Incheon Airport Duty-Free Store Humiliation... Even Private Contracts 'Ignored'

No Change in Bidding Conditions Leads to Turning Away
Outpaced by Downtown and Internet Duty-Free Shops
Increasingly Lower Dependence on Airport Duty-Free Shops

[Image source=Yonhap News]

[Asia Economy Reporter Lim Hye-seon] The duty-free shop business rights at Terminal 1 of Incheon International Airport have failed to attract bidders for the third consecutive time. Although the airport corporation proposed a private contract, the bidding conditions remained unchanged, causing duty-free operators to avoid participation.

Duty-Free Industry Also Avoids Private Contracts

According to the duty-free industry on the 25th, no companies responded to the 'Inquiry on Intent to Perform Duty-Free Business Rights at Incheon International Airport Terminal 1' sent by the airport corporation to domestic duty-free operators in mid-last month.

The corporation requested companies interested in performing the business through a private contract to reply by the 30th of this month. However, the duty-free industry stated, "No company will enter a private contract that is obviously disadvantageous under the same conditions as the third bidding." The third contract conditions included lowering the minimum guaranteed payment to 30%, the same as the previous bid, and allowing payment of only operating fees without a minimum guarantee until passenger demand recovers to 60% of the same period last year.

The Incheon Airport duty-free shops have become a 'gye-reuk' (chicken ribs) for the duty-free industry. In the first bidding in February, Shilla Duty Free and Lotte Duty Free won but abandoned their priority negotiation rights, causing the deal to collapse. The second bidding failed due to insufficient bidders, and the third bidding lowered the threshold by easing conditions, but all four major conglomerates abstained, leaving the business without an owner. Consequently, instead of conducting a fourth bidding, the corporation pursued a private contract, but even this has been ignored by duty-free operators.

The duty-free industry has firmly stated that unless the corporation offers groundbreaking contract terms amid signs of a third major wave of the novel coronavirus (COVID-19), the airport duty-free business is impossible. A duty-free operator explained, "Airport duty-free shops have been running at a loss every year due to high rent, which was compensated by downtown duty-free sales. Incheon Airport duty-free shops have symbolic significance as a stepping stone for overseas expansion, leading to fierce competition for entry. However, after the COVID-19 crisis, operators are focusing on strengthening their fundamentals and are reconsidering the airport business entirely."

Lower Dependence on Airports

There is also analysis that dependence on airport duty-free shops has decreased compared to before due to changes in consumer environments. The sales proportion of duty-free operators at Incheon Airport continues to decline as domestic customers increasingly use online duty-free shops. Last year, the sales proportions were approximately 50% for downtown duty-free shops, 30% for internet duty-free shops, and 20% for airport duty-free shops. Lotte Duty Free's online sales proportion increased from 8% in 2013 to 34% last year.

Given this situation, the airport corporation has set a policy to include overseas duty-free operators as candidates for private contracts. However, with the prolonged COVID-19 pandemic causing global duty-free operators to struggle, few are expected to actively engage in the Incheon Airport duty-free business, which requires fixed rent payments. Among them, the Chinese state-owned company China Duty Free Group (CDFG) is likely to be a strong candidate.

CDFG, which operates the largest downtown duty-free shop in Hainan Province, is rapidly growing in the global duty-free market with strong government support. A duty-free operator stated, "Almost no companies are expected to participate in the private contract. Incheon Airport is the only place in the world that demands fixed rent. It would be appropriate for the corporation to revise the rent structure to a percentage of sales, as overseas airports do, and reannounce the bid."