August 13, 2017 5:00 pm JST

South Korea's Chinese-free duty-free shops suffer

Industry lost $533m after anti-missile system angered Chinese

KENICHI YAMADA, Nikkei staff writer

The heavy price for a missile shield.

SEOUL -- The row over South Korea's deployment of a U.S. anti-missile system is hitting the country's duty-free industry hard. Angry Chinese travelers are shunning South Korea, stripping the country's duty-free industry of as much as 600 billion won ($533 million) in lost revenue. The cash-cow is no more, with shops shutting down and new openings being put off.

Hanwha Galleria could close its doors this month. The duty-free shop is in Jeju International Airport, a gateway to Jeju Island, visited by some 3.6 million foreigners last year. About 80% of the travelers were Chinese. The shop's operator, the Hanwha Group, a major South Korean conglomerate, plans to return its operating license to Jeju Airport Corp.

Big airports like Jeju International are an ideal location for duty-free shops. When Hanwha obtained its license in 2014, several other companies also competed. Hanwha made a stable 5 billion won a month on average last year by selling mostly branded goods.

The business was supposed to be secure until April 2019, when the license was set to expire. But things changed significantly after the Defense Ministry in February decided where to deploy the High Altitude Area Defense, or THAAD, missile shield. Sales plunged. The shop is said to be making less than the 2.1 billion won it pays in monthly rent to the airport operator. Hanwha asked the operator to lower the rent but was rejected. The two sides are now discussing when to close the shop.

The Jeju Island case is not isolated. "Now that Chinese group tourists are gone, we only get occasional visits by individual travelers," a shop clerk at the Dongwha duty-free shop in Seoul said with a wry smile. The shop is on the street where large crowds gathered last fall in mass protests against then President Park Guen-hye. Tour buses used to arrive on weekends, and groups of Chinese travelers used to march into the Dongwha shop.

Dongwha's major shareholders recently got into a dispute about ditching the company. Hotel Shilla, which holds about 20% of Dongwha, had asked Lotte Tour Development, which holds the largest stake in Dongwha, to buy its Dongwha shares. Lotte refused, and the fight has been taken to court.

At issue is a contract between Hotel Shilla and Lotte Tour Development that expired last year. Although the THAAD issue is not directly involved, the two companies wanting to get rid of the "bad asset" are widely seen as symbolic of an industry strangled by the whole missile row and is thus drawing much public attention.

Those planning to open new outlets are also feeling the pain. Late last year, the Hyundai Group and other parties obtained licenses to open three duty-free stores in Seoul. The shops were expected to open by the end of this year but so far no specific dates have been set.

If the Chinese boycott continues, more duty-free shops may return their licenses.

According to the Korea Duty Free Association, the country's duty-free market was worth $7.6 billion last year (excluding sales to South Korean citizens), almost triple the size five years ago. Over 70% of sales came from Chinese and other foreigners. Branded goods and cosmetics that are popular among tourists all but guaranteed profits. As a result, the number of applications soared for new licenses in places like the southern city of Busan. The fever led some to speculate the market was overheating.

Now existing shops are suffering from the expansion binge and from fewer customers. The number of Chinese tourists visiting South Korean duty-free shops has shrunk by about 40%, and the industry has lost an estimated 600 billion won since March because of the THAAD issue, according to the country's Korea Economic Daily newspaper.

The market is expected to shrink 40% this year.

As for the THAAD deployment, more of the anti-missile shields are on the way, due to North Korea's latest launch of an intercontinental ballistic missile late last month. South Korea's duty-free shops will probably have to endure Chinese-free for some time to come.

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