[At a Crossroads for Duty-Free] Chinese Raid... Incheon Airport Bid, Second Turning Point

CDFG's Participation in Chinese Bidding Assumed
Likely to Drive Up Bid Prices
Concerns Over Profitability Decline Even if Project Rights Secured
Domestic Companies Inevitably Impacted if Entry Materializes

Incheon International Airport Terminal 1 duty-free area is bustling with travelers preparing to depart. Photo by Jinhyung Kang aymsdream@

As the participation of China Duty Free Group (CDFG), the world's largest duty-free operator, in the bidding for Incheon Airport duty-free shops becomes more likely, domestic duty-free companies are growing increasingly concerned. If the financially strong CDFG enters the bidding, a rise in bid prices is inevitable, and if the bid prices become excessively high, even if they secure the business rights, there is a risk of falling into the so-called 'winner's curse' in the future.

According to the duty-free industry on the 23rd, Incheon International Airport Corporation will close applications for bidding on duty-free business rights at Incheon Airport Terminal 1 (T1) and Terminal 2 (T2) on the 27th. The submission of business proposals is due by the 28th.

This bidding includes a total of seven business rights: five general business rights (63 stores, 20,842㎡) and two small and medium-sized business rights (14 stores in total, 3,280㎡). The previous 15 business rights, which were divided by terminal, have been integrated and adjusted to ensure stable operation of business rights even if airlines are reassigned between terminals following mergers of domestic airlines. The general business rights are divided into two for perfumes & cosmetics and liquor & tobacco (DF1 and DF2), two for fashion, accessories, and boutiques (DF3 and DF4), and one boutique (DF5).

In this bidding, the perfume & cosmetics category and the liquor & tobacco category have been combined. Although perfume & cosmetics account for the highest sales proportion, they have weaker price competitiveness, while liquor has recently enjoyed high popularity and profitability. Combining these categories is intended to allow mutual compensation, making this sector expected to be the most competitive. Some predict that the fashion, accessories, and boutique sectors will become more preferred as their sales proportions have steadily increased since COVID-19, and their area has also expanded.

The rent calculation method has also changed. The method has shifted from the 'fixed minimum guarantee (fixed rent)' system maintained since the opening of Incheon Airport to a 'rent per passenger' system. Rent is calculated by multiplying the number of airport passengers by the unit price per passenger proposed by the business operator. Additionally, the contract period has been set to a basic 10 years, significantly enhancing operational stability compared to the previous 'basic 5 years + option 5 years' system.

The tension in this bidding competition is higher than initially expected due to the increased possibility of CDFG's participation. CDFG is a Chinese state-owned duty-free company and the largest operator of the Hainan duty-free zone, a special duty-free area in China. It has rapidly grown based on active support from the Chinese government, such as raising the domestic duty-free purchase limit during the COVID-19 period. According to the global duty-free industry report Moody Report, CDFG's sales in 2021 were 9.369 billion euros (approximately 12.9967 trillion KRW), ranking first in the world. Lotte Duty Free (4.046 billion euros), Shilla Duty Free (3.966 billion euros), and Dufry (3.776 billion euros) follow.

If CDFG participates in the bidding leveraging its financial strength, competition will intensify, likely driving up bid prices, which could impose a significant burden on domestic companies already struggling with rent pressure due to deteriorated business conditions during the pandemic. In fact, despite the transition to endemic last year, domestic duty-free shops have seen slow recovery in passenger demand, with Shilla Duty Free turning to a loss in Q4 last year and Lotte Duty Free continuing to post losses. Shinsegae Duty Free and Hyundai Department Store Duty Free, which have contracts until August and August 2025 respectively, are also facing increased fixed rent burdens as rent reduction measures are lifted this month, making aggressive bidding difficult. Furthermore, if bidding competition intensifies, even if they win the business rights, the increased rent burden could lead to profitability deterioration over the next 10 years.

If CDFG's entry into the domestic duty-free market becomes a reality, it could absorb the demand from its core customer base, Chinese tourists, leading to weakened competitiveness and performance of domestic duty-free companies. If CDFG, with its financial strength, succeeds in expanding its territory into the domestic market, it can improve its weak brand portfolio and enhance price competitiveness based on increased sales. Given the nature of the duty-free industry, which involves many direct purchase products, increased purchasing power also strengthens price negotiation power with luxury brands. A representative from Duty Free Shop A said, "Since economies of scale apply to the duty-free industry, the pie must be expanded to increase brand negotiation power, but if CDFG enters the market, domestic companies' shares will shrink by that amount."

Some also suggest that entering Incheon Airport could serve as a stepping stone for CDFG's future entry into domestic downtown duty-free shops. A representative from Duty Free Shop B said, "Based on experience operating Incheon Airport, they can accumulate qualitative evaluation competitiveness, such as social contribution scores, which are still insufficient, making future entry into downtown duty-free shops possible. If this happens, they could direct all group tourists to their own duty-free shops," they predicted.

However, despite rapid growth centered on the domestic market during the pandemic, lack of overseas airport operation experience is considered a weakness. Domestic companies have infrastructure such as logistics and online services, but as a new player, CDFG must build related infrastructure from scratch, which could be a financial burden. Also, although it is the largest in scale externally, it lacks experience in attracting major luxury brands such as 'Erusha' (Herm?s, Louis Vuitton, Chanel), which may put it at a disadvantage in brand competitiveness and customer service.

Meanwhile, the evaluation for this duty-free business rights bidding will select companies scoring over 600 points out of 1,000 points, with Incheon Airport Corporation scoring 500 points (60% business plan score + 40% price proposal score) and the Korea Customs Service License Review Committee scoring 500 points.