Incheon Airport Duty-Free Store Bidding: 5 Korean and Chinese Companies Enter... Competition Intensifies

Submission of Duty-Free Application Forms by Lotte, Shilla, Shinsegae, and Hyundai Department Store for General Business Licenses DF1~5
Chinese CDFG Participates in DF1~4... Competition Intensifies

On the 22nd, when the number of daily passengers at Incheon Airport exceeded 120,000 for the first time since the COVID-19 pandemic, the duty-free area of Terminal 1 at Incheon Airport was crowded with travelers.
Yeongjongdo - Photo by Kang Jinhyung aymsdream@

The world's largest duty-free operator, the Chinese state-owned China National Duty Free Group (CDFG), has officially confirmed its participation in the bidding for duty-free shops at Incheon International Airport. Four major domestic duty-free operators?Lotte, Shilla, Shinsegae, and Hyundai Department Store Duty-Free?also submitted their bids, marking the start of intense competition for entry into Incheon Airport's duty-free market.

According to the duty-free industry on the 27th, along with the four domestic duty-free operators, China’s CDFG submitted bid applications for the duty-free business rights at Incheon Airport’s Terminal 1 (T1) and Terminal 2 (T2). The four domestic companies applied for all five general business rights, which include perfumes & cosmetics and liquor & tobacco (DF1 & DF2), fashion, accessories & boutiques (DF3 & DF4), and boutiques (DF5). CDFG reportedly submitted applications for DF1 through DF4, excluding DF5. These five companies are expected to complete the submission of their business proposals by the deadline on the 28th, officially entering the competitive phase.

Initially, it was anticipated that CDFG would strategically bid for the boutique category, which has relatively lower competition, aiming primarily to establish a foothold in the domestic market. However, CDFG has shown active interest even in the highly competitive zones, including DF1 and DF2. Prior to this bidding, CDFG reportedly recruited personnel from the Korea Customs Service and Incheon International Airport Corporation to prepare for the bid. The evaluation of duty-free business rights will be conducted in two stages: in the first stage, Incheon Airport Corporation will select multiple companies based on 60% business plan scores and 40% price proposal scores (rental fees). In the second stage, 50% of the Korea Customs Service’s license evaluation score will be added. The first-stage winners are expected to be announced as early as next month, with the final results declared after the Korea Customs Service’s review in April. The new operators are scheduled to begin operations around July.

With CDFG officially entering the bidding to become the 10-year duty-free operator at Incheon Airport, domestic duty-free operators are growing increasingly anxious. The foremost concern is price competition. As the largest operator of the Hainan duty-free zone in China, CDFG rapidly expanded during the COVID-19 period with full support from its government. It is expected to leverage its strong capital to submit high bids for entry into the domestic market. However, domestic duty-free operators agree that aggressive, reckless bidding as seen in the past is unlikely. Considering the rapidly changing duty-free market conditions due to COVID-19 and other factors over recent years, companies must submit reasonable bids that account for even the worst-case scenarios, introducing new variables into the process.

The rental fees for the 10-year duty-free operator are calculated by multiplying the number of airport passengers by a unit price per passenger, rather than by duty-free shop visitors. Industry insiders note that since an increase in airport passengers does not guarantee a rise in duty-free sales, they cannot ignore the possibility that after COVID-19 is fully over and domestic and international conditions improve, the number of airport passengers could surge explosively, driven by K-content. If such a scenario unfolds after aggressive bidding, even winning the business rights could lead to increased rental fee burdens and deteriorating profitability over the next decade.

The domestic duty-free industry shares a common concern that if the Chinese state-owned CDFG succeeds in this bid and enters the domestic duty-free market, then uses this as a stepping stone to expand into downtown duty-free shops, the situation will become even more serious. There is worry that CDFG could rapidly grow by absorbing the demand of Chinese "daigou" shoppers, who currently account for about 90% of domestic duty-free sales, thereby dominating the domestic duty-free market. Downtown duty-free shops can be granted new licenses if foreign arrivals increase by more than 300,000. With a full recovery expected this year, the industry anticipates a high possibility of new licenses being issued in 2024. This raises the likelihood of CDFG’s seamless entry into the market, leveraging its operation at Incheon Airport as a foothold.

An industry insider commented, "Considering that the duty-free license system was introduced to attract foreign tourists, earn foreign currency, and promote tourism, the entry of China’s CDFG?whose presence is expected to increase foreign currency outflow?into Incheon Airport contradicts the original purpose of the duty-free system." Based on its domestic business experience, if CDFG enhances its brand portfolio by attracting luxury brands, which has been a weakness, and improves price competitiveness, a winner-takes-all market structure could be established.

Meanwhile, this bidding includes not only five general business rights but also two rights for small and medium-sized enterprises (SMEs) and mid-sized companies. Concerns have been raised that if China’s CDFG dominates the Incheon Airport duty-free market, the competitiveness of these SMEs and mid-sized companies could further decline. A duty-free industry official pointed out, "If a Chinese duty-free shop is established at Incheon Airport, there is a possibility of reputation damage due to counterfeit product issues."