Hotel Shilla to challenge Lotte’s duty-free shop dominance in Korea

South Korean leading luxury hotel and retail operator Hotel Shilla is challenging its crosstown rival Lotte, the dominant player in the country’s duty-free shop business.

The Korea Customs Service on Thursday announced the successful bidders for the rights to run duty-free outlets at the country’s largest Incheon International Airport for 10 years from July.

The Shilla Duty Free and Shinsegae DF Inc. were selected as new duty-free operators at the country's main gateway, while Korea’s longtime giant Lotte Duty Free was left out in the cold.

Shilla will run its shops in the DF1 and DF3 zones while Shinsegae will operate in the DF2 and DF4 zones.

The DF1 and DF2 zones sell perfume, cosmetics, alcohol and tobacco while DF3 and DF4 handle fashion goods, accessories and brand boutiques.

The DF5 zone, reserved only for boutiques, went to Hyundai Department Store Duty Free.

Five companies, including China Duty Free Group, competed for the 10-year licenses at the airport.

Lotte, Korea’s largest duty-free business operator, was said to have offered a highly conservative bid, apparently concerned about the future profitability of its business at the airport.

The longtime leader in the country’s duty-free industry has been reducing its operations from the airport since 2018, citing high rent. Lotte will pull out of the Incheon airport entirely at the end of June.

SHILLA TO RISE

Analysts said Shilla will fill the void left by Lotte and could eventually emerge as Korea’s top duty-free operator.

In 2021, Lotte’s sales revenue from its duty-free business reached 3.72 trillion won ($2.78 billion), closely followed by Shilla with 3.35 trillion won.

Given that duty-free operators posted a combined 3 trillion won in sales from Incheon International Airport in 2019, Shilla, once its shops start running at the airport in July, could easily surpass Lotte in overall duty-free revenue, which includes sales at downtown outlets.

Lotte Duty Free, an affiliate of the Lotte Group, aims to retain its market leadership by expanding its overseas and domestic downtown duty-free shop businesses.

Globally Lotte operates 13 shops in six countries with its flagship stores largely in the Asia Pacific, targeting Chinese travelers, the world's largest spending group at duty-free shops.

The company plans to add one at Melbourne Airport and another in downtown Hanoi by the end of this year.

While withdrawing from Incheon airport, Lotte has steadily expanded its in-town business for years.

Downtown duty-free shops accounted for 93.7% of Lotte’s entire duty-free business in 2019, up from 79% in 2016.

“We had to pay huge rent to run our shops at the airport. Now that we’re pulling out of it, we can use the money as marketing expenses for our downtown shops,” said a Lotte official.

OPPORTUNITIES FOR LATECOMERS

Shinsegae and Hyundai Department Store, latecomers to the duty-free business, are expected to use their admittance to Incheon airport as stepping stones for their business expansion in Korea and abroad.

The DF2 and DF4 zones, to be occupied by Shinsegae, are located in Terminal 2, the main gate to many national airlines, including Korean Air Lines Co.

Shinsegae has no overseas duty-free outlets yet.

Meanwhile, the Shilla Duty Free Shop at Singapore’s Changi Airport last month was chosen by the airport operator as an excellent business partner for providing exceptional services to customers.

Industry watchers said it is also noteworthy which brands Hyundai Department Store Duty Free will bring to its boutiques in the DF5 zone.

Hyundai entered the duty-free business in 2018 but has since underperformed largely due to the COVID-19 lockdown.

“Hyundai Department Store Group Chairwoman Chung Ji-sun tried to lure a Louis Vuitton outlet to their duty-free shop when she met LVMH Chairman Bernard Arnault last month,” said an industry official.

“It would be interesting to see which brands Hyundai will have at its airport boutique. We’re paying close attention to it.”

Write to Mi-Kyoung Lee at capital@hankyung.com

In-Soo Nam edited this article.