How Kap Lee intends to create ‘lifetime value’ at Lotte Duty Free

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Martin Moodie meets new Lotte Duty Free CEO Kap Lee at company headquarters in Myeong-dong, Seoul.

Lotte Duty Free’s flagship store in Myeong-dong, Seoul is the epicenter of Korean travel retail. What happens here in many ways shapes the whole sector, particularly in terms of new product development and identifying what’s hot and, less often, what’s not.

This store has been both a local and international springboard, in fact a commercial trampoline, for so many brands (and sometimes whole categories) that it warrants a case study all of its own.  Many duty free executives from around the world come here just to view what amounts to a vast, throbbing human laboratory. Lotte Duty Free’s advantage is that it monitors that laboratory each and every day, giving it a unique insight into what’s hot among Chinese consumers. Remember, all of those daigou traders that shuttle in and out of this store every day know precisely what they want, buying to fulfil demand from all over the vast Chinese nation.

[Click on the Podcast icon to hear Martin Moodie getting up close and personal with hundreds of daigou shoppers outside Lotte Duty Free in Myeong-dong, Seoul]

Hundreds of daigou traders queue up outside Lotte Duty Free every morning awaiting opening time.

And what a laboratory it is. This is a near US$4 billion business remember. What an astonishing number. One that has grown from just under US$3 billion in a year and which is projected to stretch over US$5 billion this year.

Recently Lotte opened a dedicated zone, nicely dubbed an “incubation” area by store Director Steve Park, to introduce new and untried brands (mainly from small & medium enterprises). Several of these will go on to secure places in the main beauty, accessory or wellbeing departments. That concept is typical of Lotte’s ability to search out and then champion emergent brands (especially Korean SME products), some of which go on to become blockbusters.

Lotte Duty Free Director of the Myeong-dong store Steve Park has led extraordinary top-line growth over recent years. He is confident of a further 30% lift this year.
Blooming Beauty: A nice tagline for Lotte Duty Free’s ‘incubation zone’.
Korean lifestyle fashion brands such as MLB and Fila are generating extraordinary levels of business.

Yesterday I had the honour of conducting the first interview with new Lotte Duty Free CEO Kap Lee. The former CEO of Lotte’s Daehong Communications business (he has been with Lotte for 32 years) has a precise, well-articulated vision of where he wants to take the travel retailer. His top priority, he told me, is to create a “differentiated strategy” for Lotte within a Korean duty free industry structure that he admits is “not healthy”. Refreshingly, he does not hide from the fact that currently Lotte is “in the daigou business” (if you doubted it simply take a look at the 500-600-strong queue of daigou outside the flagship store every morning) but he is looking beyond that.

He plans to focus on a more personalised marketing strategy (Lotte Duty Free currently has 6.9 million database member, a number that is slated to grow to 7.8 million this year), an especially important factor if, as expected, a more traditional Chinese tourism and shopping base is restored later this year as relationships between the two nations thaw (Chinese leader Xi Jinping is expected to visit South Korea this year).

Like so many travel retailers, Lotte has been chastened by its airport bidding experience. In 2018 it pulled out of much of its Incheon International Airport Terminal 1 business after posting a colossal KW192.5 billion (US$182.2 million) operating loss for its Incheon and Seoul Gimpo airport operations. Consider this statistic for a moment – In 2017, Lotte’s sales at Incheon International Airport sales reached KW1.1 trillion (just over US$1 billion) but concession fees reached KRW580 billion, over half of sales. That’s before any other costs, remember. While most observers believe that Lotte would now like to boost its Incheon presence (its partial exit might have benefited the bottom line but also meant a big loss of market share), such a return will not be at any cost.

Kap Lee isn’t interested in entering into any more ruinous airport contracts. As you will read in my fascinating interview, the company is likely to be highly selective about its targets, focusing on locations where it can be the sole operator, paying sensible fees and creating a win/win/win for airport, retailer and consumers alike. On his business card, Lotte Duty Free’s motto reads, ‘Lifetime Value Creator’. That sums up the Kap Lee vision nicely. This year he expects his business to grow by around 30%, buoyed in the short term at least by a continued boom in daigou trading. But it’s the long-term value he is really focused on.

[Look out for the full, fascinating interview with Kap Lee in coming days]

Daigou traders queue up to buy Philip Morris International’s IQOS ‘heat not burn’ tobacco device and sticks, reflecting burgeoning demand in China.