The folly of allowing ‘Dufry Thomas Julie Korea,’ which took advantage of a legal loophole, to open its store in the Gimhae International Airport should not be repeated.
Image: Baek Jin
‘DFS,’ the Global No. 1 duty-free enterprise, will potentially come to a new JTO downtown duty-free shop operated by the Jeju Tourism Organization. If its entry into the local market is finalized, a huge change is expected in the duty-free shop licensing business, which the state licensed after giving up taxes. Having waited for a chance to advance into the Korean market, the world’s largest duty-free market, global enterprises are about to overcome the barrier of the domestic duty-free market capitalizing on the fact that the small-sized Jeju Tourism Organization’s lack of brand bargaining power.
2015 was a year when the Korean duty-free industry was caught in a maelstrom of violent changes. New downtown duty-free shops were opened in Seoul and Jeju due to the rapid rise in Chinese tourists, and the licenses of existing duty-free business operators were cancelled, and new large corporations advanced into downtown duty-free shops, leading to the restructuring of and confusion in the entire market. The competition for ‘attracting brands’ and the ‘issue of employment succession’ still remain. From the very beginning of 2016, the news about a global duty-free business operator’s entry into Korea is adding to the confusion.
Originally, the Jeju downtown duty-free shops had been divided until 2014 into the Jeju downtown Shilla Duty-Free Shop and the Lotte Duty-Free Shop operated by Lotte Hotel Jeju in the Jeju Jungmun Resort. As the license for the Lotte Duty-Free shop Jeju Store (Jungmun Resort) expired on March 31, 2015, the Jeju Lotte Duty-Free Shop was relocated to downtown Jeju, and a new license was granted to the Seogwipo area to cope with the rapidly increasing Chinese tourists. The Jeju Tourism Organization obtained the new license for the Seoguipo area. As a result, a total of three downtown duty-free shops are in downtown Jeju.
The Jeju Tourism Organization, which obtained the government-led bid for a license in July 2015, must open the stores by January 14, 2016 according to the “Notification Regarding the Operation of Bonded Stores (revised on July 1, 2015).” If preparations are not adequate, however, the opening may be put off once by up to 30 days with permission from the head of the competent regional customhouse. A lot of questions have been raised about whether the Jeju Tourism Organization would be able to open its stores in January since the end of 2015. Given this background, the Jeju Tourism Organization is thinking to open the stores a month later, i.e. February 12, due to inadequate preparations.
Photograph: Kim Jae-young
Originally the industry and outsiders have been predicting that JTO would have much difficulty attracting brands to its downtown duty-free shops since it obtained the license. Furthermore, due to the characteristics of the Jeju region, Lotte and Shilla, No. 1 and 2 operators in the domestic duty-free market, began to compete with each other in downtown Jeju, and they are expected to engage in a fierce marketing war. The less importance of the Seogwipo region has been regarded as an obstacle to JTO’s attracting brands. Various prestigious brands are thriving in the two largest domestic duty-free shops in downtown Jeju. Therefore, even if new duty-free shops open in Seogwipo, the predominant forecast was that famous brands would not be willing to open their stores in Seogwipo especially because sales are not guaranteed.
It seems that the problem started here. As soon as JTO obtained the license, it began to intensify its efforts to secure brands. The Jeju Tourism Organization corresponds to an SME in Korea, and its ability to attract major brands encountered the wall of harsh reality and JTO had difficulty finding a solution. It did everything it could to attract domestic and overseas brands, but it obviously had considerable difficulties attracting various brands within a short period of 6 months. In addition, ‘DFS,’ which had always been trying to advance into the Korean market, seemed to make an alluring proposition to JTO.
A JTO insider said, “It is true that ‘DFS’ directly proposed it last October, and we reviewed it. We conducted legal review of the current notification, but there is no problem with the ‘sourcing’ of brand products including prestigious brands as ‘DFS’ proposed.” Article 177-2 and Article 178 of the Customs Act only stipulate that “Licensed bonded area operators are prohibited from ‘allowing others to use their names.’” Accordingly, if ‘DFS’ does not operate the Jeju Seogwipo downtown duty free shop (JTO), for which the Jeju Tourism Organization obtained the license, on consignment, or only supplies the products sold in the duty-free shop without borrowing the name of JTO, there will be no problem according to the current law.
He added, “Despite the Jeju Tourism Organization’s efforts to attract brands, we had lots of difficulties in reality and failed to source the products of many brands. We reviewed three methods of attracting brand products to JTO. First of all, JTO will attract brands directly, and the brands will manage the stores and supply products on their own responsibilities, which is the existing method. Second, famous overseas outlets will supply. Lastly, like the state-authorized parallel importation, products will be supplied through foreign duty-free business operators. Involving ‘DFS’ is no different than parallel importation. No matter which method is chosen, there will not be a lot of difference in terms of product quality, and we may make the right decision from the viewpoint of consumers.”
The Jeju Tourism Organization does not seem to have reached a conclusion as to whether part of the products to be sold in the duty-free shop will be supplied through ‘DFS,’ or JTO will directly source brands and supply products. It seems that it’s a matter of time. As it already put off the opening by a month due to its inadequate preparations, JTO does not have many options to choose from. If JTO asks people to believe in it since it can secure various brands in the next month or so, it will only sound hollow.
The situation is the same for downtown duty-free shops in Seoul, for which large domestic corporations obtained the license at the same time. Looking at the ‘Shilla IPark Duty-Free Shop,’ which opened on December 24, and the ‘Galleria Duty-Free Shop 63,’ which opened on December 28, leading corporations in Korea jumped on the bandwagon because they had the locational advantage, i.e. downtown duty-free shops in Seoul, but they have attracted few prestigious brands. They say that things will be different when the duty-free shops open next March or June, but things do not seem that easy. The Jeju Tourism Organization has operated a duty-free shop exclusively for Korean citizens, but it is unclear whether JTO will successfully attract brands by February 12 when the duty-free shop opens.
If the world’s No. 1 duty-free business operator DFS supplies products to the Jeju Tourism Organization because it will not violate any law, it will be another “Dufry Thomas Julie Korea,” which took advantage of legal loopholes to open its store in the Gimhae International Airport. As it is does not have the ability to attract brands independently, the Jeju Tourism Organization seems to face harsh criticism if it voluntarily unlatches the domestic duty-free market to a global behemoth.
