Kap Lee’s business card bears the motto ‘Lifetime Value Creator’. That’s the mantra that Lotte Group has adopted to promote sustainable development over the next 50 years, a newly developed vision that is underpinned by focusing on qualitative growth.

It’s just over two months since Lee took up what he admits is a high-pressure role of leading Lotte Duty Free, the Republic of Korea’s travel retail giant and the world number two. But already he has a clear qualitative plan to embrace the group philosophy and drive the business to new heights.

In Korea, the travel retail and tourism sectors are more intertwined than perhaps anywhere in the world. “We need to think about tourism and duty free retail simultaneously,” Lee says. “The main purpose of foreign travellers visiting Korea is shopping and I believe that we can develop the duty free industry hand in hand with tourism.”

With admirable understatement Lee describes Korea’s duty free sector as “a very complicated playing field”. His top priority, he says, is to create a differentiated strategy for Lotte within a duty free industry structure that “is not as healthy as it once was”. Quality must prevail, he insists.

“Today, our overseas sales volume only accounts for a small percentage of our business. But in the future, I anticipate that it really should be more than 30%.”

Lee’s choice of the word “healthy” is interesting. At first glance, the world’s biggest duty free market appears in robust condition. Any statistician looking at the top-line numbers for Korean duty free would note that the sector rose by an astonishing 35% last year to an all-time high of over U$17 billion. Lotte Duty Free’s own sales in Korea soared by 25% to a record 38-year peak of over KW7.5 trillion (US$6.7 billion). Its flagship store in Myeong-dong, the world’s busiest duty free door, generated an approximate 35% rise in revenues to over US$3.8 billion.

But look beyond the top line and to pressure on every retailer’s operating margins, and a different perspective emerges. As has been well-documented by The Moodie Davitt Report, most of the market’s recent growth has been driven by a huge surge in daigou trading, the modern-day phenomenon of duty free shopping by ‘shuttle traders’ – legions of Chinese travellers purchasing large quantities for subsequent resell in China.

Since early 2017, when South Korea’s row with China over the former’s deployment of the US anti-missile system THAAD (on Lotte Group land) erupted, conventional group and FIT tourism has gone into freefall, plunging by 48.3% in 2017 and despite a steady recovery from March 2018, still being well short of 2016 levels. In 2016, the Chinese represented one in every two travellers to South Korea. In 2018 the ratio was just under one in three. The disparity between such a tourism slump and record industry sales is entirely attributable to the daigou business.

“Sales volume, as you know, is heavily dependent on the Chinese customer, and in particular daigou shoppers,” confirms Lee. “One of my top priorities is to get FITs back to Korea. I want Lotte Duty Free to be a symbolic brand for this global sector in the same way that Samsung is in the cellphone industry or LG in the LCD sector.”

Lee is convinced that Lotte can play a lead role in broadening Korea’s tourism base from its reliance on Chinese travellers in general, and daigou in particular. He points out that Lotte Duty Free is part of the powerful Lotte Group, whose subsidiaries include department store, hotel, online, travel agency, cinema and leisure enterprises. “A priority is to combine those tourism-related sectors to create some new kind of retail platform,” he comments. In short, through value creation.

While drawing on his experience with Daehong and with the department store business, Lee admits that the world of duty free is a very different one. “Daehong is an advertising company that deals mainly with the domestic market whereas Lotte Duty Free is a sort of exporting business, mainly targeting foreigners. So, there is the key difference. Today, our overseas sales volume only accounts for a small percentage of our business. But in the future, I anticipate that it really should be more than 30%.”

Such growth, both at home and abroad, will be key to Lotte Group finally delivering its long-awaited IPO, a project officially deferred in 2017 due to the commercial fall-out from the THAAD row between China and South Korea. Lee says the IPO plans, currently on hold due to “internal and external situations”, remain in place but the timeline is uncertain.

“Before we proceed with an IPO, we have two quests,” he explains. “The first is to get the operating profits high enough so that the market can correctly price the shares. The second is to create a new business model that will be effective long into the future.”

“In the second semester, depending on how relations develop between Beijing and Seoul, we anticipate that we will see more growth in the Korean duty free market.”

That “new business model”, he says, includes several elements – global expansion; the steady transition from a daigou-driven business to a more conventional one based on FIT shopping; and a further upgrading of the already impressive flagship store in Myeong-dong.

In top-line terms, 2018 was another stellar year for Lotte Duty Free in a Korean duty free market which Lee points out has consistently achieved 30% annual sales growth in recent years. But he points out that 2019 presents a whole set of different, and challenging, circumstances.

“There will be a lot of changes in the Korean domestic duty free industry, for example new downtown licences in Seoul and Jeju and the opening of arrivals stores at Incheon Airport. So, the competition will be more intense compared to other industries. But we will find breakthroughs by offering attractively priced products – authentic, credible products – and by increased hallyu (Korean wave) marketing and so on.

“In the second semester, depending on how relations develop between Beijing and Seoul, we anticipate that we will see more growth in the Korean duty free market,” he adds.

How concerned is Lotte Duty Free about the new Chinese e-commerce law, introduced on 1 January, designed in large part to curb daigou trading? In response, Lee describes it as “a big turning point” for the Korean duty free market. “In my opinion the purpose of the new e-commerce law is to make daigous register as legal e-retailers,” he comments. “In the short term it will be threatening to the Korean duty free market, but in the long term I think it will actually have a positive impact.

“Remember, Daigou business is everywhere, not just in Korea. It’s also in Japan, the USA, Australia and so on. In the long term, I do not believe the new law will have as much of a negative impact as we originally thought.”

The early 2019 evidence certainly appears to support that view. When The Moodie Davitt Report visited the Myeong-dong store on successive days in early March, business was frenetic, with scenes reminiscent of the Harrods New Year’s Day sale in Knightsbridge London. The difference is that with Lotte Duty Free, it’s like this every day. At 8:30 in the morning, an hour before opening on a bitterly cold Seoul morning, some 600 daigou shoppers were queued up outside, waiting to spill into the shop. Most beauty brands confirm that early 2019 performance has been very strong, particularly with Lotte, the sector’s bellwether.

Lee confirms the trend. Sales were “a little soft” in early January but overall business has grown strongly this year, he says [the company is projecting 2019 sales of US$5 billion in Myeong-dong alone]. He also notes that visitor arrivals from China are still well short of 2016’s record numbers. When the group tourists and FITs return, he says, bolstered by a continuance in daigou trading, business should develop strongly, he contends.

“Since we began our e-commerce business, it has grown really fast and we want to keep that growth on track. Within five years, if we double again, it will represent a 50% share of total sales.”

Lee’s aim of restoring the FIT business, and creating a broader, more traditional shopper base, is not confined to Chinese tourists. “We are also trying to focus on other nationalities – like Vietnam, Thailand, and so on,” he comments, returning to his earlier theme of a multi-faceted tourism/shopping drive. “For example, we recently created a tourism package for Taiwanese travellers, cooperating with other Lotte subsidiaries across our hotel, department store and travel agency operations.” That kind of combined tourist package, mainly targeting FITs, will be the “new phenomenon” in the near future for Korean duty free, Lee says.

The new CEO is also driving an ambitious expansion of Lotte Duty Free’s already highly successful membership programme. “We have around 6.9 million registered customers in our database. Our goal is to increase it to 7.8 million.”

The time frame? “This year.” The new Lotte Duty Free leader clearly doesn’t mess around. Such an approach, he says, underlines Lotte’s desire to further customise and personalise its services to help differentiate its offer from rivals.

“Looking at the big airports like Incheon and Hong Kong, it is really hard for operators to generate operating profits.”

In a travel retail sector that was historically slow to embrace social media as a communication tool and e-commerce as a selling platform, Lotte Duty Free has stood out like a beacon. Its brilliance at hallyu marketing, manifested in the Star Avenue entranceway to the main store and played out in numerous blockbuster campaigns, videos and promotions over recent years, has been complemented by a burgeoning online business. E-commerce now represents 25% of the retailer’s sales, roughly doubt the share of five years ago. And Lee says there’s much more room for growth yet.

“It’sa more complex business than people think because it has developed so quickly,” he says. “We have to react with agility to those changes. Since we began our e-commerce business, it has grown really fast and we want to keep that growth on track. Within five years, if we double again, it will represent a 50% share of total sales.”

But that would require a change to the current business model which is currently focused on serving only two sectors – foreigners visiting Korea and domestic travellers going abroad. If Lotte Duty Free could develop a broader online marketplace platform, sales could surge past the 50% mark, Lee says.

Global growth

Lotte Duty Free has made no secret of its global growth ambitions in recent years, stating its aim to be the world’s number one travel retailer in several high-level interviews with The Moodie Davitt Report. But much of its remarkable growth has been at home while progress internationally has been modest. Overseas airport concessions have been difficult and costly to secure, with heavyweight bidding opposition and a high price of entry. Guam, Vietnam and Indonesia have been the footholds to date but the recent acquisition of JR/Duty Free’s Australasian interests offers an interesting new geographical dimension to the business.

Lee says entering the region is an important stepping stone in the company’s international ambitions. “To be a global operator, you need to meet some conditions, like having good partnerships with brands and understanding your customers well,” he comments. “We are very familiar with our Korean and other Asian customers, but we don’t really know so much about travellers from Western countries.

“The Australasian market has relatively small sales volumes right now, but it has big potential to grow. Also, there are a lot of global operators operating in that region. So, it’s very competitive and therefore a big chance for us to test how well we can operate and compete. So, before we extend our business to USA and Europe, the Australia market is a stepping stone.