Korean duty free shops take opposite paths to draw Chinese shoppers

There appear to be two diverging roads for South Korea's top duty free operators Lotte and Shilla: expanding outside China, or going deeper inside the country. And each is taking the road not traveled by the other. 

As Lotte Duty Free and Shilla Duty Free Shop are reviving their drive for global expansion, they are setting their sights on the popular destinations of Chinese tourists, the world's largest spending group at duty-free shops.

Lotte, the world's No. 2 duty-free operator, runs 11 shops in the US, Guam, Japan, Singapore, Vietnam, Australia and New Zealand. Now its overseas expansion pivots on Asia and Australia, mainly targeting Chinese travelers.

So far this year, it has opened five luxury stores in Kansai International Airport in Japan. It is now working on the launch of a full-size store in Singapore Changi Airport, which was postponed last year due to the COVID-19 pandemic.

Next year, Lotte Duty Free will open stores in Danang and Hanoi in Vietnam, as well as in Sydney, Australia.

"Last year we were in a defensive mode, but now we are proactively preparing for the post-coronavirus recovery in the tourism industry," said a Lotte Duty Free official. 

INSIDE CHINA

Meanwhile, third-ranked Shilla Duty Free Shop is advancing further into the inland cities of China. It is preparing to open a store in the inland city of Hainan to become the first Korean duty free operator to run a store there. Hainan will be designated a duty free zone, starting in 2025.

Shilla last July agreed to set up a joint venture with HTDF, an affiliate of Hainan Tourism Investment Development Co. next year to cooperate in product procurement and development. Duty free sales in Hainan reached 27.5 billion yuan ($4.4 billion) in 2020, customs data showed.

Shilla's overseas stores are mainly located in the greater China region and Southeast Asia, including Macau International Airport, Singapore Changi Airport and Hong Kong International Aiport on Chek Lap Kok. It also operates a downtown duty free shop only in Phuket in Thailand.

Prior to the outbreak of the COIVID-19 pandemic, Chinese tourists made up 80% of visitors to Shilla Duty Free Shop in Macau International Airport. Back in 2019, Chinese travelers spent $254.6 billion on travel, according to the World Tourism Organization. 

South Korean duty free shops' main customers, both at home and abroad, used to be divided into Chinese and Korean travelers, as well as Chinese vendors who purchase duty free products in South Korea for resale to Chinese consumers. 

Since the onset of the COVID-19 pandemic, however, the Chinese vendors became the only customers of duty free shops in South Korea, sparking cutthroat competition and eating into profit margins at the stores.

Lotte Duty Free reported an operating loss of 25.3 billion won in the third quarter of this year on revenue of 2.6 trillion won. Shilla Duty Free earned 20 billion won in third-quarter operating profit on sales of 857.6 billion won, posting a 2.3% operating margin. 

"Now that the Chinese vendors have greater bargaining power, sales growth barely translates into profit growth at Korean duty free shops," said Hana Financial Investment analyst Park Jong-dae. "The duty free shops' operating profit margins are actually close to zero."

An industry source advised that Korean duty free shops need to attract more individual Chinese travelers from inland or outside China to improve their bottom lines. 

Write to Yoo-jung Roh at yjroh@hankyung.com
Yeonhee Kim edited this article.