Lotte Duty Free Reshapes Its Business Around Profitability as It Returns ...

The company is cutting overseas stores and reducing reliance on Chinese resellers

A renewed airport presence could help Lotte challenge for the industry’s top spot again

As Lotte affiliates accelerate profitability-focused business restructuring under Chairman Shin Dong-bin’s rebalancing strategy, Lotte Duty Free is actively reducing its overseas stores.

[Insight Korea = Lee Suk-yeong]

Lotte Duty Free is accelerating a profitability-focused overhaul. After reducing transactions with Chinese daigou, or bulk resellers, last year, the company is continuing to close inefficient stores. More recently, it returned to Incheon International Airport, signaling an attempt to reclaim the top position in the duty-free industry.

Lotte Group affiliates are speeding up efforts to streamline their business structures around profitability in line with Chairman Shin Dong-bin’s rebalancing strategy.

According to the retail industry on May 11, Lotte Duty Free has recently been reducing overseas stores. Last year, it closed four overseas locations: the Melbourne downtown store and Darwin airport store in Australia, the Wellington airport store in New Zealand, and the Da Nang downtown store in Vietnam. It is now moving to withdraw from its Sydney downtown store in Australia.

Overseas Stores and Daigou Deals Cut as Profitability Improves

The Sydney downtown store was launched in 2022 as Lotte Duty Free’s key base in Oceania. But with the tourism market recently weakening and the downtown store falling short of profitability expectations, the company has begun the process of exiting.

The move is part of Lotte Duty Free’s broader business overhaul. Since last year, the company has been working to improve profitability, and store closures are one part of that effort. It is also considering whether to extend the contract for its Guam airport store, which expires in July.

Ending transactions with daigou resellers has also been a representative profitability strategy. Daigou traders buy products in bulk at duty-free shops and resell them overseas. They help boost revenue, but duty-free operators must shoulder commissions amounting to 40 to 50 percent of the regular price.

For duty-free companies, daigou sales had been difficult to give up because they accounted for roughly half of revenue. But continuing those transactions made it hard to improve profitability because of the commission burden. Lotte Duty Free decided early last year to scale back such transactions and prioritize profitability.

The result was clear. Lotte Duty Free’s revenue declined last year from the previous year, but operating profit turned positive. Operating profit reached 51.8 billion won, up 195 billion won from a year earlier and the highest level in the past four years. The strategy of choosing profitability over sales volume was proven in the results.

Incheon Airport Could Add Up to 600 Billion Won in Sales

Having completed much of its restructuring, Lotte Duty Free is moving to accelerate growth this year. The starting point was its return to Incheon International Airport last month after about two years and 10 months, when it resumed operations in the DF1 zone covering cosmetics, perfumes, liquor and tobacco.

Shilla Duty Free, which had previously operated in the DF1 zone, decided to withdraw because it could not withstand the rent burden. Lotte Duty Free entered the space at a relatively lower rent, which gives it a better chance of securing profitability.

The industry is watching whether Lotte Duty Free can regain the No. 1 position. Based on last year’s revenue, Shilla Duty Free ranked first with 3.3818 trillion won. If Lotte Duty Free achieves its target sales at Incheon Airport, it could reclaim the top spot.

If passenger traffic at Incheon Airport remains near previous levels, Lotte Duty Free is expected to generate annual sales of 500 billion to 600 billion won from the airport. Last year, Lotte Duty Free posted revenue of 2.816 trillion won.

The fact that Shilla and Shinsegae Duty Free returned some operating rights at Incheon Airport, making revenue declines inevitable for them, could also work in Lotte Duty Free’s favor. Still, a weaker price advantage from high exchange rates and the rise of Hyundai Duty Free remain variables Lotte must overcome.

“After the new CEO took office at the end of 2024, we rebuilt our business strategy around strengthening profitability,” a Lotte Duty Free official said. “Daigou now account for only a single-digit share of total sales, and we are maintaining those transactions only where they are profitable.”

- This article was translated by ChatGPT. (이 기사는 챗GPT가 번역했습니다.)