October 8, 2014 / 11:19 AM / 3 years ago

South Korea powers up downtown duty-free sales as China tourism magnet

A woman leaves a shopping mall in central Seoul July 31, 2013. REUTERS/Kim Hong-Ji

SEOUL (Reuters) - Already the world’s biggest duty-free market, South Korea said on Wednesday it will issue more licenses for downtown duty-free shops, doubling down on a strategy that has helped it outstrip regional rivals seeking to reel in shopaholic Chinese tourists.

Seoul-based Lotte Duty Free and Hotel Shilla (008770.KS), part of the Samsung Group [SAGR.UL], have been adept at luring mainland China shoppers by promoting in-vogue South Korean culture - known as the “Korean wave” - and products such as cosmetics and appliances. The tactic has helped turn the pair into the world’s fourth- and eighth-largest duty free retailers by sales respectively.

Thanks to Chinese tourists’ appetite for the luxury goods and, in particular, Korean items, South Korea overtook Britain in 2010 to become the world’s largest duty-free market. In 2012, the last year for which full sales numbers are available globally, it raked in $5.86 billion in duty-free sales, or 11 percent of the global market, according to the Korea Customs Service.

“Lotte and Shilla’s particular strength lies in their understanding of the North Asia traveler, the Koreans naturally but more particularly the Chinese and the Japanese,” said Martin Moodie, an industry expert and chairman of the Moodie Report.

Korean cosmetics, he said, are “arguably the hottest category in travel retail worldwide”.

South Korea is enjoying a wave of popularity with Chinese tourists, with visitor numbers on track to hit 6 million this year, up 39 percent from the 4.32 million arrivals in 2013, according to the Korea Tourism Organisation.

‘I CAME TO SHOP’

South Korea is hardly alone in looking to attract free-spending Chinese visitors. This month, Japan extended its list of items that can be sold duty-free, including food, medicines and cosmetics.

Driven by government tourism promotions of “Cool Japan” culture and a weaker yen, the number of travelers to Japan has doubled in the past decade to top 10 million for the first time last year. Japan wants to double that again to 20 million by 2020, the year of the Tokyo Olympics.

In downtown Seoul on Wednesday, Wei Ci, a 24-year-old Beijing resident, scanned a row of local skincare products at the Dongwha Duty-Free Store. “I came to Korea mainly to shop,” she said, explaining she planned to spend the day making the rounds of the capital’s duty-free shops.

Lotte Duty Free, a unit of Lotte Shopping (023530.KS), and Shilla have specialized in downtown duty-free shops in South Korea’s bustling cities. Unlike traditional airport duty-free shops, they must generate their own tourist traffic.

To do that, they engage in marketing that is more aggressive than the industry standard, staging Korean music - K-pop - concerts and fan meetings with actors and using Chinese social media such as the Weibo microblogging service. Both are now pursuing expansion overseas.

Of South Korea’s current 42 duty-free shops - Lotte has 8 Shilla 6 - some 17 are in city locations, including two on the holiday hotspot island of Jeju. At these locations, as in airport shops, duty-free shoppers must show a boarding pass for an upcoming flight.

South Korea government officials didn’t specify on Wednesday how many new licenses may be added. The matter needs to be discussed with regional authorities to gauge demand, they said.

Chinese shoppers remain the biggest buyers of luxury goods worldwide, making up 29 percent of the global market, according to a report last year by Bain & Company. Two-thirds of that luxury shopping takes place outside China.

Additional reporting by Hyunjoo Jin and Sohee Kim; Editing by Tony Munroe and Kenneth Maxwell

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