This story originally appeared on The Moodie Davitt Report, our content share partner. 

Hotel Shilla’s travel retail division The Shilla Duty Free recorded a 38 percent year-on-year increase in consolidated revenues in the fourth quarter of 2018, to KRW 1.071 trillion ($958 million).

The consolidated figure includes the retailer’s Korean and offshore duty-free business.

Operating profit in the division rose by 154 percent to KRW 25.1 billion ($22.4 million). However, a one-off impairment loss of KRW 50 billion ($44.7 million), relating to a company loan to Dongwha Duty Free, prompted a net loss of KRW 21 billion ($18.8 million) for the quarter.

Operating profit disappoints

Operating profit of KRW 26.6 billion ($23.8 million) for the company’s Korean business fell short of market expectations.  Local sources attributed this to heavy concession fees at Incheon International Airport Terminal 1 and start-up investment costs for Seoul Gimpo Airport (opened on January 9 this year).

One analyst told The Moodie Davitt Report: “Results were way below expectations with inventory clearing and higher rent fees bogging down profitability.”

The inventory clearing was linked to the desire by Korean retailers to move stock ahead of China’s introduction of a new e-commerce law on January 1.

The company’s airport duty free business, spurred by the opening of Incheon International Airport T2 on January 18, 2018, delivered a 49.7 percent revenue rise, to KRW 450.6 billion ($403 million). In downtown duty free, revenues rose 31 percent, to KRW 620.9 billion ($555.2 million).

Non-consolidated results (i.e., The Shilla Duty Free’s Korean market performance) showed a 34 percent revenue increase year-on-year to KRW 824 billion ($736.4 million). Operating profit for this business rose by 23 percent to KRW 26.6 billion ($23.8 million).

Extrapolating the overseas performance from the two sets of results, shows that The Shilla Duty Free’s offshore business (Changi, Hong Kong and Macau airports and Phuket and Tokyo downtown) posted sales of KRW 247.5 billion ($221.2 million). The overseas stores recorded an operating loss of KRW 1.5 billion ($1.34 million) — a sharp improvement on the KRW 11.7 billion ($104.6 million) loss in the same period a year earlier but down on the breakeven point reached in Q3.

The average tour agency commission rate in the Korean downtown business eased slightly year-on-year, from 12.1 percent in the fourth quarter of 2017 to 11.5 percent in the same period of 2018.

What next for the daigou business?

Shilla was buoyed by the continued recovery in Chinese tourism to South Korea as the THAAD dispute eased. At top-line level it was also boosted by the booming daigou (shuttle trader) phenomenon that dominated Korean duty free throughout 2018.

Daigou traders at Incheon International Airport rip away the packaging of beauty products and accessories before cramming them into cabin luggage. Will a crackdown by the Chinese government largely curb the daigou business or will it resurface after a temporary lull? Photo: Martin Moodie

This trade involves hundreds of thousands of Chinese shoppers purchasing Korean and international duty-free goods for customers in Mainland China at well below prevailing Chinese domestic prices and then reselling them.

The impact of the Chinese government’s new e-commerce law introduced at the beginning of 2019, which was designed in part to crack down on the daigou trade, remains to be seen. Some analysts have warned of a tough environment for South Korea’s duty free sector in 2019. Others believe that after a short blip, daigou traders drawn by the big price differential between Korean duty free and China domestic, will find a way to respark the unofficial channel.

Shilla though predicted an improved sales environment for the travel retail business in the first quarter fueled by seasonal demands, and particularly the Lunar New Year holiday. The retailer also said its overseas airport operations would continue to stabilize.

The latest figures from the Korea Tourism Organization showed that Chinese visitor arrivals in South Korea rose 35.1 percent year-on-year in November and 25.2 percent in December, continuing the sustained recovery from the THAAD-hit 2017 numbers. However, total Chinese visitors remain down on levels before THAAD. In December 2016, South Korea attracted 535,536 Chinese visitors, compared with just 416,279 in December 2018.

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Shopping & Duty-Free