DUTY-FREE MARKET IN ASIA - SPECIAL FOCUS ON THE DUTY-FREE MARKET IN SOUTH KOREA

Asia Distribution and Retail September 2016

In this issue •

•

Part I: Duty-free market in Asia •

Strong growth over recent years

•

Driving force

•

Key duty-free players by region

•

New store openings in China and South Korea

Part II: Duty-free market in South Korea •

Market overview

•

Driving force

•

Latest developments

•

Profiles of key duty-free players -

Lotte Duty Free

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The Shilla Duty Free

-

Dongwha Duty Free 2

Part I: Duty-free market in Asia

3

Duty-free market in Asia: Strong growth over recent years Strong growth in Asia •

The duty-free market in Asia has been growing rapidly over recent years, thanks largely to growing tourism, expansion of downtown duty-free locations and rising online duty-free sales.

CAGR of Asia-Pacific duty-free market, 2010-2015 CAGR of 9.4%

9.4%

Largest duty-free market – South Korea •

A number of duty-free stores have been opened across key Asian cities. Among the Asian markets, South Korea is the largest duty-free market in the Asia-Pacific region, contributing over 30% to the total duty-free sales in region.

Source: Reportstack

4

Duty-free market in Asia: Driving force Growth drivers • The rising disposable income of middle-class families in emerging countries, coupled with more affordable travel options available in the market have given a significant boost to the growth of tourist numbers in major travel destinations in Asia, such as Japan and South Korea.

In Japan, the total number of visitors from Asian countries in 2015 totaled 16.6 million, up 53.9% yoy.

In South Korea, the total number of visitors from East Asia and the Pacific region in 1H16 totaled 6.9 million, up 23.6% yoy.

Among the Asian visitors, those from China, South Korea and Taiwan surged 107% yoy, 45% yoy and 30% yoy respectively, taking up 30%, 24% and 22% respectively of the total number of Asian visitors going to Japan in 2015.

The number of visitors from emerging countries including India, Vietnam and Indonesia all jumped over 37% yoy in 1H16, while visitors from China and Taiwan also increased sharply by 27.2% yoy and 36.2% yoy respectively in 1H16.

Source: Japan National Tourism Organization

5

Duty free market in Asia: Key duty-free players by region Major players by region

•

A number of duty-free operators have established their presences in major Asian cities, including South Korea, Japan, China, Thailand and Singapore.

South Korea

China • China Duty Free Group • China National Service Corporation

Thailand • King Power

Singapore

• Lotte Duty Free • The Shilla Duty Free • Dongwha Duty Free

Japan • Japan Airport Terminal Co • NAA Retail Corporation

• DFS Source: Reportstack

6

Duty-free market in Asia: New store openings in China and South Korea New duty-free shops in China and South Korea •

In China, the government has been increasing its duty-free offerings to keep more luxury spending at home amid Chinese shoppers’ overseas spending spree. In July 2016, state-owned dutyfree operator China National Service Corporation opened a 3,300-sqm duty-free shopping centre CNSC Duty Free in Shanghai, cashing in on the burgeoning downtown duty free sector in China.

•

In South Korea, two more new duty-free shops were opened in Seoul in 2016, namely Doota Duty Free launched by local conglomerate Doosan Group in May 2016 and Galleria Duty Free 63 fully opened by local retail giant Hanwha Group in July 2016.

Source: Reportstack

7

Part II: Duty-free market in South Korea

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Duty-free market in South Korea: Market overview Downtown and airport duty-free shops take the majority

Location •

In South Korea, duty-free stores are mainly located in downtown areas, airports and ports, with downtown and airport duty-free stores taking up the majority.

Number of airport and downtown dutyfree stores in South Korea (as of March 2016)

Airports

Downtown

22

21

Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

9

Duty-free market in South Korea: Market overview Downtown duty-free shops make up over a half of total duty-free sales Total duty-free sales • In 2015, South Korea’s total duty-free sales# increased by 10.7% yoy to reach 9,198 billion won (US$7.83 billion) ##, according to Korea Investment & Securities. The figure is estimated to hit 11,125 billion won (US$9.47 billion) ## by the end of 2016. • Around 55% of the total duty-free sales in South Korea were contributed by downtown duty-free shops in 2015, and 22% by stores in Incheon International Airport.

South Korea’s total duty-free sales in 2015

9,198 billion won

22% Incheon International Airport

(US$7.83 billion)

Up 10.7%

55% #Note:

23% Others*

Downtown areas in Seoul

Total duty-free sales refer to the sales contributed by all domestic duty-free stores in downtown areas, airports and ports. won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

##1,175.06

*Others refer to duty-free sales from domestic ports and airports, excluding sales from Seoul and Incheon International Airport DFS Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

10

Duty-free market in South Korea: Market overview Downtown duty-free shops make up over a half of total duty-free sales (cont’d)

Downtown duty-free sales in Seoul •

Market share of downtown duty-free sales in Seoul, 2015

In 2015, downtown duty-free sales reached 5,034 billion won (US$4.28 billion)#, up 15.6% yoy.

•

As the largest duty-free player in

26%

South Korea, Lotte Duty Free posted a downtown duty-free

62%

5,034 billion won (US$4.28 billion)

sales in Seoul of 3,105 billion won (US$2.64 billion)#, representing

over 60% of downtown duty-free

Up 15.6% yoy

6% 6% Others*

sales in Seoul in 2015.

#1,175.06

won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

*Others include Walkerhill Duty Free, Shilla I’Park Duty Free, Gallery Duty Free 63 and SM Duty Free Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

11

Duty-free market in South Korea: Market overview Duty-free players in South Korea Company

City/ airport/ port

Region

Duty free operators

Lotte

Seoul, Jeju, Busan, Incheon, Gimpo

•

Shilla

Seoul, Jeju Incheon, Gimpo, Cheongju, Daegu

Shinsegae

Busan, Gimhae, Incheon

KTO

Incheon, Busan, Gunsan, Pyung-Taek

JDC

Jeju

SK Networks

Seoul

Donghwa

Seoul

JTO

Jeju

Hanwha Galleria

Jeju

Hyundai Asan

Yang Yang

JNDC

Muan

Doosan

Seoul

Daedong

Changwon

Jinsan

Ulsan

Entas

Incheon

•

In South Korea, there are currently 15 duty-free operators, with the top two players – Lotte and Shilla taking up over 80% market share. Seoul, Jeju, and Incheon Airport are the key regions for duty-free business in South Korea.

80% Source: Reportstack, CLSA, KCS, News

12

Duty-free market in South Korea: Market overview Duty-free players in South Korea (cont’d)

Yeongdeungpo-gu - Galleria Duty Free 63

Locations of duty-free stores in Seoul (As of July 2016)

Yongsan-gu - HDC Shilla Duty Free

Gangnam-gu - Lotte Duty Free (Coex)

Jongno-gu - Donwha - SM Duty Free

Jung-gu - Lotte Duty Free - The Shilla Duty Free

Source: Samsung Securities

- Shinsegae Duty Free - Doota Duty Free

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Duty-free market in South Korea: Driving force Chinese tourists fuel the growth of duty-free market in South Korea

Influx of Chinese tourists •

•

The number of Chinese tourists to South Korea has increased markedly over recent years. Visitors from China now account for over 47% of the total number of foreign visitors in South Korea, making them the largest group of foreign visitors in the country. Duty-free shops in Seoul are one of the most popular shopping places for Chinese tourists, with cosmetics, apparel and foods items topping their shopping list. A recent survey showed that nearly 95% of Chinese visitors shop for cosmetics products in South Korea*.

Number of Chinese tourists to South Korea, 2014-1H2016

Year

Share of Chinese Number of Chinese travellers among all travellers foreign tourists

2014

6,126,865

43%

2015

5,984,170

45.2%

1H2016

3,816,756

47.1%

Source: Korea Tourism Organization

*“Chinese tourists spend 6 times more than Japanese on shopping.” 21 July, 2016. The Korea Times.

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Duty-free market in South Korea: Driving force Chinese tourists spend the most in duty-free stores Spending by Chinese tourists • Chinese tourists rank first in terms of spending. They spend an average of 2.13 million won (US$1,813)# per person on shopping in South Korea, more than double that of the average spending by foreign tourists to Seoul (1.06 million won or US$902)#, making Chinese tourists the biggest spender in South Korea*. Chinese tourists spend the most in South Korean duty-free stores Top spending nationalities during visits to South Korea in 2015

2,130,000 won

790,000 won

660,000 won

660,000 won 330,000 won

Chinese #1,175.06

Southeast Asians

Americans

Europeans

Japanese

Source: The Seoul Institute, complied by Fung Business Intelligence

won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg) *“Chinese tourists spend 6 times more than Japanese on shopping.” 21 July, 2016. The Korea Times.

15

Duty-free market in South Korea: Latest developments Government granted six more duty-free licenses

Government initiatives •

To serve the increasing number of foreign tourists, especially Chinese tourists, the South Korean government announced on 29 April, 2016 that it will grant six more duty-free shop operation licenses for downtown areas. The government will issue four new duty-free shop operation licenses in Seoul and one each in Busan and Gangwon Province.

•

For the four new duty-free operation licenses in Seoul, three will be granted to large firms and one will be given to a small one.

•

Upon issue of the four new licenses, the number of duty-free outlets in Seoul will increase to 13 from the current nine.

Source: Samsung Securities

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Duty-free market in South Korea: Latest developments Purchase limits at duty-free stores Purchase caps • To prevent unofficial re-sale of duty free products by third-party brokers, South Korea Customs Service notified all local duty-free operators on 11 July, 2016 to limit the number of purchases made by each customer to 50 cosmetics and perfume products, and 10 bags and watches at each brand.

What is the impact of the purchase limitations? • As local duty-free stores takes up around a fourth of combined sales generated by South Korean cosmetics firms, the new policy is expected to pose a negative impact on South Korean cosmetics market, though the impact will vary by company depending on the details of purchase caps. •

Local cosmetics giants Amore Pacific and LG H&H expressed that they do not expect a drastic impact as their key brands already placed their own sales limitations at duty-free stores that are even more stringent than the one currently being imposed by Korea Customs Service.

Purchase limitations of duty-free products made by each customers

50

50 cosmetics & perfume items

10 bags & watches at each brands

10 17

Profiles of key duty-free players in South Korea

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Lotte Duty Free Company profile • A duty free business unit affiliated to South Korea’s major hotel business operator Lotte Hotel • First store founded in Sogong-dong, Seoul in 1980 • No. 1 duty free retailer in Asia; the third largest global duty-free operator • Houses approximately 850 international and domestic brands Physical stores: • Seven domestic branches: three in Seoul, one each in Jeju, Busan, Incheon International Airport and Gimpo International Airport

•

The main branch of Lotte Duty Free at Lotte Department Store in Sogong-dong, Seoul

Lotte Duty Free shop at Incheon International Airport

Five overseas branches: two in Japan (with one each in Tokyo Ginza and Osaka’s Kansai international Airport), two in Jakarta (one each in Jakarta prestigious business district and Jakarta International Airport) and Guam International Airport

Online store • Transactional website (http://en.lottedfs.com/main) • Transactional mobile app

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Lotte Duty Free (cont’d) Sales • Sales of Lotte Duty Free’s branches in Seoul totaled 3,105 billion won (US$2.6 billion) # in 2015, with the main branch in Sogong-dong making up over 70% of its total DFS sales in Seoul.

Lotte COEX branch, 265 billion won (US$0.23 billion)#

Lotte World Tower branch, 611 billion won (US$0.52 billion)#

#1,175.06

Lotte Sogong branch, 2,229 billion won (US$1.90 billion)#

won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

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Lotte Duty Free (cont’d) Latest developments – store expansion

Latest trends - domestic jewellery brands perform well

Lotte Duty Free has kick-started upgrading and expanding its Sogong main branch at Lotte Department Store in downtown Seoul as a move to attract more foreign shoppers, especially the Chinese. •

The makeover, scheduled to be completed in 2017, is expected to add a sales area of 3,000 sqm to the main branch. Upon the expansion, the store will accommodate more cosmetics and perfume brands.

•

Meanwhile, the concessions of sought-after cosmetics brands such as Sulwhasoo and Whoo, will also be enlarged to engage more Chinese shoppers.

Cosmetics stores of Lotte Sogong-dong duty-free branch (located on at Lotte Department Store in Sogong-dong, Seoul) are being renovated.

•

Lotte Duty Free reported that sales of domestic jewellry brands surged 80% yoy in 2Q16, while the number of domestic jewellry brands at Lotte Duty Free rose to 30 in 2016 from 20 in 2H15.

•

The remarkable sales growth was driven by several factors, including increased demand for South Korea products following the popularity of K-beauty products, a rising number of tourists visiting South Korea, and the on-going hype of the Korean wave.

•

Lotte Duty Free houses a number of medium-priced domestic jewellery brands, including J.Estina and Sejung Group’s Didier Dubot, which are largely aiming at foreign shoppers from China, Hong Kong and Japan*.

Local cosmetics brand Sulwhasoo’s store in the Lotte Sogong-dong duty-free branch

*“Popularity of Korean Jewelry Soars.” 5 July, 2016. Retail News Asia.

The store of local jewellry brand J.Estina in Lotte Sogong-dong duty-free branch

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Lotte Duty Free (cont’d)

“I prefer to buy Sulwhasoo and Whoo at Lotte Duty Free as it offers the best deals and more skincare products. ” Ms. Wang A tourist from China

“It’s so easy to become Lotte Duty Free VIP member! The VIP card gives me additional 5% to 15% discount at Lotte Duty Free branches” Ms. Liang A student from China

Ms. Zhang A flight attendant from Hong Kong

“The three duty-free outlets in Seoul are easily accessible! Especially the main branch, which is conveniently located and close to other hot shopping spots in Myeong-dong” 22

The Shilla Duty Free Company profile •

A duty free business unit operated by Samsung’s hospitality arm The Shilla

•

First store opened inside Shilla Seoul Hotel in 1986

•

The second largest duty-free operator in South Korea; one of the top 10 global duty-free players

•

Houses over 550 international and domestic brands

Physical stores: • Four domestic branches: one each in Seoul, Jeju, Incheon International Airport and Gimpo International Airport •

Two overseas branches: one in Singapore Changi International Airport and another in Macau International Airport

Online store • Transactional mobile app

Sales •

Sales of The Shilla Duty Free’s main branch in Seoul totaled 1,321 billion won (US$1.12 billion)# in 2015, accounting for about 26% of downtown dutyfree sales in Seoul in 2015.

The Shilla Duty Free shops at Incheon International Airport

The main store of Shilla Duty Free inside Shilla Seoul Hotel in Jung-gu, Seoul (photo credit: http://www.shilladfs.com/)

23 #1,175.06

won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

The Shilla Duty Free (cont’d) Latest developments – Debut store in Phuket

Latest development – Duty-free pet food

•

The Shilla Duty Free has announced that it will open its first Thailand duty-free store in central Phuket, Thailand in August 2016.

•

As most of the customers who shop at duty free stores are Chinese travelers and it is estimated that at least 90 million people in China own pets, The Shilla Duty Free believes that pet supply brands will become popular at duty-free stores in the near future.

•

The Phuket store will be operated under the name of The Shilla Duty Free but owned by GMS Duty Free, a joint venture company formed by Shilla Duty Free and its Thai allies Gems Gallery Group, a major jewellery retailer in Thailand, as well as The Mall Group, one of Thailand’s leading shopping mall operators.

•

The Shilla Duty Free has recently introduced online its first duty-free pet supplies home brand.

•

At its offline stores, the company also offers pet supply brands including Sniff, CosmoUnit, Dentists Appointment and Ruffwear.

•

Besides, it is set to open a premium pet supply shop named Louis Dog in 2016**.

•

It will stock a wide range of duty-free products, including perfume, cosmetics, luxury fashion, watches and jewellry, confectionery, local products and souvenirs*.

*“Shilla Duty Free to open Phuket store in August.” 15 July, 2016. Retail in Asia. **“Popularity of Korean Jewelry Soars.” 5 July, 2016. Retail News Asia.

24

The Shilla Duty Free (cont’d)

“ The Seoul branch taxi fare payback scheme is cool! Can’t believe I can have taxi fare paid back with up to four 5,000 won-worth gift cards! ” Ms. Hsu A student from Taiwan

“ Almost everything is here! It carries numerous international and domestic brands. There is also a free shuttle from Shilla to Myeondong, very convenient! ” Ms. Zhang A K-fashion fan from China

“The Shilla Duty Free newsletter’s subscribers can receive via email regular newsletters which show at the glance The Shilla Duty Free Shop latest events and benefits.” Ms. Chan A tourist from Hong Kong

25

Dongwha Duty Free Company profile •

Established in 1973, Dongwha Duty Free is the first duty free shop operator in South Korea

•

Currently the third largest duty-free player in South Korea

•

Houses approximately 388 international and domestic brands

•

Sales of Dongwha Duty Free totaled 320 billion won (US$0.27 billion)# in 2015, around 6% of the total dutyfree sales in Seoul

Dongwha Diplomat Duty Free shop on the 2nd floor Dongwha Duty Free shop in Gwanghwamun, Seoul

Physical stores: • One domestic branch in Gwanghwamun, Seoul - The branch comprises five floors and one basement, with the second floor housing Dongwha Diplomatic Duty Free Shop Online store • Transactional website (http://www.dutyfree24.com/) • Transactional mobile app

#1,175.06

won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

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Dongwha Duty Free Latest development – Partnership with Wanda •

Dongwha Duty Free forged a partnership with Wanda Tourism Investment, a hospitality arm under China’s biggest property developer Wanda Group, in June 2016

•

Under the partnership, Dongwha Duty Free can utilize Wanda Tourism’s online-offline strengths to attract more Chinese tourists to its duty-free products and services

•

Both parties will also look for new ways to deepen cooperation, potentially expanding into duty-free products and other travel retailing-related businesses in the future.

•

Meanwhile, Dongwha Duty Free has also teamed up with South Korea's conglomerate E-Land Group to supply admission tickets for regular Korean WAPOP (World & Asia Pop) concerts to Wanda Tourism's tourists*

In-store promotion at Dongwha Duty Free’s main branch in Seoul

MCM is one of Dongwha’s top-selling fashion brands.

*“Wanda Tourism and South Korea's Dongwha Duty Free enters into partnership agreement.” 6 September, 2016. Wanda Group.

27

Dongwha Duty Free

“Dongwha Duty Free boasts various brands from around the world.. and the price is cheaper than the others.” Ms. Zhu A tourist from China

“The duty-free store is well-structured and tastefully done. Inside the building there are cafés and restaurants where I can rest my feet for a quick snack and coffee.” Mr. Lai A tourist from Hong Kong

“Very convenient location as it is close to Gwanghwamun subway station; there are bus stands for major local buses and airport buses too. ” Ms. Wu A student from Taiwan

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Contacts Asia Distribution and Retail Teresa Lam Vice President Tel: (852) 2300 2466 Email: [email protected] Tracy Chan Senior Research Analyst Tel: (852) 2300 2480 Email: [email protected]

Fung Business Intelligence 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: (852) 2300 2470 Fax: (852) 2635 1598 Email: [email protected] http://www.fbicgroup.com/

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