Korea’s duty-free sector faces pressure as sales decline

(Han Joo-hyung)

South Korea’s duty-free industry, which is already struggling with operating losses, faces increasing financial strain as temporary license fee reduction measures expire and Incheon Airport’s rental fees climb. Leading duty-free operators including Shinsegae, Shilla, Hyundai, and Lotte are now pushing for lower fees and cost-cutting measures in response to the challenges.

According to the Ministry of Economy and Finance and industry sources on Tuesday, the government will not extend the 50 percent reduction in bonded warehouse license fees in 2024, which is a relief measure that supported duty-free businesses from 2020 to 2023 to ease the economic impact of the Covid-19 pandemic.

Businesses are expected to pay the full 2024 fees by March 2025. According to Korean customs law, a percentage of duty-free revenue is designated as license fees, with rates ranging from 0.1 to 1 percent depending on sales.

A ministry official said that with Covid-19 declared an endemic, the fee reductions are no longer deemed necessary. An industry insider estimated that the waived license fees had saved duty-free operators between 14 billion and 40 billion won ($28.4 million) annually, and some in the industry are warning of further losses with the restoration of full fees, especially if the fees remain based on gross sales rather than profits. “The current fee structure could lead to widespread closures if it isn’t revised to consider operating profits,” the insider said.

Another challenge lies in the shifting rental policy at Incheon Airport, a major revenue hub for the duty-free sector, and the airport has adopted a “per passenger” rental system rather than fixed rates since 2022. Under this new system, rental fees are calculated based on the number of travelers, meaning fees increase as airport traffic rises. Based on the pre-pandemic level of 35 million departing passengers in 2019, for example, the annual rental fees owed by duty-free shops could exceed 800 billion won, with Shinsegae and Shilla facing 400 billion won each and Hyundai Department Store around 39 billion won.

With outbound travelers now at nearly 90 percent of pre-pandemic levels, these rental fees are expected to impose even heavier financial burdens on the sector. The recent completion of Incheon Airport’s recent expansion in July 2024 has also seen duty-free operators transitioning from temporary to permanent stores, which are now subject to this traffic-based rental system.

But despite rising airport traffic, duty-free revenue remains depressed largely due to reduced spending by Chinese travelers - a key customer segment- amid China’s economic downturn and a drop in purchases by Chinese daigou shoppers. Another industry insider said, “Per-customer spending has declined sharply since the pandemic, and while airport traffic is up, profits are down.”

As a result, duty-free operators posted heavy losses for the third quarter of 2024 and have implemented emergency cost-cutting measures, including workforce adjustments.