[Exclusive] Lotte and Shilla Duty Free Finally Give Up Incheon Airport Duty-Free Business Rights

On the 12th, the shutter door of Lotte Duty Free Gimpo Airport branch was closed, while Shilla Duty Free was operating normally. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Lim Hye-seon] Lotte and Shilla Duty Free, the top two players in the domestic duty-free industry, have ultimately decided to forgo bidding for the 4th phase duty-free business rights at Incheon International Airport (Incheon Airport) Terminal 1. This decision comes amid the impact of the COVID-19 pandemic, which caused airport duty-free sales to plummet by up to 90%, making it difficult to bear the high rental fees.

According to the duty-free industry on the 8th, Lotte and Shilla Duty Free decided not to sign the standard lease contract related to duty-free shops with Incheon Airport. This is the first time a large corporation duty-free shop has given up operating a store due to rental fee issues after acquiring duty-free business rights. Hyundai Department Store Duty Free, which won the DF7 (Fashion & Others) business rights, signed the lease contract. The winning bid rental fee (minimum guaranteed amount) for the DF7 area is 40.6 billion KRW.

Previously, on the 8th of last month, Lotte Duty Free was selected as the preferred negotiator for the DF4 (Liquor & Tobacco) rights, and Shilla Duty Free for the DF3 (Liquor & Tobacco) rights. The minimum guaranteed amounts were 69.7 billion KRW and 63.8 billion KRW, respectively.

The reason Lotte and Shilla Duty Free gave up the business rights despite the 10-year lease period is due to the increased burden of rental fees. Duty-free shops are expecting their first-half performance this year to hit an all-time low, making it difficult to meet the rental fee increase standards proposed by Incheon Airport.

The payment method for the first-year rental fee of Incheon Airport duty-free business rights is fixed at the winning bid amount. However, from the second year of operation, the payment is adjusted by applying 50% of the previous year's passenger growth rate to the first-year minimum guaranteed amount. The annual adjustment limit for the minimum guaranteed amount is within 9%.

If the number of passengers at Incheon Airport next year returns to the 2019 level (71.77 million), the year-on-year growth rate will increase. This is because the number of passengers is expected to hit a record low until the first half of this year. Last month, Incheon Airport had 609,489 passengers (337,001 arrivals, 272,488 departures). This is a decrease of 89.3% compared to the same period last year, which had 5,882,519 passengers (3,043,199 arrivals, 2,839,320 departures). Since the beginning of this month, the daily average number of passengers at Incheon Airport has been around 6,869. On the 6th, the number of passengers was only about 4,500. Due to this, the industry expects the rental fee increase rate for 2022 to rise to the maximum limit of 9%.

A duty-free industry official explained, "Since the number of airport passengers is at rock bottom this year, if it returns to normal levels next year, the minimum guaranteed amount for the year after next will increase significantly." Accordingly, companies have requested Incheon Airport to "flexibly adjust rental fees when unexpected situations like the COVID-19 pandemic cause a decrease in passenger numbers." However, Incheon Airport has maintained the position of "complying as stipulated in the bidding announcement."

As a result, Incheon Airport will reselect operators for DF3 and DF4, following DF2 (Perfume & Cosmetics) and DF6 (Fashion & Others).