A giant in the duty-free industry 'DFS', opens a duty-free shop (JTO) in Jeju. It is “predestined.”
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A giant in the duty-free industry 'DFS', opens a duty-free shop (JTO) in Jeju. It is “predestined.”
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  • 승인 2016.01.14 15:13
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The Jeju Tourism Organization and the Korea Customs Service gave foreign companies an opportunity to advance into the duty-free industry in a circuitous way.
It is likely to spread like wildfire to small duty-free business operators who have difficulty attracting brands.

The Jeju Tourism Organization (JTO), planning to open a downtown duty-free shop in February, is expected to have a global duty-free business operator DFS supply products to JTO due to difficulties in attracting brands. As there is no regulation that can prevent it, it is almost certain that a foreign corporation will advance into the Korean duty-free market.

사진=지난 7월 10일 서울과 제주 시내면세점 4개 특허에 대한 심사 결과를 발표하는 이돈현 관세청 차장. 이날 제주지역은 3개 업체가 경합을 벌였으며, 제주관광공사가 가장 높은 점수를 받아 특허획득에 성공했다. Photograph= On July 10 Lee Don-hyeon, Korea Customs Service, announces the result of reviewing the 4 licenses for downtown duty-free shops in Seoul and Jeju. 3 companies competed for the Jeju area, and the Jeju Tourism Organization received the highest score and obtained the license.

 

The issue here is that it cannot be denied that a precedent was left so that new downtown duty-free shops, having difficulty attracting various brands, can make the same choice as JTO, shaking the foundation of the domestic duty-free industry.

According to a JTO official, it received a proposal from DFS and Dufry last October, but it already included the strategy to rely on a large foreign duty-free enterprise in the business plan it submitted to the Korea Customs Service when it applied for a license last May. “We carefully considered store composition and brand attraction plan from various perspectives,” said a JTO insider said. “Even the E-Land Group, which gave up bidding, included a supply contract with Dufry in its business plan. Many companies are considering it as a means of reinforcing their competitiveness.”

What concerns us the most is that it may spread like wildfire to other SMEs. As a matter of fact, not only the Jeju Tourism Organization, but also many SMEs around the country are having difficulties attracting brands. Except for Seoul, Jeju and Busan, there are not many foreign tourists, and so the sales amount is not that great. From the viewpoint of brands, as their image is highly likely to be damaged in duty-free shops with less than satisfactory sales, they have no reason to open their stores in such duty-free shops. In domestic duty-free shops with small sales and volume, small and medium-sized companies cannot but be an ‘underdog.’

As if to prove it, officials of metropolitan small and medium-sized duty-free shops also complain about the difficulty of attracting brands. “Small and medium-sized companies almost gave up attracting prestigious brands,” said a small duty-free shop insider. “What we call ‘class B brands’ do not even meet SMEs. After all, they cannot but rely on large companies with efficient distribution, and we are discussing it as one of the ways to attract brands.”

Like this, the difficulty of attracting brands was anticipated when licenses were given out to SMEs. “The most important element of duty-free shop operations is MD. Locations and interior are important elements too, but as it is possible to attract customers only when there are assorted brands, attracting brands and purchasing are regarded as core elements,” said an industry insider said. “What we worried about when licenses were given out to SMEs became a reality after all.”

As a result, the Korea Customs Service is as good as ‘giving licenses to companies without brand bargaining power’ even though it underwent the bidding process which reviewed the qualifications for duty-free shop operations, revealing an error in the verification process. However, the Korea Customs Service says that it cannot be avoided as the competitiveness of small and medium-sized duty-free shops must be reinforced. Excessive government intervention is likely to amplify the oligopoly of the market. There is no legal way to restrict it.

“Even now small and medium-sized companies are depending on large corporations like Lotte, Shilla and Shinsegae for the supply of goods. If other supply channels are not secured, this structure will deteriorate and the dependency will increase,” said a Korea Customs Service official, hinting at the double-sided character of the issue. “Large duty-free shops like Lotte and Shilla receive their supplies of goods this way when they first started their duty-free business. Currently small and medium-sized duty-free shops, having difficulty with their brand bargaining power, will improve the situation by reinforcing their competitiveness.”

Also, the Korea Customs Service official believes that there is no legal ground for blocking the inflow of foreign capital. “If we prepare legal grounds for preventing the inflow of foreign capital, we may be sanctioned by the International Trade Organization. So it is unreasonable to have a legal provision for preventing it,” he said. “So we did not include global sourcing capabilities in the screening criteria, and we leave it to the judges during the bidding process for the sake of reinforcing the competitiveness of domestic companies.”

From the viewpoint of improving the current market structure that is too dependent on large corporations, the argument of the Korea Customs Service sounds plausible. Unlike the duty-free market of the past which used to be dominated by large corporations, however, no one can be sure about the impact of foreign companies, which take advantage of the weaknesses of SMEs to advance into the Korean market, on the industry. It is very likely that foreign companies will continuously encroach on the domestic small and medium-sized duty-free shops with their prices and brand power. It is about time to be concerned and think deeper about the future moves of global companies.

 


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