Foreign tourists at a duty-free shop in Seoul (Image : Yonhap)
SEOUL, March 17 (Korea Bizwire) – Another duty-free market upheaval looms as South Korea is toying with the idea of easing the licensing system to attract more foreign travelers, drawing a strong backlash from five companies given the right to open new shops.
Less than a year after giving out three more duty-free licenses and changing two operators in Seoul, the government is seeking ways to ease regulations to grant more in a move widely seen as an attempt to salvage long-established players subject to closure in the coming months.
In May, the Korea Customs Service gave new licenses to HDC Shilla Duty Free, Hanwha Galleria and SM Duty Free to open outlets in Seoul to lure the growing number of foreign travelers.
Six months later, Lotte Duty Free and SK Networks lost out in their bids to renew their operating rights in Seoul to Doosan and Shinsegae, respectively.
As a result, shops in Lotte World Tower and Sheraton Grande Walkerhill face closure in June and May, respectively, while new operators have partially opened shops without luxury brands.’
A labor union member of Lotte Duty Free stages a protest in front of a public hearing held on March 16, 2016, to discuss ways to ease regulations on a duty-free licensing system. (Image : Yonhap)
It is the first time that an existing duty-free operator has lost a license under a 2013 law that requires renewal through open competition every five years, which was designed to ease monopolies in the market controlled by a handful of players.
Although the competition is over, controversies still remain over the current licensing system.
Industry leader Lotte’s losing bid to Doosan, a heavy engineering conglomerate with no experience in the duty-free business, sparked questions over the evaluation criteria and feasibility of long-term investment.
Market watchers say the current system raises uncertainties in the industry, calling for a revision to allow a longer period of review and automatic renewal for existing operators.
“Unexpected factors have risen in the duty-free industry as the government stepped in to decide on the licensing system. The current regulation should be revised to reduce market uncertainties,” Ahn Seung-ho, a tourism professor at Soongsil University, said in a public hearing on Wednesday, which was attended by industry and customs officials.
“The new operators are having a hard time in negotiating with luxury brands because it seems unclear if they can maintain their businesses five years from now.”
Two industry leaders — Lotte Duty Free, operated by retail giant Lotte Group, and Hotel Shilla, a hotel unit under top conglomerate Samsung Group — accounted for 80 percent of the 9.2 trillion won (US$7.81 billion) duty-free market in South Korea as of 2015, the world’s largest.
While revising the law requires parliamentary approval, discussions to issue new licenses have picked up pace in recent months as Lotte, the world’s third-largest operator, has waged aggressive campaigns to keep its store at Lotte World Tower. Once the construction of the 123-story skyscraper is completed later this year, it will be the nation’s tallest building.
In response to growing pressure, the government has held a series of public hearings to mull ways to lower entry hurdles. The finance ministry will announce new measures to improve the duty-free market later this month.
Choi No-seok, the president of the Korea Tourism Association, stressed the customs policy should focus on ways to best serve inbound travelers, who account for about 80 percent of sales at duty-free shops.
“It doesn’t make sense that Lotte World Tower has to close down its duty-free store, which has been successfully drawing travelers with a wide range of shopping and entertainment options. The decision (to deprive Lotte of a duty-free license) was not in consideration of the convenience of foreign travelers,” Choi said. “The government needs to ease regulations for duty-free businesses to boost the tourism industry in the face of tougher competition with other nations.”
Choi Nak-kyun, a researcher at the Korea Institute for International Economic Policy, took it a step further, demanding retroactive application of the law to allow existing operators to maintain their stores and raise the license fee from 0.05 percent of sales to 1 percent.
“Considering the rising number of foreign travelers and sales growth, the government should consider issuing additional licenses,” Choi said.
Combined duty-free sales rose 15 percent on average from 2011 to 2014 thanks to the sharp rise in inbound travelers, but they slowed last year in the wake of the Middle East Respiratory Syndrome (MERS) outbreak, according to the customs office.
Any move to extend the number of licenses, however, is bad news for retailers that won recent bids.
New operators have been struggling to host luxury brands that express concern over a supply glut in the capital city, left with no other options but to open shops mostly with cosmetics and middle-range brands.
“We opened a duty-free shop in Seoul in late February, but business is weak. The business environment is very tough as high-end brands have stopped negotiations with us since last month, saying the Korean duty-free market is already saturated,” said Kwon Hee-seok, CEO of SM Duty Free, a unit under No. 1 tour agency Hana Tour.
“We need staff from the shops that lost their licenses in the recent bid. But if the government gives out additional licenses, we cannot proceed with the employment plan.”
Some criticized the government’s flip-flop for confusing market order.
“Our business just started after receiving the license, but the government is already floating the idea of giving out duty-free licenses to companies that lost bids,” said Sung Young-mok, the head of Shinsegae Duty Free. “It takes time for new businesses to lift off. Discussions to improve the system can start later this year after evaluating business conditions.”
It remains unclear whether the government will give licenses back to Lotte and SK or increase the number of licenses up for grabs through another competition. One thing for sure, market watchers say, is that Lotte would become the biggest beneficiary as it is set to list Hotel Lotte on the Seoul bourse.
Getting a license for Lotte World Tower, which logged 500 billion won in sales, or 12.5 percent of duty-free revenue, last year, would boost the hotel unit’s market value.
“If the government pushes to issue more licenses, Hotel Lotte’s initial public offering will draw more demand from investors as the duty-free business is its key source of income,” said Nam Ok-jin, an analyst at Samsung Securities.
(Yonhap)
