SOUTH KOREA. Lotte Duty Free is threatening to close its operations at Incheon International Airport unless it is granted rent relief due to the escalating THAAD crisis, the company has told The Moodie Davitt Report.

As revealed, Lotte Duty Free posted an operating loss of KW29.7 billion (US$26.1 million) in the second quarter ended 30 June – its first quarterly loss since the SARS crisis of 2003.

The loss is directly linked to South Korea’s decision to deploy the US anti-missile system THAAD earlier this year, which prompted a furious backlash from China. Tourism and travel retail have been in the front line of the retaliation, with Chinese tourism in South Korea collapsing.

“We are considering the pull-out option seriously. It will not be feasible to retain our operation in the current situation, mainly due to the conflict regarding THAAD.” – Lotte Duty Free

Down, down, down: Marry already sky-high guarantees with a slump in Chinese tourism and trading becomes unviable, Lotte Duty Free claims

On 15 March China imposed a ban on group tours to South Korea, leading to a -40% year-on-year fall in Chinese arrivals in March, a drastic -66.6% decline in April, a -64.1% slump in May, a -66.4% decrease in June and a -69.3% decrease in July, according to Korea Tourism Organization statistics.

Chinese arrivals in July represented just 27.9% of all visitor arrivals. This compares to a 53.9% share in July 2016, a percentage that grows much higher (65-70%) in terms of share of duty free purchasing.

“Under these unpredicted and uncontrollable circumstances, we decided that we will not be able to continue our [Incheon] operation as before.” – Lotte Duty Free

The Moodie Davitt Report can confirm that the CEOs of three leading Korean travel retailers, Lotte Duty Free, The Shilla Duty Free and Shinsegae Duty Free, met Incheon International Airport senior management last week to seek rent relief from their heavy loss-making contracts. So far no progress has been made. The Moodie Davitt Report has approached Incheon International Airport Corporation for comment. We will bring you any response as soon as we get it.

Shilla stays in

However, The Shilla Duty Free won’t be mirroring its rival’s position. “Shilla’s position is quite simple,” a spokesman told The Moodie Davitt Report. “Shilla is not considering withdrawal from Incheon International Airport.”

At T1, Lotte Duty Free won a five-year concession in 2015. It covers three beauty stores, five liquor & tobacco shops, four luxury boutiques in the main Passenger Terminal Building as well as 23 multi-category stores in the remote concourse. Shilla won a four-store beauty concession and a five-shop liquor & tobacco contract in the same tender. Shilla also won the package for 11 general merchandise stores, with Shinsegae Duty Free taking the other general merchandise contract for 12 stores.

In April 2017, Lotte Duty Free was also awarded the liquor, tobacco and packaged foods concession (DF2) at Incheon International Airport’s new Terminal 2, due to open later this year. Shilla secured the perfumes & cosmetics contract and Shinsegae the contentious fashion & accessories concession after several failed bids.

A Lotte Duty Free spokesman told The Moodie Davitt Report: “We are considering the pull-out option seriously. It will not be feasible to retain our operation in the current situation, mainly due to the conflict regarding THAAD.”

The spokesman said that even before the THAAD crisis, Incheon rents were very high. “We used to be able to afford the rent due to the profits of our downtown stores,” he commented. “However, the number of Chinese visitors dropped drastically as the Chinese government banned group tours to Korea, and the number of downtown duty free operators increased because the Korean government has added several downtown licences over recent years.

“We used to be able to afford the [Incheon] rent due to the profits of our downtown stores,” says a Lotte Duty Free spokesman. Now, however, the collapse in Chinese tourism has meant that the Incheon losses are too great to sustain.

“Under these unpredicted and uncontrollable circumstances, we decided that we will not be able to continue our [Incheon] operation as before.

“Of course, it will be best if Incheon International Airport Corporation and airport duty free operators, including Lotte Duty Free, come up with a reasonable conclusion through negotiation. But if that is not possible, we believe that there won’t be any other option left.”

Selected January-July tourist arrivals by nationality and purpose. Note the sharp decline in Chinese arrivals after a strong first two months of the year. July saw a disastrous -69.3% fall in arrivals. [Charts: Korea Tourism Organization]

Selected July tourist arrivals by nationality and purpose