In South Korea, duty-free boom a bust so far for new players

Hanatour Service

30/03/2016 10:01

* $8 bln market, world's biggest, set for more growth 
    * But market debutants cut sales outlook for big new stores 
    * Vuitton, Chanel, Hermes absent from new outlets for now 
    * Changing spending among China tourists adds to uncertainty 
    * Regulatory uncertainty amid govt moves to change rules 
 
    By Joyce Lee 
    SEOUL, March 30 (Reuters) - New players setting up shop in 
South Korea's $8 billion duty-free sales industry, the world's 
largest, are finding all that glitters isn't gold as Chinese 
tourists spend less and cornerstone luxury brands resist adding 
new outlets. 
    Some of the biggest names in Korean business, including 
units of the Samsung and Lotte conglomerates, scrambled to win 
one of just three new licences available last year. The winners 
opened outlets in downtown Seoul targeting tourists, mainly from 
China, who drove duty-free revenue 11 percent higher in 2015.  
    Last week, Samsung's Hotel Shilla  008770.KS  joint venture 
formally opened a gleaming store boasting floorspace the size of 
the capital's Olympic baseball stadium. The company's original 
internal sales target for the store this year was 1 trillion won 
($867 million), a store spokesman said, but the official target 
now stands at 500-600 billion won.  
    With other new store operators making similar revisions, the 
government plans "to lessen uncertainty in the market" with new 
measures to be announced Thursday, a finance ministry official 
told Reuters. Some in the industry, though, say they fear that 
could mean Seoul plans even more store licences. 
    Chinese visitors, while rising in number, are spending less 
per person, and increasingly favour Korean brands with lower 
price tags.  urn:newsml:reuters.com:*:nL3N15H2UT  
    Evolving spending habits, as well as uncertainty over the 
government's intentions, have made luxury powerhouses such as 
LVMH's  LVMH.PA  Louis Vuitton wary of setting up a presence 
inside the growing numbers of duty-free outlets. That's a dual 
blow for store operators: the brands act as a magnet for other 
high-end labels as well as shoppers.  
    "We are running everywhere trying to make it work," said 
Jung Ki-youn, an official at Hanatour Service Inc  039130.KS , 
owner of a new duty-free outlet in a tourist-heavy Seoul 
district that is generating just a tenth of expected revenue. 
"Allowing more stores would be nonsense," said Jung. 
    The government's new plans will "focus on the problem of 
short licence periods and difficulty of renewal," the finance 
ministry official said, speaking on condition of anonymity. 
     
    CONSUMERS VOLATILE 
    South Korea overtook Britain in 2010 to become the world's 
biggest duty-free market, with more than half of sales from 
downtown Seoul stores rather than airport outlets. Revenue rose 
11 percent to just under $8 billion in 2015, and analysts expect 
it to grow about 14 percent this year to $9 billion.  
    But analysts cite the absence - thus far - of anchor brands 
in the new stores as contributing to the slow start. Hotel 
Shilla's joint venture store is still in talks to bring in top 
luxury brands such as Louis Vuitton, Chanel and Hermes 
 HRMS.PA , a person with direct knowledge told Reuters.  
    A source close to LVMH said, "The problem is that this 
market is very driven by the Chinese consumer who, as we have 
seen in places such as Hong Kong, is very volatile, and will 
swiftly go somewhere else depending on currency swings or 
security issues." 
    "Therefore, for now, it is very much wait-and-see for big 
luxury brands but I would think they will have to make their 
position clear relatively soon," the person said. 
    Alongside the Hotel Shilla joint venture and Hanatour 
Service's SM Duty Free outlet, Hanwha Galleria Timeworld 
 027390.KS  won the last new store licence up for grabs last 
July.  urn:newsml:reuters.com:*:nL3N0ZQ2X1 
    But shares which soared when the trio won the licences have 
since tumbled as doubts over the stores' prospects emerged: From 
their 2015 peaks, Hotel Shilla shares have dropped 53 percent, 
Hanwha Galleria Timeworld stock is off 71 percent and Hanatour 
has lost 58 percent. 
    More worryingly for investors, competition could intensify 
if Seoul does grant new store licences. 
    Last November, the government didn't renew licences held by 
Lotte Duty Free and SK Networks  001740.KS  due to expire by 
this summer. But industry executives believe Seoul may grant a 
reprieve when it announces new industry measures.  urn:newsml:reuters.com:*:nL3N139067  
    "Mid- to long-term, strong duty-free operators will have a 
more stable environment to operate in as the government is 
expected to lengthen duty-free licenses from five to 10 years," 
said Kim Ji-hyo, an analyst at Eugene Investment & Securities. 
    "But in the meantime, it will be messy." 
 
($1 = 1,153.4000 won) 
     
 
 (Reporting by Joyce Lee; Additional reporting by Astrid 
Wendlandt in PARIS; Editing by Tony Munroe and Kenneth Maxwell) 
 ((jungyoon.lee@thomsonreuters.com; +82 2 3704 5609; Reuters 
Messaging: jungyoon.lee.thomsonreuters.com@reuters.net)) 
 
Keywords: SOUTHKOREA DUTYFREE/