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Lotte Duty Free mulls exit from Incheon

Sept 05,2017
Lotte Duty Free, Korea’s largest operator of duty-free stores, is considering a pullout from Incheon International Airport, a company source said Monday, as the local duty-free industry is struggling to cope with the impact of a diplomatic row between Seoul and Beijing over the deployment of a U.S. missile defense system.

Lotte’s consideration of withdrawing from the main gateway to Korea is feared to spark a domino effect as other operators demand the airport corporation cut rent to help them tide over a tumble in the number of Chinese tourists, their main customers.

In mid-March, China imposed a ban on selling package tours to Korea in apparent retaliation over the deployment of an antimissile system known as Terminal High Altitude Area Defense. The ban dealt a harsh blow to the local duty-free industry, which has heavily relied on Chinese customers.

Chinese tourists accounted for nearly 47 percent of all tourists coming to Korea last year.

“Lotte Duty Free is carefully weighing an option to drop its business at Incheon International Airport unless the Incheon International Airport Corporation slashes rent substantially,” a senior company official said. “We have been consistently demanding a rent cut.”

The official said Lotte Duty Free can’t pay rent for the remaining period of a five-year contract due to drastic changes in the business climate, including a plunge in the number of Chinese tourists.

It is the first time that Lotte Duty Free has disclosed the possibility of withdrawing from Incheon International Airport. In 2015, Lotte Duty Free won a five-year deal with total rent reaching more than 4 trillion won ($3.54 billion). Under the contract, Lotte Duty Free is to pay 75 percent of the rent between September this year and August 2020.

Lotte has been operating a duty-free shop at Incheon International Airport because of its symbolic status as the nation’s main gateway, though it has been unprofitable. The situation changed drastically after its duty-free shop in Seoul suffered a nosedive in the number of Chinese visitors. In the April-June quarter, Lotte Duty Free posted an operating loss of 29.8 billion won.

Industry observers say other companies may follow suit if Lotte Duty Free decides to withdraw from Incheon International Airport.

Hanwha Galleria has already decided to shutter its duty-free shop at Jeju International Airport, mirroring the difficulties facing local duty-free operators. They’re demanding Incheon International Airport Corporation lower the rent after the airport posted an operating profit of some 1.3 trillion won last year. Nearly 66 percent of the operating profit came from rent.

Last week, the CEOs of local duty-free operators met with the chief of the airport authority to call for a temporary reduction in rent, but a corporation official said Monday it is not considering any direct cut.

Yonhap