How will the coronavirus crisis affect the daigou business in South Korea?

Normally South Korea – the world’s biggest duty free market – would be celebrating news of a record year in sales.

As we reported last week, duty free sales in 2019 leapt by +23.7% year-on-year to a record US$21.32 billion (KRW24.86 trillion).

But there’s no mood of celebration among Korean travel retailers. They know what they have known for several years – that the market is overwhelmingly reliant on one nationality, the Chinese. If anything happens to disrupt or stem that source market, then the repercussions are potentially frightening.

But it’s not straightforward. When the South Korean and Chinese governments became embroiled in a major dispute in early 2017 over the former’s deployment of the US anti-missile system THAAD, many predicted disaster for Korean travel retail. Chinese visitor numbers (46.8% of total arrivals in 2016) went into freefall, spurred by the banning of group tours from the Mainland.

Despite a -48.3% slump in Chinese visitors that year, the duty free market actually grew by +20.7% to a record US$12.8 billion. And despite the continued absence of group tourists, it has kept on growing ever since, rising by an extraordinary +67% in two years.

The reason is simple. A flourishing daigou or shuttle trader business. There may not have been traditional tourist demand (or supply) from the Mainland but – driven by the huge price disparity between Korean duty free and China local market – there was immense product demand across the vast Chinese nation.

Consequently, it is the daigou business that underpins the record numbers. Sales to foreigners (principally Chinese and principally Daigou) increased by +30.9% year-on-year to US$17.84 billion (KRW20.81 trillion), which more than compensated for a decline in spend among Koreans (-3.5% to US$3.49 billion/KRW4.05 trillion).

The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung is a Korean national who has covered the daigou sector closely as part of his analysis of the country’s beauty and travel retail channels. “The resellers don’t appear to be phased,” he commented. “For now, they look to have moved a bulk of their purchases from cosmetics to mask packs.

“Resellers are not scared off easily and they will be back. The duty free stores will however see a short-term impact. With the MERS (Middle East Respiratory Syndrome), which hit Korea badly from May to July 2015, sales recovered in just three months following the end of the outbreak.”

Jung continued: “The daigou are not easily phased and people don’t doubt if they will return but question when. Since 2016, duty free sales in Korea have also structurally changed with large-scale resellers accounting for the majority of the market in 2019. This should help to expedite a sales recovery as corporate resellers are incentivised to return to Korean duty free as long as the arbitrage trade opportunity is still there.

“The negative to the fast recovery scenario would be that MERS never really impacted China and demand for goods from overseas was unimpacted. The key question with the comparison between MERS and SARS is how will Chinese consumers who demand goods from resellers in Korea recover after the coronavirus?

“Data of recovery in air passenger traffic in China suggests negative impacts are short lived. Air traffic immediately recovered in 2004 after SARS, supporting the conclusion that the negative impact will be short-lived if the virus can be got under control.”