S.Korean travel retailers face downturn without Chinese big spenders

Before COVID-19 swept the world, South Korea’s top two travel retailers Lotte Duty Free and Shilla Duty Free Shop ascended to the world’s No. 2 and No. 3 spots by sales in 2019 but hopes of repeating that past glory seem far over the rainbow. 

Betraying their euphoric expectations, Chinese tourists’ return to Korea has failed to rejuvenate the Korean duty-free retail industry, largely due to the absence of lavish Chinese spenders who used to gobble up expensive cosmetics and luxury brand items before the pandemic.

According to The Moodie Davitt Report on Monday, Lotte Duty Free dropped to the world’s fourth-largest travel retailer after its sales fell 11.9% year-over-year to 3.84 billion euros ($4.2 billion) in 2023. Shilla Duty Free Shop was knocked out of the world’s top five club and ranked No. 6 with sales of 3.07 billion euros, down 20.4% over the same period.

Switzerland-based travel retail giant Avolta AG returned to the top spot thanks to a 21.6% rise in sales to 9.21 billion euros after elbowing out China Duty Free Group (CDFG) with sales of 8.62 billion euros to the second spot.

French retailer Lagardère Travel Retail and US rival DFS Group ranked third and fifth with sales of 5.2 billion euros and 3.4 billion euros, respectively.

Korean travel retailers suffered more sales losses in the first half of this year, dimming hopes of a recovery.

Lotte Duty Free swung to an operating loss of 46.2 billion won ($34.5 million) in the first six months of this year from a year ago, while Shilla Duty Free Shop’s sales plunged 43% to 1.67 trillion won over the same period.

LOSS OF CHINESE BIG SPENDERS

The main culprit of the Korean duty-free retailers’ poor performance is a change in the spending trends of Chinese tourists, said the industry observers.

Korea received about 7.7 million foreign visitors in the first half of this year, up 73.8% from the same period last year. Of them, 41%, or 3.2 million, were tourists from China, Hong Kong, Macao and Taiwan.

But Chinese tourists did not spend much on luxury items during their visits to Korea unlike those who were not hesitant to open their wallets for expensive goods before the pandemic.

According to Jing Daily, a Chinese news outlet mainly reporting the luxury shopping trend, Chinese big spenders opt for Japan over Korea to shop for expensive duty-free items largely due to the sharp fall in the Japanese currency value against the Chinese currency.

Over the past five years, the yen weakened about 40% against the yuan, but the Korean won fell about 15%, making the same luxury items sold in Japan cheaper and more attractive with Chinese money than those in Korea.

BANG FOR THE BUCK

Chinese tourists’ shopping trends in Korea have also changed.

Before the COVID-19 pandemic, Chinese travelers spent heavily on high-end Korean cosmetics products from the country’s household names such as LG H&H Co. and Amorepacific Corp.

Now many Chinese tourists chase after bang for the buck offered by smaller Korean cosmetics brands such as Mediheal, Clio Cosmetics, Dr.G and Rejuran.  

The outlook for the Korean duty-free shopping industry looks grim as Beijing has vowed massive state support to nurture the country’s travel retail industry.

The Chinese government announced late last month that it would add city duty-free shops in other parts of the country such as Guangzhou, Chengdu and Shenzhen.

It has so far licensed city travel retail shops in six cities including Beijing and Shanghai.

During the travel retail boom before the pandemic, the Korean government also issued many duty-free shop licenses to add more players to the market.

Korea’s major travel retailers include Shinsegae Duty Free, Hyundai Department Store Duty Free and Hanwha Galleria Time World Duty Free.

The country also has many city and on-arrival duty-free shops operated by smaller players such as Dongwha Duty Free, City Plus Korea, Doota Duty Free and more.

However, some Korean travel retailers have closed their city outlets to offset mounting losses. 

Write to Jae-Kwang Ahn at ahnjk@hankyung.com

Sookyung Seo edited this article.