As the won-dollar exchange rate has fallen into the 1,300-won range recently, the duty-free industry, which had suffered a prolonged slump, is also growing hopeful. When the won-converted prices of duty-free goods drop, demand for duty-free shopping among Koreans, which had been dampened by the strong dollar, is likely to revive.
The domestic duty-free industry has significantly improved profitability through restructuring, including winding down loss-making business sites. In this situation, if the exchange rate continues to decline, some say it could serve as a primer that also leads to a recovery in sales.
According to the Seoul foreign exchange market on the 24th, at around 11:14 a.m. that day, the won's exchange rate against the U.S. dollar stood at 1,376.5 won. That was down 10 won from the previous trading day's 3:30 p.m. benchmark on the 21st (1,386.5 won), marking the lowest level in about 11 months since the intraday low of 1,375.7 won on Sept. 17 last year.
The duty-free industry, where prices fluctuate sharply with exchange rates, welcomes the decline. For dollar-denominated goods such as imported luxury brands, even at the same dollar price, the lower the exchange rate, the less won Koreans have to pay. For example, if you buy a $1,000 item at a duty-free shop, you need 1.5 million won at a 1,500-won rate, but 1.4 million won at 1,400 won, a drop of 100,000 won. Based on exchange rate moves alone, the won-denominated price falls by about 6.7%.
The prolonged strong dollar has greatly eroded duty-free shops' price competitiveness. The average monthly won-dollar rate was 1,366.95 won in June last year, but surged into the 1,500-won range in June this year.
As the high exchange rate persisted, major duty-free shops raised their internal base exchange rate from 1,350 won to 1,400 won in Nov. last year, then to 1,450 won in Mar. this year, and to 1,500 won in July in successive hikes to stabilize prices. The base exchange rate is the in-house rate duty-free shops apply when converting the won prices of domestically supplied brand products into dollar sale prices. Because the won price is divided by the base exchange rate, raising the base rate lowers the dollar-denominated price, and lowering it does the opposite.
However, overseas luxury brands often set selling prices according to their headquarters' global pricing policies, so they are typically excluded from base exchange rate adjustments. The exchange rate increase is thus reflected directly in the won purchase price paid by Koreans.
Accordingly, as the strong dollar persisted, the incentive for Koreans to use duty-free shops diminished, and the number of actual buyers fell noticeably. According to the Korea Duty Free Shops Association, the number of Korean buyers at domestic duty-free shops in June was 1,196,865, down 23.3% from the same period a year earlier (1,561,010). Over the same period, sales to Koreans fell 19.8% to 211 billion won from 263.1 billion won.
The decline was steep even compared with early this year. The number of Korean buyers, which was 1,633,015 in January, fell to 1,452,252 in February and 1,363,241 in March. It rebounded slightly to 1,389,530 in May but fell below 1.2 million in June. Compared with January, that is a 26.7% drop in just five months. Sales to Koreans also fell 25.8% over the same period, from 284.2 billion won to 211 billion won.
The domestic duty-free industry has largely restored profitability through restructuring. Hotel Shilla's duty-free institutional sector posted an operating profit of 36.4 billion won in the second quarter this year, swinging to black from a 11.3 billion won operating loss a year earlier. Shinsegae Duty Free also swung to black, with second-quarter operating profit of 33.3 billion won from a 1.5 billion won loss a year earlier.
Lotte Duty Free posted operating profit of 31.9 billion won, up 385% from a year earlier, marking six consecutive profitable quarters. Hyundai Duty Free also returned to profit, shifting from a 1.3 billion won operating loss in the second quarter last year to 6.2 billion won in operating profit this year.
However, Shilla and Shinsegae Duty Free faced an inevitable sharp drop in sales as they exited high-rent concessions at Incheon Airport. Hotel Shilla's duty-free institutional sector recorded second-quarter revenue of 772.6 billion won, down 9.1% from a year earlier. Shinsegae Duty Free likewise saw second-quarter revenue fall 10.3% year over year to 542.6 billion won.
Brokerages say that if Korean duty-free demand, which had been subdued by the strong dollar, revives, companies could also see faster sales recovery. Yoo Jeong-hyun, an analyst at Daishin Securities, said, "Hotel Shilla's second-quarter downtown duty-free sales grew only 2%, which was due to higher discount rates stemming from the strong dollar," adding, "With exchange rates stabilizing in the third quarter, discount rates will decline again, and the sales growth rate will recover."