Shinsegae Decides to Return DF2 Zone Business Rights
Shilla Duty Free Gave Up DF1 Zone Last Month
Operations Halted After Rent Reduction Negotiations Break Down
Airport Says "We Will Expedite Additional Bidding and Operator Selection"
As Shinsegae Duty Free returns some of its duty-free business rights at Incheon International Airport, attention is focused on whether another round of bidding competition will unfold in the domestic duty-free industry. Incheon Airport, as the gateway to South Korea, has seen duty-free operators endure high rents for years, but with the sluggish market, both Shilla Duty Free and now Shinsegae have ceased operations.
On October 30, Shinsegae DF, the operator of Shinsegae Duty Free, announced after a board meeting that it has decided to return the business rights for the DF2 zone (cosmetics, perfumes, liquor, and tobacco) at Incheon Airport.
The company explained, "Continuing operations would only increase losses, and the management losses are too significant," adding, "We have inevitably decided to suspend operations in the DF2 zone at Incheon Airport to improve the profitability of our duty-free business through operational efficiency." The company also stated, "In the mid- to long-term, we expect improvements in our financial structure and profitability. We will focus our capabilities on our downtown duty-free store in Myeong-dong, Seoul, and the DF4 zone (fashion and accessories) at Incheon Airport, and pursue profit improvement through efficient operations."
Previously, Shilla Duty Free also decided to return its business rights for the DF1 zone, which sells cosmetics, perfumes, liquor, and tobacco, on September 18, after Incheon Airport refused to accept its rent reduction proposal. Hotel Shilla, the operator of Shilla Duty Free, stated, "The company has inevitably decided to return the business rights for the DF1 zone at Incheon Airport, judging that it is necessary to improve the financial structure and enhance corporate and shareholder value."
10-Year Operating License... Withdrawal After Just 2 Years, Why?
Shilla and Shinsegae both won the rights to operate duty-free stores at Incheon Airport in July 2023, after the end of the pandemic. They were granted licenses to operate for 10 years, until June 2033. Shilla won the DF1 zone (cosmetics, perfumes, liquor, and tobacco) and DF3 zone (fashion and boutique), while Shinsegae won the DF2 (cosmetics, perfumes, liquor, and tobacco) and DF4 (fashion and accessories) zones. At that time, the rent for Incheon Airport duty-free stores was calculated by multiplying the expected per-passenger fee (rent per customer) by the number of airport users, changing the previous system of fixed rent payments per company.
Stores selling cosmetics, perfumes, liquor, and tobacco are in high demand among customers, making their rents relatively expensive among the various duty-free zones at Incheon Airport. At the time, the minimum per-customer rent proposed by Incheon Airport was 5,346 won for DF1 and 5,617 won for DF2. This was two to five times higher than other zones dealing in fashion and boutique items.
The bids submitted by Shilla and Shinsegae for DF1 and DF2 were 8,987 won and 9,020 won, respectively, 68% and 61% higher than the minimum. Not only these two operators, but also Lotte Duty Free and China Duty Free Group (CDFG) joined the competition, driving up the unit prices. Market conditions at the time also reflected expectations of recovering overseas travel demand after COVID-19.
However, the duty-free market did not recover as expected. Last year, the number of outbound passengers using Incheon Airport was 35.31 million, nearly returning to the pre-pandemic level of 35.56 million in 2019, but duty-free sales at Incheon Airport were 2.0181 trillion won, down 27.8% from 2.7958 trillion won in 2019 before the pandemic.
An industry insider explained, "As the exchange rate rises, domestic travelers feel more burdened using duty-free shops, and the time required for departure procedures has increased, leaving less time and energy for duty-free shopping. Most importantly, the influx of Chinese group tourists, who account for a large portion of sales, has decreased compared to before, and their spending has also dropped significantly."
For both Shilla and Shinsegae Duty Free, the per-customer rent for their two zones, including fashion and boutique stores, exceeded 10,000 won. Based on the calculation reflecting the monthly average of 3 million Incheon Airport users last year, this meant over 30 billion won per month, or 360 billion won annually, was spent on rent for each company. Last year, Shilla paid 11% of its annual sales (3.2819 trillion won) and Shinsegae paid 18% of its annual sales (2.006 trillion won) as rent.
As a result, the operators' performance deteriorated after winning the Incheon Airport duty-free licenses. Shilla Duty Free recorded an operating loss of 38.7 billion won in the third quarter of last year and continued to post losses for four consecutive quarters through the second quarter of this year. Shinsegae Duty Free also remained in the red from a 16.2 billion won operating loss in the third quarter of last year through the second quarter of this year. Within just one year of winning the licenses, the so-called "winner's curse" became a reality.
Even Rent Adjustment Talks Collapse... New Bidding Within 6 Months
Accordingly, Shinsegae Duty Free filed for mediation with Incheon District Court in April, requesting a temporary reduction in rent for the cosmetics, perfume, liquor, and tobacco zones. Shilla Duty Free made a similar request in May. However, Incheon Airport Corporation refused to discuss the matter during two mediation sessions, citing fairness issues with other unsuccessful bidders, and the negotiations broke down. Subsequently, the court proposed a compulsory rent reduction of 25% for Shilla Duty Free and 27% for Shinsegae Duty Free, but the corporation rejected even this proposal and filed an objection.
Even if these operators give up some of their zones, they are required by contract to pay penalties totaling up to 190 billion won and continue operations for six months from the date of their decision to return the business rights. Shilla Duty Free will cease operations on March 17, 2026, and Shinsegae Duty Free on April 28, 2026.
Incheon International Airport Corporation plans to hold new bidding during this period to attract new operators. The airport authority stated, "We will select successor operators through a swift bidding process to ensure normal airport operations and minimize inconvenience for passengers using duty-free shops."
Industry sources predict that Lotte Duty Free and China Duty Free Group, which lost out in the 2023 operator selection, are highly likely to participate again. Shilla and Shinsegae Duty Free may also re-enter the bidding for these zones, but could face penalties for doing so. The corporation will evaluate the reliability of operators' business performance over the previous year, scoring it as a qualitative assessment (5 points) from the date of the bidding announcement.
Additionally, there is speculation that Hyundai Department Store Duty Free, which currently operates the DF5 zone (boutiques) at Incheon Airport, may bid for the cosmetics and liquor sales zones. During the previous bidding two years ago, Hyundai Department Store Duty Free won the business rights for its zone by bidding about 5% higher than the minimum amount set by the corporation, resulting in a relatively lower rent burden. However, Hyundai Department Store Duty Free commented, "We have not reviewed this matter," declining to elaborate further.
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