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In my near-30 years of visiting the Republic of Korea, I don’t think I’ve ever seen such an intriguing backdrop for the duty free and travel retail sector. A collapsed in Chinese group tourism; a bitter THAAD row with China; concession fee disputes and related contract withdrawals; crazy duty free licence proliferation; daigou trading run riot; peace possibilities with North Korea; intense competitive rivalry – you name it, Korean duty free has it.
I’m in Seoul this week to talk to retailers, airport executives, distributors and analysts about a unique market (the world’s biggest) that is simultaneously bursting with challenges, problems and opportunities. Whether the business is doing well, satisfactorily or disastrously depends entirely on you’re talking to.
Yesterday I visited The Shilla Duty Free’s flagship store in Seoul and had a fascinating chat with Hotel Shilla President of Travel Retail Division Ingyu Han. Mr Han feels optimistic about prospects for 2018 after a very tough 2017, especially if Chinese tourism starts to normalise soon in the wake of improved relations with China.
I also walked the store, along with hundreds of Chinese shoppers, most of them clearly daigou traders. Whatever one thinks of the daigou phenomenon (and perspectives again change markedly according to who you talk to), no-one can doubt its profound influence on the travel retail channel here. For some smaller travel retailers, daigou trading now represents well over 90% of turnover, an incredible statistic. Even for the big players, Lotte, Shilla and Shinsegae, the proportion may be as high as 70%, sources told me today.
“Korean duty free has now become a Chinese sales channel,” a leading Korean duty free agent told me this week. To walk The Shilla Duty Free store yesterday as I did only confirmed it. Customer after customer carrying four to six (sometimes more) shopping bags, packed to bursting with Korean and international brands. Many shoppers wheeling suitcases around the store, ready to repack their goods. One sees extraordinary scenes played out on a grand scale of a sort of mass trading frenzy. The same scenes occur each day at Lotte Duty Free, Shinsegae Duty Free and other stores.
“Is this kind of daigou business sustainable?” one leading Korean analyst asked me this morning, echoing a widely held concern in the investment community. One could equally ask, “Is it healthy?” and “Is it profitable?”
The questions (and the answers) are more complex than they seem. Given the disastrous collapse in conventional Chinese tourism to Korea last year due to the THAAD dispute, both the Korean travel agencies and the country’s travel retailers had to find alternative ways to survive. The daigou market provided it. But while it drove remarkable top-line growth for the channel last year (up +20.7% sales to a record US$12.8 billion), the cost of doing such business remains punishing.
The people making the real money here are the travel agents specialising in bringing in the daigou traders. Via a combination of straight commissions (up to 18% for Lotte and Shilla and higher for smaller retailers) and pre-paid coupons (which the travel agents then pass on to the shoppers), retailers are often effectively paying more than 40% of sales to outside parties. No wonder the travel retail community here is hoping against hope for a normalisation of Chinese tourism soon in the wake of improving Chinese-South Korean relationships.
So much to take in during a whistle-stop visit. Today I caught up with City Duty Free Senior Managing Director Allen Hong over lunch at my hotel. Like all small & medium enterprises (SMEs) here, City Duty Free (CityPlus) is facing massive profitability issues, particularly at Incheon International and Gimpo airports. At Gimpo, saddled by onerous concession fees bid during much better times in 2016, it has said enough is enough and will exit later this month. I’ll bring you a full interview with Allen in our special South Korean report out in May.
Tonight I had the great pleasure of having dinner with long-time Shilla Duty Free boss Jeong-Ho (Jason) Cha, now CEO of Shinsegae International; Shinsegae Duty Free CEO Yungsik Son; and long-time Incheon International Airport Corporation commercial boss Sang-joon Ahn, now an industry consultant (and occasional contributor to The Moodie Davitt Report).
Shinsegae Duty Free has been in my view travel retail’s most impressive newcomer of recent times and based on its current momentum will be a top ten global player in the near future. I’m visiting their flagship store tomorrow, one of the best you will find, and one also currently benefiting from the daigou boom.
Stay tuned for my full report in coming weeks. Korean duty free is a fascinating sector but it is surely no place for the faint-hearted.