[Exclusive] Lotte Defends Pride... Shinsegae vs Shilla, Battle for 2nd Place in Duty-Free Market

Lotte's Myeongdong Main Store Sales Exceed '3 Trillion'
Shinsegae-Shilla Gap of 200 Billion Won Until November
Duty-Free Shops Without Chinese Customers See Sharp Decline in Overall Sales

Lotte Duty Free is expected to maintain its pride as the 'industry leader' by recording sales of 3 trillion won solely at its Myeongdong flagship store. Last year, Shilla Duty Free, which was considered a strong candidate for the top sales spot after Lotte Duty Free withdrew from Incheon International Airport, showed sluggish performance as it was overtaken by Shinsegae Duty Free in both flagship store and overall sales.

Lotte Keeps Its Pride... Shilla Stumbles

According to data received from the Korea Customs Service by Jin Sun-mi, a member of the National Assembly's Planning and Finance Committee from the Democratic Party of Korea, Lotte Duty Free recorded sales of 2.7582 trillion won from January to November last year, ranking first among domestic duty-free stores by store sales. The company explained that when December's results are added, sales are expected to exceed 3 trillion won.

After withdrawing from Incheon International Airport duty-free stores early last year, Lotte Duty Free focused on increasing downtown duty-free sales. In the first half of the year, it concentrated on attracting daigou (personal shoppers), and in the second half, it focused its efforts on attracting individual foreign tourists in line with changing travel trends. A representative example is the opening of the LDF House in Myeongdong, a duty-free showroom concept providing experiential content for foreign tourists. A Lotte Duty Free official said, "There were concerns that the 3 trillion won sales mark might be broken, but recently, focusing business strategies mainly on domestic and foreign customers proved effective."

Following Lotte Duty Free's Myeongdong flagship store, Shinsegae Duty Free's flagship store ranked second with sales of 2.2097 trillion won. Shilla Duty Free's Seoul store closely followed with 2.1301 trillion won.

From January to November last year, group sales also saw Lotte Duty Free maintaining the top spot with 3.89 trillion won. Shinsegae Duty Free followed with 2.8558 trillion won, then Shilla Duty Free (2.6639 trillion won), and Hyundai Department Store Duty Free (1.6639 trillion won).

The biggest concern in the duty-free industry last year was whether Shilla Duty Free's sales would surpass Lotte's after Lotte Duty Free withdrew from Incheon Airport. However, Shilla Duty Free was instead held back by Shinsegae Duty Free. In 2022, Lotte Duty Free's sales were 5.03 trillion won, Shilla Duty Free's were 4.3263 trillion won, with a gap of 700 billion won between the two companies, and the gap between Shilla Duty Free and Shinsegae Duty Free (3.4386 trillion won) was 890 billion won.

This year, the duty-free market saw an overall decline in sales due to a reduction in daigou commissions (from 50% to 30%) and a shift in travel trends from group tours to individual travel. Chinese group tourists (Youke) also did not visit Korea as much as expected, which likely led to fewer visits to Jeju Island, a previously essential stop. Shilla Duty Free operates Jeju Airport Duty Free and Shinjeju Duty Free, but combined sales from these two locations last year were reported to be less than 200 billion won.

An industry insider said, "If there had been competitive sales battles, they might have paid higher commissions to daigou to boost sales, but now the mood is that it's hard to make a living, so they decided not to do that. As commissions decreased, many daigou left because it was no longer profitable." According to the Korea Duty Free Association, total sales of duty-free operators from January to November last year were 12.45 trillion won, a contraction compared to 17 trillion won in 2022.

Duty-Free Industry Loses Its Core... Securing Individual Travelers and Domestic Customers Is Vital

As the situation worsens, duty-free stores are focusing less on competing over sales and more on finding new revenue sources and ways to improve profitability. With forecasts predicting that China's economic growth rate will slow further due to domestic demand stagnation, it is expected to be difficult to attract Chinese travelers in the short term.

Shinsegae Duty Free plans to sign a memorandum of understanding (MOU) with China Southern Airlines this month to secure individual travelers. The goal for this year is to increase individual travelers by 30% compared to the previous year. Last month, Shinsegae Duty Free signed an MOU with Hong Kong airline Cathay Pacific, allowing customers who shop at Shinsegae Duty Free to earn 'Asia Miles,' a proprietary currency usable within the Cathay Pacific Group. This time, they will offer partnership services and benefits to members of China Southern Airlines' 'Sky Pearl Club.' The two companies also ran promotions last year offering discount coupons and welcome gifts to Sky Pearl Club members.

Lotte Duty Free is considering opening an additional 'LDF House' with a duty-free showroom concept. The strategy is to attract tourists by allowing individual foreign travelers to experience the LDF House. They are also serious about securing loyal domestic customers. Early this year, Lotte Duty Free revamped its 'LDF Mileage Program,' offering gifts based on purchase amounts to secure regular customers. Shilla Duty Free recently expanded its partnership with CJ One Points, widely used by women in their 20s and 30s, allowing shopping with CJ One Points. Additionally, in December last year, Shilla Duty Free launched a paid membership called 'Shilla & Basic,' freely available to domestic customers, aiming to secure customers by providing benefits exceeding the membership fee.

All major players, including incumbent Shilla Duty Free, Lotte Duty Free and Shinsegae Duty Free (in charge of DF1 zone), and Hyundai Department Store Duty Free, participated in the recent bidding for the new operator of the liquor and tobacco section (DF2 zone) at Gimpo Airport Duty Free. This is part of a strategy to secure new revenue sources. Gimpo Airport's rent calculation method is based on a basic rent (300 million won) plus a sales-linked rent (over 30%), so operators do not bear a heavy burden in paying rent. If sales decline in a given year, they pay less rent than the previous year. The fact that many Japanese travelers use this duty-free store is also attractive. Another industry insider said, "What can be done now is to secure domestic and individual foreign travelers. Regarding the Gimpo Airport duty-free business rights, all likely saw that operators can still make a profit, so there was no reason not to participate."