“Spring is not far away for the travel retail industry”

Introduction: Despite a sharp fall in 2020 sales prompted by the biggest crisis in industry history, Lotte Duty Free retained its status as the second biggest travel retailer in the world last year, driven by a resilient daigou business and some highly creative ways (supported by the Korean government) of depleting unsold inventory. The retailer also continued to make impressive strides with its online business, which accounted for a 44% share of revenue in 2020. Lotte Duty Free believes that the channel will account for about 50% of total sales by the end of the pandemic. How does the company view prospects at home and abroad? Can its impressive omnichannel credentials and ability to flex its business model quickly help accelerate its bounce back? Is the traditional airport contract model still fit for purpose? Will the huge importance of the daigou business to Lotte Duty Free prove a boon or a burden? How to counterbalance it? To answer those questions and others, Lotte Duty Free CEO Kap Lee spoke exclusively to The Moodie Davitt Report Founder & Chairman Martin Moodie in a fascinating and ultimately uplifting interview that maps out the road to recovery, and examines an enhanced ecommerce focus, the daigou versus FIT balance and the meaning of partnership today.

The Moodie Davitt Report: Mr Lee, it has been a long and difficult crisis for Korean travel retail, for Lotte Duty Free and for the industry at large. How do you see the prospects for a turnaround in 2021 and beyond?

Kap Lee: I believe that global tourism demand will begin to recover this year. This is because vaccination is being carried out without major problems in many countries, and there have been some discussions about how to bring about breakthroughs in the stagnant global tourism industry. There are talks about introducing a vaccine passport, the travel bubble and the concept of Area Hotel Quarantine [a Thai initiative to support tourism -Ed], to name a few. South Korea is the world’s top travel retail market, and we are expecting to see a V-shaped recovery in the industry this year. The status of infectious disease prevention and control and vaccine distribution in South Korea has been successful and is being recognised worldwide. In addition, the Korean government has formed a task force to accelerate the early recovery of the international tourism market and has been actively engaged in discussions on vaccine passports and travel bubbles. International tourists are expected to be able to visit South Korea starting in places like Seoul and Jeju this year. Such a rebound is expected to take place in line with the ‘revenge consumption’ that has been suppressed.

Lotte Duty Free has been highly proactive during the crisis, with many initiatives to stimulate sales. Can you talk us through your major actions and strategies over recent months and those you have planned?

Lotte Duty Free has led positive changes amid crisis for the past 40 years. In spite of the unexpected situations caused by COVID-19, we have been introducing new ideas with resilient responses and innovation. While selling off undepleted stock through domestic channels and offering sales on flights to nowhere, we are also presenting a new normal in the duty free industry through rapid digital transformation. We are pioneering new sales channels by entering the live commerce market, securing potential customers by converting our Family Concert to online channels, and expanding brand awareness. Lotte Duty Free is planning to respond more flexibly and quickly to trend changes this year by accelerating digital transformation and through business diversification. The digitalisation of offline stores starts with the opening of our Smart Store. Opened at the Lotte Duty Free Main Store in Seoul last year, Smart Store is a hi-tech zone where you can discover beauty brands’ various services combined with cutting-edge technologies. We will soon introduce a mobile self-payment system and strengthen the AI-based customer experience at the stores. The Smart Store concept will be opened at further Lotte downtown stores in South Korea and other countries. In addition, we are pushing forward services for individual customers, introducing a customised product recommendation based on DDM (Data-Driven Marketing) and utilising extensive Big Data. As for our business diversification, we are expanding partnerships with local travel agencies in neighbouring countries, developing cruise packages, and launching combined package products through collaboration with hotels, home shopping channels and travel agencies. These are among our efforts to become a travel retailer rather than a mere duty free operator.

“We are laying the foundations to lead the global online duty free market”

You are also President of the Korean Duty Free Association, a very important role in normal times but particularly so during such a crisis. How has the association responded to the pandemic and how would you describe your leadership priorities?

I was appointed as President of the Association, a role that had been vacant for about four years, and felt a heavy responsibility in taking over this position in an unprecedented crisis. The most urgent task after I took office was to help the Association to properly play a pivoting role, representing the interests of members as a whole so that the industry could speak with one voice. I had a strong faith that if all the members of the industry consolidated and overcame this crisis together, we would be able to solidify our status as the world's top duty free market and promote the development of the entire industry. Currently, the Korean Duty Free Association is actively listening to the voices of all members and is doing its best to achieve shared growth not only for the duty free industry but also to work with related industries such as tourism and aviation. For the remainder of my term, I will work hard to strengthen the competitiveness of the Korean duty free industry.

Korean duty free sales in March 2021 were up +20% month-on-month, well ahead of the figure in March 2020 when traffic and buying collapsed in the face of the then-fledgling COVID-19 crisis. Note the dominance of sales to foreigners compared to the small share of customers they represent.

Source: Korea Duty Free Association

The Korean government has been consistently supportive of the duty free industry over recent months. What have been the key aspects and how would you assess their impact on Lotte Duty Free and Korean travel retail?

From permitting the clearance of undepleted stock through domestic channels to tax reductions for airport duty free shops to the introduction of non-landing tourism flights and a -50% reduction in patent fees, every one of these support measures has helped the industry significantly. As the President of the Association and as a representative of a member company, I would like to express my deep gratitude for the support for the duty free industry from various government ministries and the National Assembly. The travel retail industry inherently bears many risks. It is important that relevant economic actors, including the government, communicate quickly and respond flexibly to changes, and come up with countermeasures together. Even after the pandemic ends, the industry and the government will work together to enhance the competitiveness of the Korean travel retail industry.

Lotte Duty Free has historically been the most advanced travel retailer in terms of ecommerce. You told me when we met in March 2019 that you thought this channel would reach 50% of your business within five years. Globally, the pandemic has accelerated the move to online shopping. So what is the share of online business for Lotte Duty Free today and do you still see that 50% target in the same timeline, or earlier?

After the pandemic, the business model of all retail industries has quickly transformed from offline to online. Ecommerce had been on the rise even before the pandemic, but after the pandemic, its pace has accelerated, its scope has expanded, and ecommerce has become deeply embedded in the daily lives of customers. In 2019, our online sales accounted for 34% but our annual performance in 2020 showed that online sales accounted for a 44% share. As online sales are growing continuously, it is expected that these will account for about 50% of total sales by the end of the pandemic. The ecommerce department of Lotte Duty Free has doubled in size since I took office. Lotte Duty Free has been focusing on this business through reorganisation and online UI/UX improvements in recent years. The online and offline merchandising divisions have been divided to differentiate online products and enhance their competitiveness. Also, we incorporated recently the FIT team into the ecommerce sector to prepare for the transition to online purchases among FITs. As such, we are laying the foundations to lead the global online duty free market.

“We will compete with world-class companies based on ESG management. We will not spare any resources, as this is a way for us to evolve one step further into becoming a sustainable duty free shop.”

We also talked previously about Lotte Duty Free’s international aspirations in terms of both concession gains and M&A. What are your international ambitions today and how have they been influenced – positively or negatively – by COVID?

Although the launch of previously planned new stores was partially delayed due to the pandemic, we will continue developing new overseas markets at the right time by considering the recovery in each country. To this end, we are paying close attention to the recovery trend of passenger numbers from each country, the travel bubble implementation plan, and vaccination status. In particular, we are considering opening new stores in countries with excellent quarantine performance, such as Australia and Vietnam, where international flights are expected to resume sooner than other places. Specifically, we are considering prioritising the grand opening of the Singapore Changi Airport store, which is currently in partial operation, as well as new stores in Sydney downtown in Australia, and Da Nang and Hanoi downtown in Vietnam. Going forward, we will continue to establish different strategies and take multi-faceted approaches to overseas expansion to pre-emptively respond to the post-pandemic era. Currently, we are operating 20 business sites in seven countries in the Asia Pacific region (Korea, Japan, Vietnam, Australia, New Zealand, Guam and Singapore). Just like the acquisition [of the JR/Duty Free business in Australia and New Zealand] in 2018, we will continue to exert our efforts to hone our competitive edge by reviewing business expansion through M&A or by opening shops in new locations. We will help the duty free industry to take a leap forward together by collaborating with outstanding players across boundaries and barriers.

One of your top priorities pre-COVID was to get FITs back to Korea. Once Korea opens up again, is that still a priority?

Irrespective of the COVID-19 pandemic, FITs remain very important for duty free. To improve business soundness and secure sales stability, our priority is to gradually expand the ratio of FITs in the long term. In particular, our focus is on implementing online-oriented strategies. First of all, we are revamping our app this year so that it can provide a differentiated customer experience, including content-oriented product displays and live commerce. Many brands in duty free are also realising the importance of FITs and are seeking collaboration with our company. For example, we are preparing a dedicated pavilion for high-end brands for our online shop and app along with different services that can meet the needs of customers for boutique brands.

What can Lotte Duty Free and Korea do to attract more international tourists/shoppers from other countries to offset the reliance on Chinese visitors?

Chinese customers remain an important customer base that cannot be overlooked. However, diversifying the customer base in terms of nationality for FITs is our major goal in the long run. Accordingly, we plan to gradually expand our customer base with differentiated strategies tailored to the characteristics of each nationality. Currently, we are expanding business partnerships targeting Southeast Asian customers, and introducing local payment platforms in each country for quick and easy checkout. In August last year, we opened an online shop in Vietnamese, laying the foundation to expand our Vietnamese customer base. Since we are constantly striving to diversify the demographics of our customers, we have prepared a service base for each language. Thus, we are ready to actively attract international customers when the market normalises after the pandemic.

Clearly the role of daigou traders has grown during the crisis. Many Korean industry insiders fear that the Chinese authorities will seek to further control the flow of daigou products into China from Korea – as evidenced by the recent crackdown in Shenzhen. Given the reliance on Chinese shoppers (mostly daigou), this is clearly a critical issue. What are your thoughts on a) the role of the daigou business going forward; b) its vulnerability to curbs by the Chinese authorities and c) how you can begin to offset this reliance by driving more traditional duty free business?

One encouraging fact is that the demand for Korean duty free goods is still high in China, which we take from the fact that daigous are active in the Korean market, even with the borders closed due to the pandemic. Currently, the Korean duty free market environment revolves around the Chinese shuttle traders, peddlers who carry small goods to sell in their luggage. However, once the pandemic is lifted and people are free to travel overseas, their proportion will naturally decrease, while FITs take their place at the centre of the industry. Therefore, the ultimate goal of Lotte Duty Free is to attract more FITs and group tourists, strengthening the competitiveness of Korean tourism. While we are strengthening our network of travel agencies that are widespread both at home and abroad, we are also securing potential customers using Hallyu (Korean Wave) content such as our Family Concert, establishing live commerce, and consolidating marketing elements such as data-driven marketing using extensive customer data. We plan to proactively prepare for the post-pandemic era.

Lotte Duty Free exited its Incheon T1 business due to the high cost of entry. What are your thoughts on the airport concession model both in Korea and abroad? What needs to change to make it a more viable business for retailers – and to create a win/win/win for airports, retailers and brands?

Incheon International Airport is one of the major Asian hub airports, and the duty free businesses at the airport are proud to be part of this top location. Although the business environment has become uncertain for duty free due to the pandemic, there is plenty of room for the duty free retailers and Incheon International Airport Corporation to discuss and work together for win-win growth. In a situation like this where the prospects for the number of outbound travellers are uncertain, the biggest burden for duty free businesses is the fixed rental fee. Considering these difficulties, Incheon International Airport proposed several measures to reduce the stress of the business owners. However, the existing fixed rent fee still laid a heavy burden on business operations, and many overseas airports are adopting variable rental rates such as passenger linkage or operating rates according to sales totals. If these methods could be applied appropriately, duty free businesses would participate in future bids more actively. Meanwhile, there are some signs of changes in the retail leases in Singapore [a country-wide Code of Conduct governing contracts and leases, as reported -Ed]. Such initiatives are the first steps to creating a win-win situation for airports, duty free businesses and brands. When the stress to cover rent is reduced, duty free companies will be able to invest more to strengthen their competitiveness, attract more diverse brands and enhance the content of stores. This will lead to customer satisfaction for duty free stores that offer a better shopping experience. As a result, this will create a sustainable business structure.

Lotte Duty Free’s CSR policies have been particularly impressive under your leadership. Please tell us about the role of CSR to your leadership vision and mission.

Corporate Social Responsibility (CSR) is essential to the survival of a company. In particular, unlike the previous era in which companies were evaluated only on a quantitative scale, corporate values are now evaluated from the standpoint of sustainability. This has created greater challenges in terms of environmental, social and corporate governance (ESG). Lotte Duty Free announced a new vision, The most trusted travel partner, at an ESG management ceremony in March. As all of us are going through the pandemic, we have come to realise the value of a sustainable journey. In this ceremony, we expressed our commitment to free and sustainable travel both internally and externally. In order to realise this vision, we set individual goals for ESG, and we intend to put them into practice together with all employees. In terms of environmental responsibility (E), we set forth the slogan Duty 4 Earth and established four obligations that we promise to keep protecting the global environment. 1) We plan to take the lead in solving the plastic problem by expanding the introduction of eco-friendly materials to replace air caps and plastic bags. 2) In order to reduce carbon emissions, we plan to introduce solar power generation facilities at the integrated logistics centre and plan to convert all one-tonne transport vehicles to electric vehicles. In addition, 3) we will expand the number of eco-friendly products and brands. 4) We will reduce the number of printed materials by 80% through the digitalisation of receipts and paper vouchers. In addition, we will carry out step-by-step campaigns so that customers can easily understand and participate in the eco-friendly management activities of Lotte Duty Free. In the field of Corporate Social Responsibility (S), we plan to continue existing projects to support local youth entrepreneurs with a focus on coexistence with local communities and small business owners. To expand corporate management transparency (G), we plan to achieve corporate economic value and social benefits by strengthening the fair trade compliance system. Lotte Duty Free has contributed to spreading the Hallyu (Korean Wave) culture around the world as a public relations ambassador at the beginning of the millennium. From now on, we will compete with world-class companies based on ESG management. We will not spare any resources, as this is a way for us to evolve one step further into becoming a sustainable duty free shop.

How would you describe your leadership philosophy?

To respond with agility to changes in trends in the future and to develop new growth engines for expansion. Lotte Duty Free is currently reinforcing data-based marketing that reflects the preferences of individual travellers and builds a smart platform. This will enable us to create a new shopping culture that can actively respond to environmental changes, integrates experiences and strengthens our position as a leader not only in the duty free market but also in the wider travel retail market. On the one hand, we will further spread a flexible and creative corporate culture so that all members can work in a pleasant working environment, where positive spirits can be passed onto the customers in the form of the best possible service. In addition, we will further expand the model of win-win growth with local communities and partners. This is an important time to shape the future based on the achievements of the past 40 years. Lotte Duty Free will continue to grow as a company loved by everyone, satisfying our customers, remaining a trusted partner for business collaborators, and making employees happy. I, too, will do my utmost to achieve this goal as a representative of the company.

This interview will be read by the duty free and travel retail sector worldwide. Do you have an overall message to the industry?

I would like to offer a word of support to all those in the travel retail industry who are going through difficulties amid the unprecedented challenges we face in the pandemic. As vaccination is taking place around the globe and there is talk about travel bubbles and vaccine passports, we can be optimistic that Spring is not far away for the travel retail industry. Lastly, I would like to express my deep gratitude to all partners who have been supporting Lotte Duty Free through these challenging times. We grew together with our partners over the years, overcoming numerous difficulties. The biggest factor in ensuring Lotte Duty Free could sustain customer loyalty and become the leader in the industry over 40 years is through product competitiveness, based on trust from our partners. If we continue to work together to develop products and support each other in terms of capabilities and resources, we will be able to share the fruits of the growth that the future without COVID-19 will bring. Lotte Duty Free will always put coexistence and cooperation with our partners first.