Duty-free operators in South Korea are reducing their organizations and store sizes as sales struggle to rebound in the face of falling numbers of tourist shoppers from China. 

The once highly lucrative industry had been heavily dependent on group tourists from China, who swept Korean cosmetics and other products off store shelves. 

However, these groups sharply fell off earlier this year when Beijing imposed an unofficial travel ban on Korea following Korea‘s decision to install an American anti-missile system here. The so-called THAAD crisis, named for the anti-missile Terminal High Altitude Area Defense system, is now entering its sixth month. 

“Overall in August, our sales have fallen about 14 percent compared to last year. When looking just at sales from Chinese shoppers, the drop is 28 percent,” said an official with Lotte Duty Free, the largest duty-free operator. Lotte, as well as Hotel Shilla and Shinsegae, saw losses in the second quarter directly following China’s travel ban.

The crisis is hitting small and medium-sized operators such as SM and newly licensed operators such as Doosan and Hanwha particularly hard. Over the last two years, the Korean government had issued new duty-free licenses through highly competitive tenders, raising the number of duty-free stores in Seoul alone to 13.

But without enough time to establish themselves among tourists, these smaller and newer duty-free shops are finding it difficult to stay afloat in the unexpected THAAD crisis.

Doosan’s Doota Duty Free Store and SM Duty Free have reduced the size of their stores as well as their operating hours. Hanwha and SM have reduced the number of employees dedicated to its duty-free operations.
“The closure of our outlet in Jeju means that we only have one duty-free store, in Seoul,” said an official with Hanwha. 

“We reduced the size of the team to reflect the reduced workload.” 

Hanwha Galleria had decided in July to return its license to operate a duty-free store in Jeju International Airport, which was valid until 2019. Although Hanwha initially announced that it would be closing its Jeju branch at the end of August, the company decided to extend its operations until the end of the year because the airport could not find a replacement operator.

Airports have also been hit hard by falling sales at duty-free outlets. High profits from downtown stores had been used by operators in the past to make up for the heavy rent costs at airports. 

Last year, top two companies Lotte Duty Free and Shilla Duty Free had paid out 451.8 billion won ($402.5 million) and 264.8 billion won respectively for rented space at Incheon International Airport.

With sluggish sales in downtown stores, companies are now hesitant to make high offers on rents at airports. Incheon, the largest gateway into Korea, felt this change head-on earlier this year when it had to slash its rent prices by 30 percent to find an operator for its fashion and accessories sector in its upcoming second terminal.

By Won Ho-jung (hjwon@heraldcorp.com)