Lotte Duty Free and Hyundai Duty Free have been selected as the new operators for the duty-free zones at Incheon International Airport, where The Shilla Duty Free and Shinsegae Duty Free withdrew mid-contract due to high rent burdens. As the business was once dubbed the "winner's curse," questions over profitability are surfacing again, but the securities market is leaning toward the likelihood that the new operators can reach break-even thanks to eased contract terms.
According to the duty-free industry on the 3rd, the Korea Customs Service recently selected Lotte Duty Free as the successful bidder for the DF1 (perfume and cosmetics) zones at Incheon Airport's Terminal 1 and Terminal 2, and Hyundai Duty Free for the DF2 (liquor and tobacco) zones. The business period is about seven years from the start of operations through June 30, 2033, with the right to request contract renewal for up to 10 years.
The zones in question are where The Shilla Duty Free and Shinsegae Duty Free withdrew mid-contract last year. The two companies won the DF1 and DF2 rights in the 2023 bidding, but after conflicts with Incheon International Airport Corporation (IIAC) and the burden of high rent, they each returned their licenses in September and October last year. Under the contracts, The Shilla is to operate through Mar. 17 this year and Shinsegae through Apr. 28 before pulling out.
Starting with the 2023 bidding for duty-free zones, Incheon Airport introduced a rent calculation method that multiplies the per-passenger amount proposed by bidders by the number of airport users, instead of paying a fixed monthly rent. At the time, as the COVID-19 pandemic ended, expectations for performance improvement grew across the duty-free sector, and bidding competition among companies intensified. Accordingly, The Shilla Duty Free wrote 8,987 won per passenger and Shinsegae Duty Free wrote 9,020 won, becoming the final successful bidders.
However, while the number of airport users rebounded quickly after the reopening, the proportion of duty-free shoppers and the average ticket size did not bounce back as much as expected. This was due to a combination of changes in foreign tourists' spending patterns and the prolonged slowdown in China's economy. In the process, for The Shilla Duty Free and Shinsegae Duty Free, rent—fixed in nature regardless of sales—grew, profitability deteriorated rapidly, and they decided to withdraw after failing to withstand monthly losses in the billions of won.
Afterward, Incheon International Airport Corporation (IIAC) moved to select new duty-free operators for the zones. In the industry, concerns were raised that the "winner's curse" could play out again, as in the cases of The Shilla and Shinsegae. That was because the possibility of participation by overseas operators such as China Duty Free Group (CDFG) was mentioned, and not only Korea's four major duty-free operators but also Switzerland's Avolta (formerly Dufry) attended the business briefing, signaling interest.
However, with only Lotte Duty Free and Hyundai Duty Free participating in the actual bidding, the level of competition was lower than expected. As the structure in which multiple operators aggressively submit high per-passenger rents did not form as in the past, the winning bids were set only slightly above the minimum acceptable rent proposed by the corporation.
In this bid, the corporation's minimum acceptable per-passenger rent was 5,031 won for DF1 and 4,994 won for DF2. Lotte reportedly bid 5,345 won for DF1, and Hyundai bid 5,394 won for DF2 to win each zone. That is roughly a 40% reduction compared with the winning bids by the incumbent operators, The Shilla Duty Free and Shinsegae Duty Free.
The securities market projects that Lotte and Hyundai Duty Free can surpass break-even on the back of lower rent. Park Sang-jun, an analyst at Kiwoom Securities, said, "Last year's rent for The Shilla and Shinsegae Duty Free is estimated at 330 billion won, but applying Lotte and Hyundai's bid amounts, the annual rent could fall to around 190 billion won," adding, "The new entrants should be able to achieve operating profit from year one."
The recent improvement in the duty-free business environment is also bolstering expectations for better results by the new entrants. According to Kyobo Securities, duty-free sales in January this year rose 12.2% from a year earlier. In particular, departures duty-free sales increased 18.4%, and foreigner sales growth rate reached 35.3%. Across the duty-free industry, visitor numbers rose 12.6% while average ticket size fell 0.3%. Although purchase unit prices have not fully recovered, the increase in inflows is driving sales.
A Lotte Duty Free official said, "We expect the newly won business rights to boost annual sales by more than 600 billion won," adding, "We will conduct thorough handovers in line with Incheon International Airport Corporation (IIAC) guidelines to minimize passenger inconvenience."