Korea plans to allow duty-free SMEs

Sour consumer sentiment has been taking its toll on Korea’s department stores and discount chains for months, but the duty-free retail industry has been a shining exception.

Duty-free shops run by chaebol conglomerates such as Lotte, Shilla and SK posted some 4.4 trillion won ($3.9 billion) in combined sales last year, nearly double their combined revenue of 2.2 trillion won three years before in 2008.

The two-story Lotte Duty Free Shop above Lotte Department Store in central Seoul alone generated over 1 trillion won in sales last year.

In the intra-city duty-free market, Lotte and Shilla together command an 85 percent market share.

The government has not given out licenses for duty-free business to any new players since the year 2000.

Currently, Paradise, AK Global, Korea Tourism Organization and several other public companies funded by local governments are the only duty-free retailers that do not belong to conglomerates with total assets of more than 5 trillion won.

Retail giant Shinsegae Group’s Westin Chosun Hotel recently acquired a controlling stake in the Paradise duty-free shop in Busan, emerging as another major chaebol in the business.

In consideration of opinion that the current chaebol dominance is excessive and the government policy to promote shared growth among large and small firms, the Korea Customs Service said last week that it will revise its rules to offer duty-free business licenses to small and medium-sized enterprises.

Under current rules, the KCS can recruit new bidders for duty-free licenses in a specific area ― Seoul, Chungcheong, Gyeongsang and so on ― only if foreigners accounted for more than 50 percent of sales and customers at existing duty-free shops in that area and the number of foreign tourists increased by more than 300,000 in the previous year.

The 50-percent threshold has been unreachable even for chaebol affiliates so far, meaning it has been impossible for SMEs to enter the duty-free business.

“Under the new rule, however, we will soon pick SMEs eligible for licenses in Seoul, Busan and Jeju,” KCS official Park Sang-deok said.

A number of SMEs have shown interest and made inquiries about applying for the license, he said.

Some argue that more should be done to allow SMEs to enter and survive in the business which has so far been controlled by conglomerates.

Rep. Hong Jong-haak of the Democratic United Party is preparing to submit a revised customs bill that forbids duty-free shops run by conglomerates with over 5 trillion won in assets from selling certain tobacco or liquor products such as Andong soju.

Giving to SMEs a chance is the government’s plan, albeit a last-minute call, at Incheon International Airport as well.

As part of a policy package dubbed “advancement of public corporations” unveiled in 2008 as the Lee Myung-bak administration came in power, KTO’s duty-free shop is scheduled to move out of Incheon Airport by February.

In response to lawmakers’ aggressive questions, Finance Minister Bahk Jae-wan said during the parliamentary audit earlier this month that the KTO shop in the airport will be replaced by SMEs only.

“It was the first time I heard about that plan, but both the Incheon International Airport Corp., which will lease the space to new tenants, and the KCS are aware of it now, although we have not received any official request from the ministry yet,” KCS official Chung Koo-cheon said.

KTO’s pullout from the duty-free business comes after much dispute between the government and the KTO.

“It was decided that KTO should withdraw its duty-free business from airports since selling duty-free goods doesn’t serve the organization’s purpose of promoting tourism,” said Park Ho-sung, a Finance Ministry official overlooking public firms.

The KTO has already sold off subsidiaries that operated casinos and golf courses as part of the government plan.

KTO president Lee Charm and the company’s labor union have argued that its duty-free shop in Incheon Airport was worth keeping since Korean-made goods took up over 40 percent of its sales, much higher when compared to 24 percent of Lotte and 16 percent of Shilla.

“The initial purpose of duty-free shops was to sell Korean products to foreigners and attract foreign tourists, but in Korea, they have only fanned Koreans’ consumption of imported luxury items,” said Oh Hyun-jae, the union leader for KTO.

“KTO posted about 2.5 billion won in profit from the airport duty-free shop last year. The Lee administration is pushing hard on the smaller parts of its ‘advancement of public corporations’ scheme since it looks like it will fail on the big ones such as privatization of the Incheon Airport and the railways.”

Rep. Hong claimed during the parliamentary audit that the government was giving special favors to chaebol’s duty-free business despite their explosive sales growth in recent years.

Like for the broadcasting and telecommunication businesses, companies need government licenses to run duty-free shops.

But unlike the broadcasters and telecoms, which pay about 1 percent of their revenue as license fees each year, the annual license fee for duty-free shops costs practically nothing compared to their revenue.

The Lotte Duty Free Shop in downtown Seoul, for example, paid only 900,000 won in license fees to the government last year, when it raked in over 1 trillion won in sales.

The law that sets the license fees for duty-free shops depending on their floor space has remained unchanged since 1993 despite rapid growth of the duty-free retail industry over the past few years.

By Kim So-hyun (sophie@heraldcorp.com)