SOUTH KOREA. CityPlus Duty Free (City Duty Free) has written to Incheon International Airport Corporation (IIAC) warning it of potential monopoly issues if the airport company allocates its vacant Terminal 1 perfumes and cosmetics to The Shilla Duty Free.
As reported, the IIIAC auctioned off the three T1 dealerships resigned by Lotte Duty Free in February. But he restructured them into just two contracts (see table below). And therein lies the crux of the complaint from small and medium-sized enterprise (SME) player CityPlus.
Lotte resigned from its DF1 (perfumes & cosmetics), DF5 (leather goods & fashion) and DF8 (various categories). The concessions, which Lotte Duty Free won in early 2015 after a series of successful bids, were to run from September 2015 to August 2020.
Lotte Duty Free cited the excessive cost of the contracts, having failed to renegotiate its terms. The retail giant said its Incheon stores (hit by the THAAD-related collapse in Chinese tourism, the proliferation of competition in the city center and excessive airport fees) had posted losses of 200 billion KW (184 million dollars) since 2016.
The contracts would result in a 1.4 trillion KW ($1.3 billion) deficit, the retailer said, if the stores continued to operate for the full term in 2020.
The new tender combines DF1 and DF8 into one package. DF5 remains a separate opportunity. By combining DF1, which has a higher spend-per-passenger (SPP) potential and sales volume, with DF8’s lower SPP and sales potential, the IIAC hoped to create a more attractive proposition for bidders.
However, Allen Hong, senior general manager of CityPlus Free’s merchandising division, told the Moodie Davitt report that the revamped contract structure was unfair to smaller retailers and could hurt the consumer’s proposition. “We, CityPlus Duty Free, sent a document to the IIAC which warned of a possible cosmetics/perfume monopoly in Incheon airport duty free if the most likely incumbent retailer (Shilla) wins DF1 for P&C,” he said.
Hong noted that since 2001, the IIAC has always offered paired concessions for the all-important fragrance and cosmetics category. But if Shilla, which already operates DF2 (beauty products), wins the new combined DF1 contract, its market share for the category will be 90% or more in Q1 – and 95% for Q1 and Q2 combined.
This would be an “absolute category monopoly,” Hong said. Such a situation would cause “serious harm” to consumer welfare and threaten the survival of smaller competitors, he said.
“We have notified the IIAC to review this issue and prevent the retailer [Shilla] to win the DF1 concession,” Hong said. “If the IIAC does not propose appropriate measures to prevent a monopoly, we are prepared to take this issue to the Fair Trade Commission.”
Disagreement with CityPlus complaint
Although The Shilla Duty Free declined to comment, the company will certainly disagree with CityPlus’ assertion. The Fair Trade Commission will have no problem with the proposed structure, according to sources close to the company. The company could also reasonably point to many other international airports that have a single retailer for one category (or indeed all categories).
However, the Shilla Duty Free is unlikely to be the sole bidder. Both Shinsegae Duty Free and industry newcomer Hyundai Duty Free (which is preparing to open a store in downtown Gangnam, Seoul later this year) have expressed interest in The Moodie Davitt Report.
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