[Asia Economy Reporter Hwang Yoon-joo] Lotte Duty Free and Shilla Duty Free have given up their duty-free business rights at Incheon International Airport Terminal 1 due to the impact of the novel coronavirus (COVID-19). This decision was made because it was deemed difficult to bear the high rent amid a 90% drop in airport duty-free sales. This is the first time that a major corporation duty-free shop has abandoned store operations due to rent issues after acquiring duty-free business rights.
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.
Hyundai Department Store Duty Free, which acquired the DF7 (Fashion & Others) business rights, signed the lease contract. The winning bid rent (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) business rights, and Shilla Duty Free for the DF3 (Liquor & Tobacco) business 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 lease period being 10 years is due to the increased burden of rent. Duty-free shops are expecting their performance in the first half of this year to hit an all-time low, making it difficult to meet the rent increase standards proposed by Incheon Airport.
The payment method for the first-year rent of Incheon Airport duty-free business rights is fixed at the bid amount. However, from the second year of operation, the payment is adjusted by 50% of the previous year's passenger fluctuation rate added to the first-year minimum guaranteed amount. The annual adjustment limit for the minimum guaranteed amount is within 9%.
If the number of passengers using 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, the number of passengers at Incheon Airport was 609,489 (arrival 337,001, departure 272,488). This is a decrease of 89.3% compared to the same period last year, which had 5,882,519 passengers (arrival 3,043,199, departure 2,839,320). 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 rent 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 requested Incheon Airport to "flexibly adjust the rent if the number of passengers decreases due to unexpected situations like the COVID-19 crisis." However, Incheon Airport maintained its position, stating, "We will comply as specified in the bidding announcement."
As a result, Incheon Airport will reselect operators for DF3 and DF4, following DF2 (Perfume & Cosmetics) and DF6 (Fashion & Others).
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