Korean duty free sales reach second-highest monthly figure as daigou business booms

New records set in September

– Second-highest duty free sales by month (the all-time high was in March 2019)
– Second-highest sales to foreigners by month (again, trailing only behind March 2019)
– Lowest sales to Koreans since January 2017 (Korean custom has been affected by the recent boycott Japan campaign and lowered consumer sentiment)
– Lowest number of Korean customers in total duty free since March 2016
– Lowest number of Korean customers in airports and the first time the number of customers has fallen below the 1 million mark since data became available in January 2016
– Highest sales portion attributed to foreigners (85.9%)
Source: The Moodie Davitt Report Business Intelligence Unit

SOUTH KOREA. Duty free sales grew +23.2% year-on-year in September 2019 to KRW2,242.2 billion (US$1,872.1 million), buoyed by soaring sales to foreign shoppers, writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung.

Spending by foreigners rocketed +31.8% year-on-year to KRW2,242.2 billion (US$1,608.9 million), offsetting losses from declining sales to Koreans, which were down -11.8% year-on-year to KRW315.1 billion (US$263.2 million).

Buoyed by an increase in business with resellers (daigou) looking to stock up on inventory ahead of China’s Mid-Autumn Festival (13 September), Golden Week (1-7 October) and Singles Day (11 November), foreigners accounted for an increased 85.9% share of the market.

Despite the implementation of China’s new ecommerce law in January 2019, which many feared would badly erode the daigou business, duty free sales in Korea continue to set new records.

September was the second-best month in the sector’s history, trailing only the US$1,918.0 million in March 2019. August duty free sales, when announced, represented the second-highest on record but it’s taken only one month for that status to be overtaken.

Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit
Sales to daigou continue to surge at the country’s leading travel retail door, Lotte Duty Free in Myeong-dong, Seoul

Researchers of game theory will find the dynamic change between stakeholders and the increasing commission rate paid by Korean duty free retailers particularly interesting. Resellers have benefited from an increase in competition among duty free retailers in recent months with commission rates elevated to gain market share and to offset resellers’ losses from negative FX movements.

The weakness in the Chinese Yuan against the US Dollar (-2.8% year-on-year and -4.5% from January 2019) means resellers lose out when purchasing products in duty free because products are priced in US dollars. While operators are increasing commission rates to enhance reseller profitability, the weakness in the Korean Won against the Chinese Yuan (+2.1% year-on-year and +1.4% from January) means resellers are benefiting in terms of lower travel and packaging costs. Higher commission rates to offset negative impact from the strong dollar and a stronger Yuan against the Won has added incentive for resellers to increase order volumes.

Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit

The lowered value of the Korean Won (USD/KRW exchange rate: September 2019 KRW1,194.9, September 2018 KRW1,119.9) sees better translated results with duty free sales growing +31.7% year-on-year in local currency to KRW2,242.2 billion. The local currency result is higher than the +23.2% growth in US Dollar terms with the Korean Won dropping -6.3% year-on-year.

Intensifying competition

Competition is increasing in the world’s largest duty free market due to a combination of downtown retailers battling to gain market share, the opening of airport arrivals duty free store, and Korean Air and Asiana Airlines looking to gain price competitiveness with their inflight retail offers.

Airline duty free was expected to be negatively impacted by the opening of arrivals shopping at Incheon Airport in late May 2019. However, Korean Air (the world’s most successful inflight retailer) and Asiana have reacted by offering increased promotions and discounts, resulting in airline duty free sales growing marginally by +1.6% year-on-year between January and September to KRW228.2 billion. Airline duty free sales have declined in recent years, largely due to the intense downtown competition.

Source: Moodie Davitt Business Intelligence Unit

Sales to foreigners remain the driving force behind Korea’s record-setting market. The number of foreign customers making purchases (up 13.8% year-on-year) and higher ASP (up 15.8% year-on-year) are trends witnessed throughout this year.

Industry sentiment varies from those who doubt the market’s long-term sustainability due to its high dependence on Chinese customers to others who reckon the return of China package tours will further strengthen the market.

Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit

While sales to foreigners continue to record new highs, the combination of Korea’s boycott Japan campaign and depressed consumer sentiment have resulted in duty free sales to Koreans sloping downwards and showing little sign of recovery.

Duty free sales to Koreans decreased by -11.8% year-on-year in September with customer traffic (down -12.6% year-on-year) and ASP (+1.0%) both weak. The number of Korean customers in airports fell below 1 million for the first time since records were made available by the Korea Duty Free Association in January 2016.

Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit
Source: Moodie Davitt Business Intelligence Unit

The widespread Korean boycott on travel to Japan has resulted in a dilemma for airlines who can’t abandon flights between Korean and Japan. Airlines have lowered the price between popular destinations in both countries, targeting Japanese consumers who are less impacted by the geo-political rift between the two nations.

The price of a round trip ticket between Osaka and Seoul is usually priced at ¥6,000-7,000 but it has steadily declined recently to around ¥3,000. Recent promotions have even been priced at ¥1,000, provided by LCCs who can’t afford to fly empty planes back and forth.

Source: Ena Travel Agency
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