Uncertainty surrounds Incheon Airport's T2 duty-free bids

Incheon International Airport Corp. on Wednesday accepted bids from duty-free companies hoping to open shops in its new second terminal, pushing bidders to outdo rival’s offers while facing an uncertain revenue forecast.

Lotte Duty Free, Korea‘s largest duty-free operator, submitted bids for each of the three slots reserved for large companies, alongside Shinsegae DF, Shilla Duty Free and Hanwha Galleria. Doosan, which was also considering a bid, decided not to apply for a slot.

The greatest problem for the industry is the recent downward spiral of sales across duty-free shops as Chinese tourists turn away from travel to Korea amid intergovernmental tensions over Seoul’s decision to host a US missile defense system.

According to the Korea Duty Free Shops Association, duty-free sales from Chinese tourists at Incheon Airport’s outlets fell 17.2 billion won ($15.3 million), or 27 percent in March compared to February following the implementation of a Chinese travel ban to Korea.

The uncertainty surrounding future developments in Korean-Chinese relations and subsequent impacts on tourism has made companies cautious about their bidding prices for the new Incheon Airport outlet.

“Sales at downtown duty-free stores are being hit hard at the moment, and all of the bidders will probably be more cautious in offering their bid for the airport license,” said a spokesman at a duty-free operator.

Industry watchers say that the current situation is likely to make the price competition for the airport duty-free space much less intense than previous tenders, when companies would bid up to twice the airport‘s asking price to secure a spot.

Another factor that has come into play is the changed evaluation criteria for the second terminal‘s bids. This is the first time duty-free bids for an airport will be conducted jointly between the airport corporation and the Korea Customs Service, per an agreement reached earlier this year.

“Incheon Airport will decide the top two bids for each of the six slots, and the KCS will make the final decisions for the operators,” a spokesman for Incheon Airport said.

This two-step evaluation means that bidders will compete on the basis of rent price offers when being evaluated by the airport, and then on their potential charitable community contributions and support of small and medium enterprises when being judged by the KCS, increasing financial pressure on the companies.

“Right now, we have to think about our pledges for potential community contributions in addition to the rent we would pay to the airport, so it‘s true that competition may not be as intense as before,” said a spokesperson for one duty-free company. “To be honest, I don’t know if anyone would be willing to offer a very high bid at this point knowing that sales are likely to stagnate for a while.”

Of the three duty-free sections currently open to large companies, DF1, which is allotted for perfumes and cosmetics, is expected to see the most competition because it offers “the steadiest sales,” according to an industry official.

Unlike previous bids, this year‘s tender will take offers for just the first year of rent, rather than for the full five years allowed by the license. Incheon Airport’s minimum rent requirements for the bids currently total about 222.3 billion won ($197 million).

After submitting their operational plans and rent offers to the airport corporation Wednesday, the companies will apply for duty-free licenses from the KCS on Thursday. The final decisions are expected to come at the end of the month.

By Won Ho-jung (hjwon@heraldcorp.com)