Incheon Airport Duty-Free Store Extension Decision Today... Fate of Lotte and Shilla

Mid-sized Company SM Duty Free, Extends Operation and Forfeits Rebid
Lotte Accepts Extension Operation, Contracts Signed Monthly
Shilla Requests Longer Extension Period and Lower Sales Commission Rates by Item

[Image source=Yonhap News]

[Asia Economy Reporter Lim Hye-seon] As the duty-free business rights at Incheon International Airport Terminal 1 approach expiration, the duty-free industry is engaged in final negotiations with Incheon International Airport Corporation over the possibility of extending operations. Amid this, the mid-sized company SM Duty Free has decided to forgo both the extension and re-bidding. The remaining duty-free shops have expressed willingness to extend operations, but negotiations over rent remain difficult, leading to ongoing stalemates with the airport corporation.

On the 7th, SM Duty Free officially announced its decision to abandon both the extension of operations and re-bidding within Incheon International Airport Terminal 1. Meanwhile, Lotte Duty Free has reportedly accepted the extension but proposed signing contracts on a monthly basis. Lotte Duty Free, considering the continuous rise in COVID-19 cases and the difficulty in recovering passenger demand within the year, requested monthly contracts to allow for termination of operations at any time. Since Lotte Duty Free operates only one zone, its rent burden is relatively low.

Shilla Duty Free, which operates three zones, requested the airport corporation to extend the operating period and reduce the sales commission rates by product category. With daily passenger numbers at Incheon Airport dropping from 200,000 to about 1,000, sales have decreased by 95% compared to the previous year, resulting in losses from labor costs alone even with reduced rent. The sales commission rates by product category are as follows: liquor (whiskey and brandy) and imported cigarettes at 35%, followed by perfume, cosmetics, and cigar cigarettes at 30%, domestic cigarettes, traditional liquor, stationery, and packaged foods at 25%, and wine, fashion accessories, and clothing at 20%. Shilla Duty Free is scheduled to discuss this again with the corporation on the 7th.

The lukewarm attitude of duty-free shops, which had fiercely competed for the Incheon Airport duty-free business rights, toward extending operations is due to the uncertainty over when the COVID-19 crisis will end. Duty-free shops are struggling on the brink of collapse due to a sharp decline in travelers after COVID-19. Currently, the average monthly sales at Lotte, Shilla, and Shinsegae Duty Free at Incheon Airport have fallen by 90% from the previous year (200 billion to 260 billion KRW compared to 2 trillion to 2.6 trillion KRW). The combined monthly rent for the three companies is about 84 billion KRW. A duty-free industry insider explained, "Before rent reductions, the three companies were incurring losses exceeding 100 billion KRW per month. After applying a 50% rent reduction, losses have decreased to 50 to 60 billion KRW." He added, "If operations are extended, switching to a sales commission system will reduce the scale of losses, but the three companies still have to endure losses exceeding 10 billion KRW monthly."

Worldwide, daily COVID-19 cases are breaking records. Over the past six months, 10 million people have been confirmed infected, and with recovery delayed in major regions such as the Americas, Southeast Asia, and Europe, Incheon Airport has raised its emergency operation level to Stage 1. This includes partial closure of airport facilities, making normal sales generation difficult.

Meanwhile, Kim Tae-hoon, CEO of SM Duty Free, issued a statement on the 6th saying, "While we are striving to survive amid the delayed recovery from COVID-19, rent remains a difficult issue for a company focused on operations at Incheon Airport." He added, "Although mid-sized companies were excluded from initial government rent support but included in additional support in April and June, support was differentiated compared to small businesses under the same business rights. After reconsidering the extension of operations at Terminal 1 and the upcoming re-bidding amid worsening business conditions, we will withdraw from the Terminal 1 departure hall duty-free shop by August 31."