95% dependence on China… Duty free shop exposed by Corona 19

With Corona 19, 16 trillion won in the domestic duty-free market last year… 35% reduction
Airport duty-free store sales plunge, save city duty-free stores to Dai Palace, China
Excessive competition and profitability deterioration as dependence on the palace soars

A court decision is imminent to decide whether Korean Air will take over Asiana Airlines, and Korean Air and Asiana Airlines airliners are moving toward the runway on the 30th at Gimpo Airport apron in Gangseo-gu, Seoul. The Seoul Central District Court is expected to conclude this day or tomorrow on an application for a provisional injunction against the issuance of new shares issued by the activist private equity fund KCGI against Hanjin Kal. If the court dismisses the request for provisional injunction, the takeover will speed up, but if the request for provisional injunction is cited, there is a high possibility that the takeover will be canceled. / Reporter Kim Hyun-min [email protected]

[아시아경제 임혜선 기자] Last year, the domestic duty-free market was hit directly by the prolonged effect of the novel coronavirus infection (Corona 19). The size of the domestic duty-free market was about 16 trillion won, down by more than 35% compared to 2019, as overseas travelers as well as businessmen on business trips dropped sharply.

Although the airport duty-free store sales plunged by more than 90%, the downtown duty-free store, which was followed by a Chinese botari statue (Tai Palace), was saved. However, as reliance on Daigung increased, profitability deteriorated due to excessive competition. Examine the structural problems of the duty-free market of’Sokbin Gangjeong’.

Nearly 90% dependence… It collapses

From January to November last year, the sales of domestic duty-free stores were 14,321.1 billion won, down 42% from the same period last year. When December sales are added, it is expected to reach 16 trillion won. The number of foreign customers dropped by 85% compared to the previous year, but the volume of sales decreased relatively little. Monthly sales of foreigners at duty-free shops in Korea increased monthly after hitting the bottom at 9664 billion won in April this year. In November, it recorded KRW 1,348.3 billion. It is recovering to the level of sales in January this year (1,701.7 billion won) before the spread of Corona 19. The average foreign guest price of 980,000 won just before the outbreak of Corona 19 has exceeded 20 million won since September.

In terms of sales composition by country, China accounted for 93-95%. It is about 3% in Korea and 1% in Japan. China’s share of sales in the duty-free market for the past four years has increased every year. In the case of Lotte Duty Free, the proportion of sales in China is 66% in 2017, 75% in 2018, 82% in 2019, and 93% in 2020. The share of Japan fell from 3% to 1%. The duty-free shop industry faced a crisis in 2017 when China imposed a Han-Korean decree (Korean Wave Restriction Decree) in retaliation for the deployment of THAAD (high-altitude massacre defense system). This is because group tourists (Euchre), who accounted for the majority of sales in China, stopped visiting. Euchre’s vacancy was filled by Tayungung. With the development of the online trading market in China, Weisang (mobile sellers) increased, and Daigung, who received orders from them, began to search for duty-free shops in Korea. Korean duty-free companies have achieved record-breaking sales every year, thanks to’Tai-gung’. At the same time, companies’ dependence on Daigung has grown even higher. In 2019, the sales share of Taigung was 80% of the total. Last year, it soared to 90%. An official in the duty-free industry explained, “Dai-gung was the only lifeline with domestic and foreign visitors being cut off,” and said, “Last year, the sales of duty-free companies were the same as those of Taigung.”

Due to the concentrated sales, the proportion of cosmetics sales in the domestic duty-free market is also rising. The proportion of cosmetics from around 50% in 2015 increased to 68% in 2019. According to the analysis data of KB Securities, the sales of cosmetics in duty-free shops last year were expected to decrease by 10% from the previous year. The share of sales in all duty-free stores reached 94%. Non-cosmetic sales were estimated to have plunged 89%. The price of cosmetics at Korean duty-free stores is more than 40% cheaper than local.

As competition intensifying for’Tai Gong serving’, companies’ profitability deteriorated. Last year, companies’ operating margins were negative. Lotte Duty Free’s operating margin, which was 9.9% in 2014, recorded -5.1% last year (January-November). The situation at the Shilla Duty Free Shop and the Shinsegae Duty Free Shop is similar. The cumulative deficit recorded 110.7 billion won and 88.8 billion won, respectively. Nearly half of its sales are being used for the cost of attracting Dai Gung. The duty-free shop pays a customer service fee (based on the sales of purchased items) in exchange for bringing Dai Gung to a Chinese travel agency. The product discount rate is applied directly to Daigung. The overall commission rate, which is the sum of the customer service fee and the product discount rate, has soared from 35-38% at the beginning of last year to 43-46% since September. Even if a duty-free shop sells goods, the profit is bound to decrease.

The sales structure that is skewed towards Dai Palace is a cross-section that shows the weakness of our duty-free industry. A duty-free company official said, “The Chinese government is intensively cracking down on Dai Gung while implementing a tax-free promotion policy. If the visit to Korea suddenly decreases in the current deformed duty-free market, the profits of duty-free companies will fall underground.”

Growth of the Chinese duty-free market… Institutional improvement is also necessary at the urgent need to improve constitution

While Korea slowed, China beat and climbed. This is because the duty-free market in Hainan Province, China’s leading resort island, has grown rapidly thanks to the benefits of the Chinese government’s tax-free promotion policy. The sales volume of the Hainan Duty Free Industry, which was 13.6 billion yuan in 2019, is expected to reach about 32 billion yuan last year. Despite the fact that the number of duty-free purchasers last year recorded 3.4 million, a decrease of 3.84 million compared to the previous year, sales more than doubled.

Last year, the Chinese government increased the duty-free limit for domestic and foreign tourists departing from Hainan from 10,000 yuan (1.71 million won) to 30,000 yuan (5.14 million won), allowing Koreans visiting the area to purchase duty-free goods online for 180 days. From July 1, the Chinese government has more than tripled the limit on overseas duty-free shopping in Hainan to 100,000 yuan per person per year (17 million won). The number of duty-free products increased from 38 to 45. The tax-free limit for individual products, which was 8,000 yuan (1.36 million won), was also removed.

In order to prevent foreign currency from being exported to Korea, the crackdown on Dai Palace was strengthened. In fact, earlier this year, the Chinese government is known to have intensively cracked down on the Ming-tung market located in the Huachang Bay commercial area in Shenzhen, where Korean duty-free goods are traded. The massive crackdown on the Mingtong market is analyzed to be a strategy for the Chinese government to promote the duty-free policy this year.

Until 2019, the world’s duty-free shop rankings were in the order of Dupree, Lotte Duty-free, and Shilla Duty-free, but the rankings changed last year as China beat. According to the duty-free magazine Moody David Report in September, CDFG, a Chinese duty-free product group, recorded sales of $2.85 billion (about 3.3 trillion won) in the first half of this year, surpassing Switzerland and Korea, and ranking first as a Chinese company. Only in Hainan, half of CDFG sales came out.

Professor Lee Hoon of Hanyang University said, “Because the tourism distribution industry is a business that requires experience, know-how, business power, and domestic and international networks, once it collapses, it takes a lot of time and money to recover.” “The duty-free industry ecosystem (manpower and structure) is maintained. As much as possible, the government should actively support it,” he argued.

For heads of domestic duty-free companies,’China’ is a difficult task. Along with improving profits this year, improving the constitution is the biggest task. Shinsegae Duty Free CEO Yoo Shin-yeol said to the executives and employees, “It is an opportunity to re-establish the essence of the business and focus on improving operational efficiency.” Shinsegae Duty Free has the goal of making it the largest tourist destination you must visit when you come to Korea.

Lotte Duty Free has turned to overseas to strengthen its international competitiveness. Lee Gap, CEO of Lotte Duty Free, said, “We have to look forward to the next 5 years,” and “We will diversify our portfolio by discovering overseas markets.” Lotte Duty Free will open additional stores in Kansai Airport, Japan this year, and will open stores in Da Nang, Vietnam, Hanoi, and Sydney, Australia. In order to respond to the non-face-to-face market, duty-free shops introduce domestic and international simple payment services and diversify sales channels such as live broadcasting.

Reporter Hyeseon Lim [email protected]

Source: 아시아경제신문 실시간 속보 by www.asiae.co.kr.

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