Domestic duty-free operators that turned to profits in the first quarter this year are on edge again. As the won-dollar exchange rate has soared to its highest level since the 2009 global financial crisis, concerns are growing that the hard-won recovery in results could be shaken.
On the 10th in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,524.2 won, up 12.1 won from the previous trading day. During intraday trading on the 6th, the rate touched the 1,560-won range, surging to the highest level in about 17 years since the 2009 global financial crisis. The duty-free industry, which had suffered from deteriorating results, pushed for profitability improvements through intensive restructuring since last year. As a result, major players all turned to profits in the first quarter this year. The average exchange rate in the first quarter was in the 1,450-won range. There are worries that if the soaring exchange rate is reflected, the recovery in results is likely to stall.
Duty-free shops buy and sell goods based on dollars. When the exchange rate rises, purchase costs increase and consumers feel a heavier price burden. For Korean customers in particular, the price advantage of duty-free shopping inevitably diminishes. According to the Korea Duty Free Shops Association, the number of Korean buyers and sales at duty-free shops fell for three straight months from January to March this year. Foreign buyers and sales, by contrast, increased, partially offsetting weaker Korean demand. Although Korean customers saw a slight recovery in April, the industry worries that if the recent surge in the exchange rate persists, demand could contract again.
Since last year, the duty-free industry has reduced reliance on Chinese resellers (daigou) and reorganized its business structure around free independent travelers (FIT). By cutting kickback commissions (fees paid by duty-free shops to travel agencies and guides to attract foreign tourists) and closing low-margin stores, Lotte, The Shilla Duty Free, Shinsegae Duty Free, and Hyundai Duty Free all posted profits in the first quarter this year. Lotte Duty Free recorded first-quarter sales of 792.2 billion won and operating profit of 32.3 billion won. Compared with a year earlier, sales rose 24% and operating profit jumped 111%. The travel retail (TR) division of Hotel Shilla, which operates The Shilla Duty Free, posted first-quarter sales of 884.6 billion won, up 7% on-year, and recorded operating profit of 12.2 billion won, turning around from an operating loss of 20.6 billion won in the previous quarter. Shinsegae Duty Free also turned to profit, with sales of 589.8 billion won, up 5% on-year, and operating profit of 10.6 billion won (compared with an operating loss of 2.3 billion won in the first quarter last year). Hyundai Duty Free likewise posted operating profit of 3.4 billion won, up 5.3 billion won from a year earlier.
The exchange rate is a variable that corporations can hardly control on their own. A duty-free industry official said, "When the exchange rate rises, duty-free prices inevitably go up as well," and noted, "Because duty-free shops fundamentally set prices on a dollar basis, the exchange-rate burden is heavy." The official added, "That said, the recent rise in the exchange rate is not a matter of a day or two—it has already stayed high for a long period," and said, "The business environment remains difficult, but ahead of the summer vacation season, rising demand for overseas travel is a positive factor."
Another industry official said, "The exchange rate is a double-edged sword," adding, "When the won weakens, Korean products become relatively cheaper for foreign tourists, but Korean customers cut spending and demand for overseas travel can shrink. It is still hard to judge the extent of the impact, so we are continuing to monitor the situation."
To immediately ease the consumer burden from the exchange rate, the industry is rolling out various responses such as raising the reference exchange rate and offering exchange-rate compensation promotions. The reference exchange rate is the rate applied when converting the dollar selling price for domestic brands purchased in won. Raising it lowers the dollar-denominated price. The duty-free industry lifted the reference rate from 1,350 won at the end of last year to 1,400 won, and then to 1,450 won in March this year.
However, the industry does not see these steps as a fundamental solution. Discounts and exchange-rate compensation ultimately maintain price competitiveness by reducing duty-free shop margins. A duty-free industry official said, "If the won-dollar exchange rate stays in the mid-to-high 1,500-won range for a long time, there are limits to how the industry can respond on its own." Accordingly, at a roundtable hosted by the Ministry of Economy and Finance on the 4th, the duty-free industry proposed easing the burden of concession fees, raising duty-free allowances for travelers, and improving regulations on duty-free shop operations.