Regulation binds 9 trillion won duty free business

By Choi Sung-jin

Korea's duty-free retailing business, a global market leader, is facing a serious crisis because of high entry barriers set up by bureaucrats, industry sources said. 

Other countries, including China, Japan and Taiwan, let alone Europe, are going all out to promote duty-free shopping as major earners of export money, but Korean regulators have locked it up in a small frame under the pretext of antitrust administration, they said. 

The nation's duty-free retail market has grown remarkably in the past five years and emerged as a global leader in 2012, beating the United States and China. The surge in Chinese tourists, the spread of hallyu, bold corporate investment and accumulated business know-how have combined to push it up. 

A problem came up the following year. In 2013, the government revised the Customs Law to limit the efficacy of operational licenses to five years, half of the previous 10 years. The revision also obligated the existing operators to renew their licenses from the ground up. 

That explains why the Lotte Group, the third-largest in the world in the duty-free business, will have to shut down its store in Lotte World Tower, which opened in 1989. SK Networks will also wind up its 23-year duty-free business unit. Winners of the latest duty-free business battle _ Shinsegae and Doosan _ are not too jubilant, either, as they have to undergo the same process in five years. 

The shortened license will remain the biggest stumbling block whoever wins it anew, market sources said, by running squarely counter to the industry's characteristic that requires a decade for a newcomer to enter a stable track. "Duty-free shops call for massive investment in the early stage, but who will throw dozens, even hundreds, of billions of won, to do business for five years?" asked an industry expert. "In a business whose main clients are foreign tourists, concerns about monopoly have little meaning." 

Other industry insiders also expressed worries about losing Chinese shoppers to Japan. "Youke (Chinese tourists) prefer foreign luxury brands, which places priority on long-term trust and relationship," one store owner said. "If the current system remains unchanged, few luxury brands will enter Korean duty-free stores." 

The biggest problem lies in the bureaucrats' perception that regards duty-free stores as a privilege. So they try to keep specific operators from doing business for long or establishing monopolies. on the contrary, most foreign governments are encouraging existing operators to grow larger, because the larger the stores, the bigger their bargaining ability with brand makers and the lower their prices. That explains why the global market share of the four biggest duty-free stores soared from 16 percent in 2010 to 25 percent last year, they said. 

These experts offer some alternatives, such as replacing the current licensing system with a reporting system or a more relaxed permission scheme, letting in far more players than now. 

The market should be open to all applicants who meet certain minimal requirements, so that it can spread to small cities and counties to help reinvigorate regional economies, they said, adding that the licensing scheme is a typical administrative expediency that spawns lots of backbiting and controversy about favoritism. 

"The duty-free business constitutes the axis of developing the tourism industry," said Professor Kim Seung-wook, of Chung Ang University. "It cannot grow by allowing a handful of operators to share its profits. Now is the time for the nation to sharply lower its entry barriers and rack its brain to loosen the purse strings of foreign visitors."