Duty-free operators enjoyed a healthy third quarter this year despite falling sales from heavy-spending Chinese shoppers, but industry sources say uncertainty still looms over the once highly lucrative sector.
On Wednesday, HDC Shilla announced its operating profit reached nearly 2.42 billion won ($2.18 million) in the third quarter this year, continuing three consecutive quarters in the black. A day earlier, Lotte Duty Free released third-quarter earnings with operating profit of 27.6 billion won. Both companies had seen near-zero profits or losses in the second quarter at the height of tensions between Korea and China.
Hotel Shilla saw 23.5 billion won in operating profits, while Shinsegae DF also entered the black with 970 million won in operating profits.
Since last year, Seoul and Beijing had been at odds over Korea‘s decision to install the US Terminal High Altitude Area Defense system here, with China taking various boycott measures against South Korean firms. Tension has been easing since Chinese President Xi Jinping’s successful elevation of position and new leadership team last month. Seoul and Beijing held high-level talks and released a joint statement on Oct. 30 indicating normalization of relations, followed by South Korean President Moon Jae-in and President Xi’s bilateral talks Saturday reiterating shared efforts to resolve disputes. The development consequently has been raising hopes for business recovery among the industries dependent on Chinese consumers, namely the duty-free operators and cosmetics, among others.
But despite healthy earnings, the duty-free operators were quick to say that third-quarter profits did not necessarily indicate the industry was moving back in the direction of its lucrative past.
“The high earnings came mostly from high-spending shoppers,” said an official with Lotte Duty Free, denying speculations that profits were rising thanks to returning Chinese tourists. An official with Shinsegae DF also credited the profits to the opening of Cartier and Louis Vuitton stores rather than rising numbers of Chinese shoppers.
Industry insiders say that even if tourists do return in droves, the effects on sales would probably not appear until next summer. The Chinese government had placed virtual bans on group tours to Korea since the THAAD controversy.
In addition to questions about when groups of Chinese tourists will return to Korea, the industry is awaiting decisions about new outlets as well. Lotte Duty Free and Shilla Duty Free are waiting for the Korea Customs Service to award a license to operate the duty-free outlet at Jeju International Airport. Hanwha Galleria returned the license it had held for the Jeju branch after seeing sales fall at the height of the THAAD crisis.
Lotte’s duty-free store at Coex in southern Seoul is also up for a new tender, with the operator to be decided by the end of the year.
Shinsegae DF and Hyundai Department Store, which were awarded new duty-free licenses for downtown stores in southern Seoul last year, are “carefully watching” the situation to determine when to open their new stores. During the THAAD crisis, both companies had received permission to push back their opening dates beyond the customary one-year deadline.
Meanwhile, Lotte Duty Free has been locking horns with Incheon Airport over rental fees at its passenger terminal. Despite repeated requests to lower the rent, the duty-free company has been unable to find a compromise. Earlier this month, Lotte reported Incheon Airport to the Fair Trade Commission, claiming the contract between the airport corporation and duty-free operators was unfairly skewed.
“We are continuing negotiations, but if talks fall through we are considering pulling out of the airport,” said an official with Lotte Duty Free.
By Won Ho-jung (firstname.lastname@example.org