter," and added, "Duty-free stores will gain momentum for performance improvement from the fourth quarter through next year, supported by demand from those planning to visit Korea."

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