With Lotte Duty Free virtually set to reenter Incheon Airport's duty-free market, expectations are growing that it could regain the No. 1 spot in domestic duty-free sales. Lotte Duty Free had long maintained the top position in sales, but after exiting the Incheon Airport duty-free stores in 2023, the gap with No. 2 The Shilla Duty Free gradually narrowed, and last year its sales were overtaken.
According to the duty-free industry on the 26th, only Lotte and Hyundai Duty Free submitted applications for the business rights tender for Incheon Airport duty-free DF1 (perfume and cosmetics) and DF2 (liquor and tobacco) held on the 21st. This tender carries a "one company, one business right" condition, making it likely the two companies will split one license each.
The areas up for bid this time are those that The Shilla Duty Free and Shinsegae Duty Free decided to exit mid-contract last year. Previously, after clashes with Incheon International Airport Corporation over high rents, The Shilla Duty Free and Shinsegae Duty Free returned the DF1 and DF2 business rights in September and October last year, respectively. Under the contract, The Shilla Duty Free is scheduled to operate Incheon Airport duty-free stores until Mar. 17 this year and then exit, while Shinsegae Duty Free will operate until Apr. 28 before exiting.
Incheon International Airport Corporation will hold presentations (PT) by the participating bidders this week. It will then select the final winner after proposal evaluations and a patent review by the Korea Customs Service. The contract runs for seven years, from July 1 this year to June 30, 2033. It can be extended up to 10 years based on operating performance.
If Lotte Duty Free reenters Incheon Airport in the second half, it is expected to gain momentum in reclaiming the No. 1 spot in domestic duty-free sales. Lotte Duty Free maintained the top spot for a long time, but fell to No. 2 last year, ceding ground to The Shilla Duty Free.
Excluding the Busan Lotte Hotel corporate branches such as the Busan store and Gimhae Airport store in 2022, Lotte Duty Free's annual sales were 5.0301 trillion won and The Shilla Duty Free's were 4.3263 trillion won, a gap of about 700 billion won. However, in 2023, Lotte Duty Free posted 3.0796 trillion won and The Shilla Duty Free 2.9337 trillion won, narrowing the gap to 145.9 billion won.
In 2024, sales were 3.286 trillion won for Lotte Duty Free and 3.2819 trillion won for The Shilla Duty Free, shrinking the gap between the two companies to 4.1 billion won. For the first to third quarters last year, sales were 2.0295 trillion won for Lotte Duty Free and 2.5269 trillion won for The Shilla Duty Free, with The Shilla Duty Free overtaking Lotte Duty Free by about 500 billion won.
The main reason the sales rankings flipped was Lotte Duty Free's exit from Incheon Airport. In July 2023, Lotte Duty Free failed to win the DF1 and DF2 zones after being outbid by The Shilla Duty Free and Shinsegae Duty Free, and had to leave the Incheon Airport duty-free stores for the first time in 22 years.
The DF1 and DF2 zones, which handle perfume, cosmetics, liquor, and tobacco, are classified as prime areas within Incheon Airport. The two zones account for the largest share of total sales at the airport's duty-free stores. In 2024, sales were tallied at 429.3 billion won for DF1 and 403.9 billion won for DF2, respectively.
At the same time, to improve profitability last year, Lotte Duty Free sharply cut transactions with daigou (Chinese bulk buyers) for the first time in the industry and streamlined inefficient overseas stores, focusing on profitability rather than sales. Lotte Duty Free ended operations at its Wellington Airport store in New Zealand in February last year and exited its downtown Da Nang store in Vietnam and Darwin Airport store in Australia in May.
If Lotte Duty Free secures either the DF1 or DF2 zone in this Incheon Airport tender, it is expected to add 400 billion to 500 billion won in annual sales. Conversely, The Shilla Duty Free, which decided to exit the DF1 zone, will inevitably see a similar-sized sales decline. As a result, calculations suggest the annual sales gap between the two companies could narrow by about 800 billion to 1 trillion won.
Some in the industry warn that this Incheon Airport duty-free tender could repeat a "winner's curse," as seen in the exits by The Shilla Duty Free and Shinsegae Duty Free. However, considering the relaxed conditions and the intensity of competition in this tender, there is also analysis that new operators could quickly turn a profit thanks to lower rents than in the past.
Park Sang-jun, an analyst at Kiwoom Securities, said, "We estimate the successful bid price for per-passenger rent by the bidders in this tender will not be much higher than the minimum acceptable per-passenger rent (about 5,000 won) presented by Incheon International Airport Corporation. Therefore, the same winner's curse as in the past is unlikely to appear." He added, "If the per-passenger rent is set at 6,000 won or less, it will be possible to achieve an operating profit in the first year of business."