Duty-free sales to see first drop in 14 years

The Korean duty-free industry may see a drop in on-year annual sales in 2017, which would make it the first decline in 14 years, according to data from the customs regulator Sunday.

Since the outbreak of the Severe Acute Respiratory Syndrome virus in 2003, the duty-free industry had seen steadily rising sales until last year. 

Especially in 2016, sales had risen sharply to 12.3 trillion won ($10.83 billion), breaking the 10 trillion-won mark thanks to the popularity of Korean music and dramas and heavy marketing aimed at the Chinese market by duty-free operators.

However, those numbers had been heavily reliant on large tourist groups from China which were brought to downtown duty-free outlets by travel agencies. This demand spiraled down beginning in mid-March when Beijing imposed an unofficial ban on travel packages to Korea. 

The loss of inbound traffic from China took a heavy toll on duty-free operators such as Lotte Duty Free, who had previously pulled in up to 70 percent of its revenues from Chinese tourists.

The blow was even harder for newer duty-free operators who do not have the brand power of industry leaders Lotte and Shilla, and are heavily dependent on tourist groups.

Earlier this month, Hanwha Galleria announced that it would be returning its permit to operate a duty-free outlet at Jeju International Airport due to continued losses. 

The move followed months of repeated bidding for the fashion and accessories duty-free area of the second terminal at Incheon International Airport, which eventually went to Shinsegae DF after Incheon Airport agreed to lower the rent prices by 30 percent.

Recent developments have indicated a sharp turn away from the optimism that had previously surrounded the duty-free industry, which had led to intense bidding wars between operators to win licenses for downtown outlets.

Analyst Choi Min-ha wrote for Korea Investment & Securities that this year‘s annual sales for the duty-free sector was likely to reach around 10.5 trillion won, marking the first drop since the SARS crisis. 

“Although numbers of Koreans leaving the country are rising, they are not enough to make up for the losses from Chinese tourists,” Choi said. 

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