'Yukeo Gidae' Box Range in Q3... Duty-Free Shops Face Year-End Season Variables

3Q Duty-Free Store Sales 3.4549 Trillion Won
Similar to 1st and 2nd Quarters, 'Youkeo Effect' Below Expectations
Trends of Chinese Group Tourists to Be Monitored from Year-End to Next Year

On the 27th, ahead of the Chuseok holiday, the duty-free area of Terminal 1 at Incheon International Airport is bustling with travelers. Photo by Jinhyung Kang aymsdream@

Sales at duty-free shops remain stuck within a narrow range with no signs of improvement. Experts anticipate that visits from Yukeo (Chinese tourists) will gain momentum starting from the end of this year, and the trend extending from the end of this year into next year is expected to become a variable affecting the stagnant domestic duty-free shop performance.

According to the Korea Duty Free Shop Association on the 3rd, domestic duty-free shop sales in September, the last month of the third quarter this year, recorded 1.3274 trillion won. Although it was the highest level this year, it still failed to break out of the 1 trillion won range. Including the September results, third-quarter duty-free shop sales this year stood at 3.4549 trillion won, remaining at a similar level to 3.1094 trillion won in the first quarter and 3.4024 trillion won in the second quarter.

In August, the Chinese government allowed group tours of Chinese tourists to Korea, raising expectations in the duty-free industry. However, the industry analysis suggests that it took time for these tourists to actually enter the country due to product price adjustments and travel agency staffing. The effect of China’s Golden Week holiday, National Day (September 29 to October 6), also fell short of expectations. During this period, the number of Chinese arrivals showed a somewhat flat trend compared to market expectations. In September, the number of Chinese tourists was about 264,000.

In fact, the number of foreign visitors to domestic duty-free shops in September reached 638,030, the highest level this year, but foreign sales during the same period were 1.0805 trillion won, similar to the level in March (1.0257 trillion won) when the number of foreign visitors was about half (314,699). Compared to the same period last year, the change is even more pronounced. Foreign visitors in September this year were 3.9 times higher than the same period last year (164,700), but sales decreased by 34.6% compared to the same period last year (1.6527 trillion won). This year, as the industry normalized the excessive commission fees for Chinese peddlers (Daigou), whose share accounted for most of domestic duty-free shop sales, the proportion of Daigou decreased, and the expected positive effect from Yukeo has yet to fully materialize.

Earlier, Shilla Duty Free, which announced its third-quarter results, received a performance far below market expectations. Shilla Duty Free posted an operating loss of 16.3 billion won in the third quarter, turning to a deficit. Sales were 845.1 billion won, down 29% from the same period last year. This was due to a one-time cost increase related to the disposal of accumulated inventory during the transition from a Daigou-centered business structure to a retail customer-centered one. Considering the significant contraction of the Chinese peddler market since the beginning of the year, inventory valuation losses were expected to continue partially into the fourth quarter. Shilla Duty Free expects demand from Chinese group tourists to recover in earnest from this month and is reorganizing its product lineup from high-end cosmetics preferred by Chinese wholesalers to products favored by general tourists, aiming to introduce 50 mid- to low-priced Korean cosmetic brands within this year.

As Daigou exited, all major duty-free shops saw a decrease in total sales volume. However, structural improvements have occurred, and some, such as Hyundai Department Store Duty Free, are increasing the possibility of turning operating profits positive. Hyundai Department Store Duty Free also expects sales to decline by around 25%, but anticipates its first quarterly profit since starting its duty-free business in 2018.

The market views that considering the restructuring of duty-free shops’ business portfolios toward retail customers and the recovery of Korea-China passenger demand, there is a high possibility of performance improvement from the end of this year into next year. With the expansion of flights leading Chinese group tourists and the increase of visa issuance centers in China easing bottlenecks, it is expected that the number of Chinese tourists entering Korea next year will reach the pre-COVID-19 level of 2019. However, since the fourth quarter is a period when inventory clearance is prominent across the industry, it is necessary to moderate expectations while monitoring the sales trends of Daigou and the recovery of Chinese group tourist numbers. Researcher Lee Seung-eun of Yuanta Securities said, "Chinese tourists have a higher per capita purchase amount compared to tourists from other countries, so a positive impact from increased purchasing power is expected."

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