Duty-free woes weigh down department store, hotel businesses

The flagship store of Shilla Duty Free’s beauty brand at Incheon International Airport, which opened earlier this month. [Courtesy of Shilla Duty Free]

South Korea’s duty-free industry is facing difficulties finding a path forward even after the COVID-19 pandemic, as increasing costs for airport leases, marketing, and wages weigh heavily on the sector. Despite a rise in the number of foreign visitors to Korea, their spending at duty-free stores has stagnated and is keeping sales largely flat. This has led to a sharp decline in operating profits for duty-free companies in the second quarter of 2024, which is also impacting the financial performance of their parent companies, including department stores and hotels.

An analysis by Maeil Business Newspaper on Sunday showed that the combined operating loss of the four major domestic duty-free companies - Lotte, Shilla, Shinsegae, and Hyundai - amounted to 6.6 billion won ($4.92 million) in the second quarter of 2024. Both Shinsegae Duty Free and Shilla Duty Free saw their operating profits plummet by nearly 80 percent, while Lotte Duty Free and Hyundai Duty Free continued to report losses.

Shinsegae’s overall operating profit for the second quarter fell by 32.1 billion won compared to the same period in 2023, with 31.6 billion won of that decline coming from its duty-free division. Hotel Shilla also saw its operating profit shrink by 39.6 billion won year-over-year, largely due to a drop in profits from Shilla Duty Free.

The situation at Lotte Duty Free and Hyundai Duty Free is even more dire. Hotel Lotte recorded an operating loss of 25.3 billion won in the second quarter of 2024, of which over 70 percent, or 18.3 billion won, was from Lotte Duty Free. Hyundai Duty Free reported a loss of 3.9 billion won in the same period, logging eight consecutive years of losses since it entered the duty-free business in 2017. An industry insider said most duty-free stores are dragging down the performance of their parent companies, including department stores and hotels.

The disappointing performance is attributed to the fact that while foreign tourist numbers have rebounded quickly post-pandemic, duty-free sales growth has not met expectations. According to the Korea Duty Free Association, 4.42 million foreign visitors visited Korean duty-free stores in the first half of 2024, a 96.4 percent increase compared to 2.25 million in the same period during the previous year. However, foreigner sales in duty-free shops only grew by 11 percent, from 5.27 trillion won in 2023 to 5.85 trillion won in the first half of 2024. Notably, foreigners account for about 80 percent of total duty-free sales in Korea.

The lack of significant growth in foreigner duty-free sales is attributed to a shift in tourist behavior. Group tours, which traditionally equaled higher spending, have decreased, while individual tourists have increased. These visitors are more likely to purchase mid-range cosmetics at stores such as Olive Young or Daiso instead of duty-free shops.