Incheon Airport Duty-Free Battle Predicted to be a Hit... Complicated Calculations Due to COVID-19

New Coronavirus Halves Downtown Duty-Free Sales
'Winner's Curse' Concerns... Find the Right Price
Lotte, Shilla, Shinsegae Big 3 Joined by Hyundai Department Store
"Up to 5+5 Years Operation Rights, Great Merit"

[Asia Economy Reporter Cha Min-young] The new coronavirus (Wuhan pneumonia) issue is expected to be a major variable in the bidding competition for the Incheon International Airport duty-free shops, which was initially forecasted to be a blockbuster. This is because downtown duty-free shop sales, which account for more than 80% of duty-free sales, have plummeted since the beginning of the year, and if excessive bid amounts are paid, the aftereffects such as the 'winner's curse' could be significant. However, from a long-term perspective, there is also an expectation that the duty-free industry will find it hard to miss the opportunity to maintain the duty-free business operation rights for up to 10 years.

According to Incheon Airport Corporation and the duty-free industry on the 11th, the registration for bidding participation in the duty-free business area at Incheon International Airport Terminal 1 (T1) is approaching on the 26th, and the final strategic moves of the duty-free industry are intense. Following Lotte, Shilla, and Shinsegae Duty Free, Hyundai Department Store Duty Free is also considering participating in the bidding, but the emergence of the new coronavirus variable is causing difficulties in calculating the bid amount. A representative from a major domestic conglomerate duty-free shop explained, "Airport duty-free shops have a stronger symbolic meaning than profitability, so the bid price is calculated in connection with downtown duty-free shop sales, but since downtown duty-free sales have plummeted since the beginning of the year due to the new coronavirus, internal discussions are urgently underway on how far to bet."

Downtown duty-free shop sales account for about 86% of total duty-free sales. They more than offset the poor performance of airport duty-free shops. However, downtown duty-free shop sales in January and February are estimated to have decreased by nearly 50% compared to the previous year. Some duty-free shops visited by confirmed patients even took closure measures. Shilla Duty Free's Seoul and Jeju branches are estimated to have suffered losses of about 8 to 10 billion KRW and 3 to 5 billion KRW per day, respectively. Lotte Duty Free Myeongdong Main Store also closed temporarily. Lotte Duty Free Myeongdong Main Store is the largest single duty-free shop in Korea and suffered losses of about 20 to 30 billion KRW in a single day. The average daily cosmetics sales of a major downtown duty-free shop in February also decreased by about 70% compared to the previous month.

Industry forecasts are divided. A representative from a major duty-free cosmetics department expressed positive expectations, saying, "We expect sales to recover to some extent due to daigou (Chinese personal shoppers) after mid-February." On the other hand, another duty-free shop representative said, "Due to the extended Chinese Lunar New Year holiday and government controls, it is difficult for daigou to move around. We need to observe the trend until the end of February."

Previously, a bidding competition with the highest bid was expected in this Incheon Airport duty-free business rights auction. This is because the presence of Hyundai Department Store Duty Free, which appeared as a latecomer, posed a threat to the existing big three: Lotte, Shilla, and Shinsegae Duty Free. Hyundai Department Store Duty Free currently holds two downtown duty-free shops, having opened a bonded sales store at the Trade Center branch and preparing to open another at the former Dongdaemun Doota Duty Free site. If it secures the Incheon Airport duty-free shop spot as well, it will stand shoulder to shoulder as the big four. In particular, the cosmetics and perfume sales area, which accounts for about two-thirds of airport duty-free sales, is also included in this bidding, making it an indispensable card for large duty-free shops like Shilla Duty Free.

Therefore, there is also speculation that a different scene from the past practice of submitting bids two to three times the minimum bid price (minimum acceptable amount) suggested by Incheon Airport Corporation may unfold. The minimum acceptable amount varies by the eight business areas. The highest-priced area is the large corporation cosmetics and perfume (DF2) zone, at 116.1 billion KRW. This is about 16 billion KRW higher than in 2015, when the third-phase business operator bidding took place. The corporation plans to evaluate large corporations with a 60% weighting on the business proposal and 40% on the bid price.

Some expect that, depending on the outcome of this auction, duty-free shops may make bold bets since they can hold the opportunity to operate Incheon Airport duty-free shops for up to 10 years. Incheon Airport plans to extend the business rights for an additional five years if the business evaluation requirements are met after five years of operation. A duty-free industry official said, "The Incheon Airport business site holds symbolic meaning in many ways despite the high commission fees. We need to carefully consider the opportunity factor of operating for up to 10 years and the costs involved."