Incheon Airport Duty-Free Shops: A Paradox of High Rents and Profits

All four major duty-free operators in South Korea reported operating profits in the second quarter of this year. The increase in foreign visitors, coupled with a restructuring of duty-free business rights at Incheon International Airport, significantly reduced rental costs.

Shilla and Shinsegae duty-free shops, which exited the DF1 and DF2 areas of Incheon Airport, cut costs by leaving high-rent locations. Meanwhile, Lotte and Hyundai, which entered those areas, secured business rights at approximately 40% lower rental rates than before, expanding their revenue base.

According to industry reports on August 24, the combined operating profit for Lotte, Shilla, Shinsegae, and Hyundai duty-free shops in the second quarter reached 107.8 billion won. Last year, three of the four companies, excluding Lotte, reported losses in the same period, but this year all returned to profitability, showing a clear improvement in performance.

Lotte Duty-Free, which returned to Incheon Airport after three years, reported second-quarter sales of 904.3 billion won and an operating profit of 31.9 billion won, marking increases of 35% and 385%, respectively, compared to the same period last year. The resumption of airport sales, which began on April 17 in the DF1 area, contributed to this growth. Hyundai Duty-Free also benefited from starting operations in the DF2 area on April 28, recording second-quarter sales of 310.4 billion won and an operating profit of 6.2 billion won. This represented a 5.8% increase in sales year-on-year and a turnaround from a 1.3 billion won loss in operating performance.

The reduction in rental fees played a significant role in improving profitability. During the 2023 operator selection process, Shilla Duty-Free bid 8,987 won per passenger for DF1, while Shinsegae Duty-Free bid 9,020 won for DF2. However, despite a recovery in passenger numbers, the average spending per passenger did not meet expectations, leading Shilla and Shinsegae to relinquish their business rights in April. Lotte, which participated in the re-bidding for the area, secured rights for DF1 at 5,345 won, while Hyundai obtained rights for DF2 at 5,394 won, both at about 40% lower rates than previous contracts.

The relinquishment of business rights by Shilla and Shinsegae has proven effective in improving profitability. Hotel Shilla's duty-free segment reported second-quarter sales of 772.6 billion won, a 9.1% decrease, but an operating profit of 36.4 billion won, a significant improvement from a 11.3 billion won loss in the same quarter last year. Similarly, Shinsegae Duty-Free saw sales of 542.6 billion won, down 10.3%, but turned an operating profit of 33.3 billion won.

The recovery of foreign tourists also supported these results. According to the Korea Duty-Free Shops Association, foreign sales at domestic duty-free shops reached 4.9967 trillion won in the first half of the year, a 3.2% increase compared to the same period last year. The number of foreign customers rose by 14.9% to 6.64 million. However, the average spending per foreign customer in June was approximately 717,000 won, a 15.4% decrease from the same month last year.

Looking ahead, the effects of the restructuring of business rights are expected to continue. Heo Je-na, a researcher at DB Securities, noted, "Hyundai Duty-Free's daily sales at the airport increased from 1.2 billion won in the first quarter to 2.9 billion won in July, indicating improved brand purchasing power, and sales at city stores also rose by 30% compared to the previous quarter. We expect to see visible improvements in profitability alongside increased duty-free sales." Oh Rin-a, a researcher at LS Securities, predicted that Shinsegae Duty-Free would likely see continued profit growth in the third quarter due to the positive effects of exiting DF2.

However, it is still too early to conclude that the industry is fully recovering. Baek Jae-seung, a researcher at Samsung Securities, pointed out that while the number of arrivals increased by 21% in the first half of the year, total sales in the duty-free sector decreased by 2.2%. He stated, "The recovery of competitiveness in the duty-free business compared to other retail sectors remains a challenge."