Despite widespread concerns within the Korean and Japanese travel retail sectors about the impact of China’s new e-commerce law introduced on January 1, neither air traffic nor duty-free sales have slowed in either country.
As reported, South Korea’s duty-free market – the world’s biggest – rose by 27 percent in the first quarter to KRW 5.6189 trillion ($4.95 billion), according to industry sources.
That momentum has continued into 2019 with March a record-breaking month in both Korea and Japan. The latter saw a new monthly high for Chinese inbound traffic while duty-free sales in Korea rose by 23 percent year-on-year to an all-time monthly peak of ($1.9 billion), according to the Korea Duty Free Association.
According to latest Japan National Tourism Organization (JNTO) figures, total inbound-tourist traffic in March grew 5.8 percent year-on-year to over 2.7 million. Five origin markets, including the U.S. and U.K., achieved monthly traffic record highs, while ten others including China and Taiwan hit record levels. Japan’s cherry-blossom season and the warmer than usual climate were key tourism drivers.
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Chinese arrivals to Korea continue to recover following a protracted slump due to the eruption of the THAAD dispute between the two countries in March 2017. Although official figures for March are yet to be announced, the travel industry expects growth levels to be in line with January (28.7 percent year-on-year) and February (31 percent).
Chinese spending continues to outpace strong traffic growth to Japan and South Korea
In South Korea, foreign customers are becoming ever more important for domestic and travel retailers afflicted by a decline in domestic spending and increased cannibalization from online shopping. Spending by foreign travelers outpaced arrival growth rates in both 2018 and Q1 2019 for both Japan and Korea with reseller (daigou) activity at record-high levels in both countries.
– Japan: Spending by foreign travelers increased by 25.8 percent year-on-year to a record ¥339.6 billion in 2018. This outpaced inbound tourist growth of 8.7 percent.
– South Korea: Duty free sales grew 35 percent year-on-year in 2018, well ahead of the 15/1 percent rise in inbound traffic.
According to JNTO, total inbound-tourist expenditures in Q1 2019 reached ¥1.118 trillion, up 0.5 percent year-on-year. Shopping remains the greatest contributor, accounting for 34.7 percent of total spending though figures released by JNTO show total expenditure on shopping declined 2.1 percent year-on-year.
Daigou business still flourishing in both countries but taking revised shape
However, the JNTO figures are based on surveys of traditional Chinese tourists and fail to reflect the growth of sales to daigou resellers. Japanese department stores saw record spending by overseas visitors in Q1 2019 with Chinese tourists flocking to Japan for the Lunar New Year. Chinese resellers continued to purchase Japanese cosmetics products heavily despite the implementation of the new e-commerce law.
As reported, cosmetics were the key to the Korea market’s vibrant Q1 performance, with the category posting a 45 percent rise year-on-year and accounting for 62.5 percent of total duty free sales. Chinese nationals accounted for 76.7 percent of total sales in the Korean market in the first quarter.
Resellers continue to act as the main driver to growth in Korea’s duty free industry with spending per person (21.9 percent in March) outpacing duty free traffic growth (0.9 percent). The spread between duty free traffic growth and spend per person widened to 21 p.p. in March 2019, up from 10.3 percent in January.
It appears that China’s new e-commerce law has failed to decrease reseller activity in both Korea and Japan with foreigner spending continuing to grow in both countries. Hotel Shilla (parent of The Shilla Duty Free) explains that sales to individual resellers have declined but sales to corporate resellers who have registered business licenses have grown sharply to fill in any gaps (sales portion by corporate and individual resellers 2018 20:80, Q1 2019 40:60).
Lotte and Shilla prosper downtown
As reported, Lotte Duty Free’s flagship store in Myeong-dong/Myungdong turned in a rip-roaring performance with sales rising 33 percent to KRW 1.2977 trillion in the first quarter.
The Shilla Duty Free, coming off a record 2018, also posted a big double-digit gain, with Q1 sales up by 35.2 percent.