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(News Focus) Retailers jockeying for lucrative duty-free rights

2015/06/01 09:00

By Lee Minji

SEOUL, June 1 (Yonhap) -- Major South Korean retailers are locked in fierce competition to win licenses to operate two new duty-free shops in Seoul, which market watchers say could become the goose that lays the golden egg amid anemic consumer spending.

Currently, four companies run seven duty-free stores in Seoul, whose main customers are foreign tourists, especially from China. Foreigners' spending at duty-free shops has been a rare bright spot in the country's retail sector struggling with slackening sales amid a weak economy.

Data by the Seoul city government shows an estimated 11.48 million foreign tourists visited the South Korean capital last year with Chinese accounting for nearly 36 percent of the total.

Seven retailers are expected to throw their hat in the ring for the two licenses, with duty-free giants aiming to further cement their footing and other would-be operators seeking to find a new cash cow to make up for slumping revenue.

The Korea Customs Service is scheduled to finish accepting bids for the two licenses to operate downtown duty-free stores later Monday, the first of its kind open to large corporations in 15 years. The customs office is slated to announce the two winners next month after assessing the applicants on a 1,000-point scale.

According to the customs office, 550 points will be allotted to a bidder's management ability, such as logistics and financial capacity. The remaining 450 points will focus on qualities such as the envisioned store's contribution to the tourism sector, its social impact and the capacity to support small and medium enterprises (SMEs).

This file photo taken on April 30, 2015 shows tourists visiting an unspecified duty-free store in downtown Seoul. (Yonhap) This file photo taken on April 30, 2015 shows tourists visiting an unspecified duty-free store in downtown Seoul. (Yonhap)

As part of efforts to win the coveted licenses that could give the winners an upper hand in the country's 8.3 trillion won (US$7.5 billion) and still-growing market, the prospective bidders are scrambling to rack up points by tying up with SMEs or targeting tourist hotspots in the capital, such as Dongdaemun and Namdaemun.

Leading the pack is market leader Lotte Duty Free, which already owns four duty-free shops in Seoul.

In a bid to get higher scores, the company announced a plan to partner with a smaller duty-free operator to launch an 11-story shopping venue in Dongdaemun. The area is a once-popular shopping spot that is now losing luster as tourists turn to hipper and newer shopping venues in Myeongdong in central Seoul and Gangnam, a posh district in the southern part of the capital.

"The envisioned duty-free town will likely reinvigorate the Dongdaemun area. We plan to promote the area to foreign tourists and hopefully this effect will spill over to local consumers as well," the company said in a press release.

Lotte Duty Free currently runs four duty-free venues in Seoul, including a branch in Myeongdong whose sales account for nearly half the overall revenue of the seven duty-free shops in the capital. But two of its operational rights are set to expire in December, which means the company could benefit from an additional license.

While Lotte is targeting points in the SME support and tourism industry contribution categories, Hotel Shilla's Shilla Duty Free is scaling up its size. The affiliate of South Korea's top conglomerate Samsung Group recently unveiled plans to develop what it calls the world's biggest downtown duty-free complex, joining forces with Hyundai Development Company, another conglomerate firm.

The envisioned "DF Land," will incorporate a hotel, concert hall and shopping center on a 65,000 square-meter venue in Yongsan, a railway hub nestled in between key tourist spots scattered north and south of the Han River, according to the two companies.

The No. 2 duty-free operator's retail expertise and "Authorized Economic Operator" status, certified by the World Customs Organization, is another asset they are relying on.

This image provided by Hotel Shilla and Hyundai Development Company shows the site for their envisioned duty-free complex "DF Land" in Yongsan, Seoul. (Photo courtesy of Hotel Shilla, Hyundai Development Company) This image provided by Hotel Shilla and Hyundai Development Company shows the site for their envisioned duty-free complex "DF Land" in Yongsan, Seoul. (Photo courtesy of Hotel Shilla, Hyundai Development Company)

SK, the country's third-largest family-owned conglomerate, is also in the running. Group affiliate SK Networks is pushing to open a branch in Dongdaemun as its current license for a duty-free store in eastern Seoul is set to expire in November.

In addition, operators of department store chains are seeking to make a foray into the potentially lucrative duty-free market.

Shinsegae, which operates its namesake department stores as well as the country's biggest discount chain E-mart, is one of them. The group plans to renovate its symbolic building in Namdaemun, which was home to the country's first-ever department store, into a duty-free outlet.

"The area still has good potential as supply is lagging behind demand in areas near Myeongdong," said Shinsegae Chosun Hotel chief Seong Young-mok in an April 30 interview with Yonhap News Agency, stressing Namdaemun's proximity to the shopping site teeming with Chinese and Japanese tourists.

Others in the race for the duty-free licenses include Hanwha Group and Hyundai Department Store.

Hanwha has announced plans to use its landmark "63 Building," once the country's tallest structure, as a duty-free venue, while Hyundai Department Store has teamed up with travel agency Mode Tour to better cater to Chinese tourists.

Apparel maker E-Land, which is considered a relative underdog, is also gearing up by striking partnerships with Dufry, the world's biggest travel retailer, and Wanda Group, China's biggest tourism company.

The heated competition for the new duty-free shop licenses comes as retailers are frantically searching for new ways to pull the industry out of a sales slump.

Domestic demand recovery has underperformed expectations and consumers have been increasingly shifting to virtual shopping platforms, eschewing traditional channels like department stores.

Department stores and discount chains saw their annual sales growth crawl at the rate of 2-3 percent, while duty-free operators have been thriving on deep-pocketed shoppers from China, whose number is on the rise.

Their combined sales are estimated to have grown at an annual average rate of 15 percent over the past five years, with growth accelerating to 22 percent in 2014.

Some market watchers, however, stress that retailers should be more prudent about their push for the duty-free business, questioning the sustainability of the current pace of the sector's blistering growth.

"Securing profitability is likely to become more difficult going forward as competition is heating up amid an increase in market participants," Dongbu Securities analyst Lee Hoon-ho said.