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DUTY-FREE MARKET IN ASIA - SPECIAL FOCUS ON THE DUTY-FREE MARKET IN SOUTH KOREA

Asia Distribution and Retail

September 2016

In this issue

• Part I: Duty-free market in Asia

• Strong growth over recent years

• Driving force

• Key duty-free players by region

• New store openings in China and South Korea

• Part II: Duty-free market in South Korea

• Market overview

• Driving force

• Latest developments

• Profiles of key duty-free players

- Lotte Duty Free

- The Shilla Duty Free

- Dongwha Duty Free

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Part I: Duty-free market in Asia

Duty-free market in Asia: Strong growth over recent years

Strong growth in Asia • The duty-free market in Asia has been

growing rapidly over recent years, thanks largely to growing tourism, expansion of downtown duty-free locations and rising online duty-free sales.

Largest duty-free market – South Korea • A number of duty-free stores have

been opened across key Asian cities. Among the Asian markets, South Korea is the largest duty-free market in the Asia-Pacific region, contributing over 30% to the total duty-free sales in region.

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Source: Reportstack

CAGR of Asia-Pacific duty-free market, 2010-2015 CAGR of 9.4%

9.4%

Duty-free market in Asia: Driving force

Growth drivers

• The rising disposable income of middle-class families in emerging countries, coupled with more affordable travel options available in the market have given a significant boost to the growth of tourist numbers in major travel destinations in Asia, such as Japan and South Korea.

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Source: Japan National Tourism Organization

In Japan, the total number of visitors from Asian countries in 2015 totaled 16.6 million, up 53.9% yoy.

Among the Asian visitors, those from China, South Korea and Taiwan surged 107% yoy, 45% yoy and 30% yoy respectively, taking up 30%, 24% and 22% respectively of the total number of Asian visitors going to Japan in 2015.

In South Korea, the total number of visitors from East Asia and the Pacific region in 1H16 totaled 6.9 million, up 23.6% yoy.

The number of visitors from emerging countries including India, Vietnam and Indonesia all jumped over 37% yoy in 1H16, while visitors from China and Taiwan also increased sharply by 27.2% yoy and 36.2% yoy respectively in 1H16.

Duty free market in Asia: Key duty-free players by region

6 Source: Reportstack

South Korea

• Lotte Duty Free • The Shilla Duty Free • Dongwha Duty Free

Japan

• Japan Airport Terminal Co

• NAA Retail Corporation

China

• China Duty Free Group • China National Service

Corporation

Thailand

• King Power

• DFS

Singapore

Major players by region

• A number of duty-free operators have established their presences in major Asian cities, including South Korea, Japan, China, Thailand and Singapore.

Duty-free market in Asia: New store openings in China and South Korea

New duty-free shops in China and South Korea • In China, the government has been increasing its

duty-free offerings to keep more luxury spending at home amid Chinese shoppers’ overseas spending spree. In July 2016, state-owned duty-free operator China National Service Corporation opened a 3,300-sqm duty-free shopping centre - CNSC Duty Free in Shanghai, cashing in on the burgeoning downtown duty free sector in China.

• In South Korea, two more new duty-free shops

were opened in Seoul in 2016, namely Doota Duty Free launched by local conglomerate Doosan Group in May 2016 and Galleria Duty Free 63 fully opened by local retail giant Hanwha Group in July 2016.

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Source: Reportstack

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Part II: Duty-free market in South Korea

Duty-free market in South Korea: Market overview - Downtown and airport duty-free shops take the majority

Location

• In South Korea, duty-free stores are mainly located in downtown areas, airports and ports, with downtown and airport duty-free stores taking up the majority.

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Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

Number of airport and downtown duty-free stores in South Korea (as of March 2016)

Airports Downtown

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Total duty-free sales

• In 2015, South Korea’s total duty-free sales# increased by 10.7% yoy to reach 9,198 billion won (US$7.83 billion) ##, according to Korea Investment & Securities. The figure is estimated to hit 11,125 billion won (US$9.47 billion) ## by the end of 2016.

• Around 55% of the total duty-free sales in South Korea were contributed by downtown duty-free shops in 2015, and 22% by stores in Incheon International Airport.

Duty-free market in South Korea: Market overview - Downtown duty-free shops make up over a half of total duty-free sales

10 Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

#Note: Total duty-free sales refer to the sales contributed by all domestic duty-free stores in downtown areas, airports and ports. ##1,175.06 won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

*Others refer to duty-free sales from domestic ports and airports, excluding sales from Seoul and Incheon International Airport DFS

9,198 billion won (US$7.83 billion)

Up 10.7% Incheon International Airport

22% 23%

55%

Others*

Downtown areas in Seoul

South Korea’s total duty-free sales in 2015

Downtown duty-free sales in Seoul

• In 2015, downtown duty-free

sales reached 5,034 billion won

(US$4.28 billion)#, up 15.6% yoy.

• As the largest duty-free player in

South Korea, Lotte Duty Free

posted a downtown duty-free

sales in Seoul of 3,105 billion won

(US$2.64 billion)#, representing

over 60% of downtown duty-free

sales in Seoul in 2015.

Market share of downtown duty-free sales in Seoul, 2015

Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

*Others include Walkerhill Duty Free, Shilla I’Park Duty Free, Gallery Duty Free 63 and SM Duty Free

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Duty-free market in South Korea: Market overview - Downtown duty-free shops make up over a half of total duty-free sales (cont’d)

Others*

62%

26%

6%

6%

5,034 billion won

(US$4.28 billion)

Up 15.6% yoy

#1,175.06 won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

Duty free operators

• In South Korea, there are currently 15

duty-free operators, with the top two players – Lotte and Shilla taking up over 80% market share.

• Seoul, Jeju, and Incheon Airport are the

key regions for duty-free business in South Korea.

Region Company City/ airport/ port

Duty-free market in South Korea: Market overview - Duty-free players in South Korea

12 Source: Reportstack, CLSA, KCS, News

Lotte Seoul, Jeju, Busan, Incheon, Gimpo

Shilla Seoul, Jeju Incheon, Gimpo, Cheongju, Daegu

Shinsegae Busan, Gimhae, Incheon

KTO Incheon, Busan, Gunsan, Pyung-Taek

JDC Jeju

SK Networks Seoul

Donghwa Seoul

JTO Jeju

Hanwha Galleria Jeju

Hyundai Asan Yang Yang

JNDC Muan

Doosan Seoul

Daedong Changwon

Jinsan Ulsan

Entas Incheon

80%

- Lotte Duty Free - The Shilla Duty Free

- Shinsegae Duty Free - Doota Duty Free

Jung-gu

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Duty-free market in South Korea: Market overview - Duty-free players in South Korea (cont’d)

Locations of duty-free stores in Seoul

(As of July 2016)

Jongno-gu - Donwha - SM Duty Free

Yongsan-gu - HDC Shilla Duty Free

Yeongdeungpo-gu - Galleria Duty Free 63

Gangnam-gu - Lotte Duty Free (Coex)

Influx of Chinese tourists

• The number of Chinese tourists to South Korea has increased markedly over recent years. Visitors from China now account for over 47% of the total number of foreign visitors in South Korea, making them the largest group of foreign visitors in the country.

• Duty-free shops in Seoul are one of the most popular shopping places for Chinese tourists, with cosmetics, apparel and foods items topping their shopping list. A recent survey showed that nearly 95% of Chinese visitors shop for cosmetics products in South Korea*.

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Source: Korea Tourism Organization

Year Number of Chinese

travellers

Share of Chinese travellers among all

foreign tourists

2014 6,126,865 43%

2015 5,984,170 45.2%

1H2016 3,816,756 47.1%

Number of Chinese tourists to South Korea, 2014-1H2016

Duty-free market in South Korea: Driving force - Chinese tourists fuel the growth of duty-free market in South Korea

*“Chinese tourists spend 6 times more than Japanese on shopping.” 21 July, 2016. The Korea Times.

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Spending by Chinese tourists

• Chinese tourists rank first in terms of spending. They spend an average of 2.13 million won (US$1,813)# per person on shopping in South Korea, more than double that of the average spending by foreign tourists to Seoul (1.06 million won or US$902)#, making Chinese tourists the biggest spender in South Korea*.

Chinese tourists spend the most in South Korean duty-free stores

Duty-free market in South Korea: Driving force - Chinese tourists spend the most in duty-free stores

*“Chinese tourists spend 6 times more than Japanese on shopping.” 21 July, 2016. The Korea Times.

Top spending nationalities during visits to South Korea in 2015

Chinese

2,130,000 won

Southeast Asians

790,000 won

Americans

660,000 won

Europeans

660,000 won

Japanese

330,000 won

Source: The Seoul Institute, complied by Fung Business Intelligence

#1,175.06 won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

16 Source: Samsung Securities

Duty-free market in South Korea: Latest developments - Government granted six more duty-free licenses

Government initiatives

• To serve the increasing number of foreign tourists, especially Chinese tourists, the South Korean government announced on 29 April, 2016 that it will grant six more duty-free shop operation licenses for downtown areas. The government will issue four new duty-free shop operation licenses in Seoul and one each in Busan and Gangwon Province.

• For the four new duty-free operation licenses in Seoul, three will be granted to large firms and one will be given to a small one.

• Upon issue of the four new licenses, the number of duty-free outlets in Seoul will increase to 13 from the current nine.

Purchase caps

• To prevent unofficial re-sale of duty free products by third-party brokers, South Korea Customs Service notified all local duty-free operators on 11 July, 2016 to limit the number of purchases made by each customer to 50 cosmetics and perfume products, and 10 bags and watches at each brand.

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Purchase limitations of duty-free products made by each customers

Duty-free market in South Korea: Latest developments - Purchase limits at duty-free stores

What is the impact of the purchase limitations?

• As local duty-free stores takes up around a fourth of combined sales generated by South Korean cosmetics firms, the new policy is expected to pose a negative impact on South Korean cosmetics market, though the impact will vary by company depending on the details of purchase caps.

• Local cosmetics giants Amore Pacific and LG H&H expressed that they do not expect a drastic impact as their key brands already placed their own sales limitations at duty-free stores that are even more stringent than the one currently being imposed by Korea Customs Service.

10 bags & watches at each brands

50 cosmetics & perfume items

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Profiles of key duty-free players in South Korea

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Lotte Duty Free

Company profile

• A duty free business unit affiliated to South Korea’s major hotel business operator Lotte Hotel

• First store founded in Sogong-dong, Seoul in 1980

• No. 1 duty free retailer in Asia; the third largest global duty-free operator

• Houses approximately 850 international and domestic brands

Physical stores:

• Seven domestic branches: three in Seoul, one each in Jeju, Busan, Incheon International Airport and Gimpo International Airport

• Five overseas branches: two in Japan (with one each in Tokyo Ginza and Osaka’s Kansai international Airport), two in Jakarta (one each in Jakarta prestigious business district and Jakarta International Airport) and Guam International Airport

Online store

• Transactional website (http://en.lottedfs.com/main)

• Transactional mobile app

Lotte Duty Free shop at Incheon International Airport The main branch of Lotte Duty Free at Lotte Department Store

in Sogong-dong, Seoul

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Lotte Duty Free (cont’d)

Sales

• Sales of Lotte Duty Free’s branches in Seoul totaled 3,105 billion won (US$2.6 billion)# in 2015, with the main branch in Sogong-dong making up over 70% of its total DFS sales in Seoul.

Lotte Sogong branch, 2,229 billion won (US$1.90 billion)#

Lotte COEX branch,

265 billion won (US$0.23 billion)#

Lotte World Tower branch,

611 billion won (US$0.52 billion)#

Source: KCS, Korea Investment & Securities, complied by Fung Business Intelligence

#1,175.06 won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

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Lotte Duty Free (cont’d)

Latest developments – store expansion

Lotte Duty Free has kick-started upgrading and expanding its Sogong main branch at Lotte Department Store in downtown Seoul as a move to attract more foreign shoppers, especially the Chinese.

• The makeover, scheduled to be completed in 2017, is expected to add a sales area of 3,000 sqm to the main branch. Upon the expansion, the store will accommodate more cosmetics and perfume brands.

• Meanwhile, the concessions of sought-after cosmetics brands such as Sulwhasoo and Whoo, will also be enlarged to engage more Chinese shoppers.

Latest trends - domestic jewellery brands perform well

• Lotte Duty Free reported that sales of domestic jewellry brands surged 80% yoy in 2Q16, while the number of domestic jewellry brands at Lotte Duty Free rose to 30 in 2016 from 20 in 2H15.

• The remarkable sales growth was driven by several factors, including increased demand for South Korea products following the popularity of K-beauty products, a rising number of tourists visiting South Korea, and the on-going hype of the Korean wave.

• Lotte Duty Free houses a number of medium-priced domestic jewellery brands, including J.Estina and Sejung Group’s Didier Dubot, which are largely aiming at foreign shoppers from China, Hong Kong and Japan*.

Cosmetics stores of Lotte Sogong-dong duty-free branch (located on at Lotte Department Store in Sogong-dong, Seoul) are being renovated.

Local cosmetics brand Sulwhasoo’s store in the Lotte Sogong-dong duty-free branch The store of local jewellry brand J.Estina

in Lotte Sogong-dong duty-free branch

*“Popularity of Korean Jewelry Soars.” 5 July, 2016. Retail News Asia.

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Lotte Duty Free (cont’d)

“I prefer to buy Sulwhasoo and Whoo at Lotte Duty Free as it offers the best deals and more skincare products. ”

“The three duty-free outlets in Seoul are easily accessible! Especially the main branch, which is conveniently located and close to other hot shopping spots in Myeong-dong”

Ms. Wang A tourist from China

Ms. Liang A student from China

“It’s so easy to become Lotte Duty Free VIP member! The VIP card gives me additional 5% to 15% discount at Lotte Duty Free branches”

Ms. Zhang A flight attendant from Hong Kong

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The Shilla Duty Free

Company profile

• A duty free business unit operated by Samsung’s hospitality arm The Shilla

• First store opened inside Shilla Seoul Hotel in 1986

• The second largest duty-free operator in South Korea; one of the top 10 global duty-free players

• Houses over 550 international and domestic brands

Physical stores:

• Four domestic branches: one each in Seoul, Jeju, Incheon International Airport and Gimpo International Airport

• Two overseas branches: one in Singapore Changi International Airport and another in Macau International Airport

Online store

• Transactional mobile app

The main store of Shilla Duty Free inside Shilla Seoul Hotel in Jung-gu, Seoul (photo credit: http://www.shilladfs.com/)

Sales

• Sales of The Shilla Duty Free’s main branch in Seoul totaled 1,321 billion won (US$1.12 billion)# in 2015, accounting for about 26% of downtown duty-free sales in Seoul in 2015.

The Shilla Duty Free shops at Incheon International Airport

#1,175.06 won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

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The Shilla Duty Free (cont’d)

Latest developments – Debut store in Phuket

• The Shilla Duty Free has announced that it will open its first Thailand duty-free store in central Phuket, Thailand in August 2016.

• The Phuket store will be operated under the name of The Shilla Duty Free but owned by GMS Duty Free, a joint venture company formed by Shilla Duty Free and its Thai allies Gems Gallery Group, a major jewellery retailer in Thailand, as well as The Mall Group, one of Thailand’s leading shopping mall operators.

• It will stock a wide range of duty-free products, including perfume, cosmetics, luxury fashion, watches and jewellry, confectionery, local products and souvenirs*.

Latest development – Duty-free pet food

• As most of the customers who shop at duty free stores are Chinese travelers and it is estimated that at least 90 million people in China own pets, The Shilla Duty Free believes that pet supply brands will become popular at duty-free stores in the near future.

• The Shilla Duty Free has recently introduced online its first duty-free pet supplies home brand.

• At its offline stores, the company also offers pet supply brands including Sniff, CosmoUnit, Dentists Appointment and Ruffwear.

• Besides, it is set to open a premium pet supply shop named Louis Dog in 2016**.

*“Shilla Duty Free to open Phuket store in August.” 15 July, 2016. Retail in Asia. **“Popularity of Korean Jewelry Soars.” 5 July, 2016. Retail News Asia.

“ Almost everything is here! It carries numerous international and domestic brands. There is also a free shuttle from Shilla to Myeondong, very convenient! ”

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The Shilla Duty Free (cont’d)

“ The Seoul branch taxi fare payback scheme is cool! Can’t believe I can have taxi fare paid back with up to four 5,000 won-worth gift cards! ”

“The Shilla Duty Free newsletter’s subscribers can receive via email regular newsletters which show at the glance The Shilla Duty Free Shop latest events and benefits.”

Ms. Zhang A K-fashion fan from China

Ms. Hsu A student from Taiwan

Ms. Chan A tourist

from Hong Kong

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Dongwha Duty Free

Company profile

• Established in 1973, Dongwha Duty Free is the first duty free shop operator in South Korea

• Currently the third largest duty-free player in South Korea

• Houses approximately 388 international and domestic brands

• Sales of Dongwha Duty Free totaled 320 billion won (US$0.27 billion)# in 2015, around 6% of the total duty-free sales in Seoul

Physical stores:

• One domestic branch in Gwanghwamun, Seoul

- The branch comprises five floors and one basement, with the second floor housing Dongwha Diplomatic Duty Free Shop

Online store

• Transactional website

(http://www.dutyfree24.com/)

• Transactional mobile app

Dongwha Duty Free shop in Gwanghwamun, Seoul

Dongwha Diplomat Duty Free shop on the 2nd floor

#1,175.06 won = US$1 (Exchange rate on 31 December, 2015 by Bloomberg)

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Dongwha Duty Free

Latest development – Partnership with Wanda

• Dongwha Duty Free forged a partnership with Wanda Tourism Investment, a hospitality arm under China’s biggest property developer Wanda Group, in June 2016

• Under the partnership, Dongwha Duty Free can utilize Wanda Tourism’s online-offline strengths to attract more Chinese tourists to its duty-free products and services

• Both parties will also look for new ways to deepen cooperation, potentially expanding into duty-free products and other travel retailing-related businesses in the future.

• Meanwhile, Dongwha Duty Free has also teamed up with South Korea's conglomerate E-Land Group to supply admission tickets for regular Korean WAPOP (World & Asia Pop) concerts to Wanda Tourism's tourists*

In-store promotion at Dongwha Duty Free’s main branch in Seoul

MCM is one of Dongwha’s top-selling fashion brands.

*“Wanda Tourism and South Korea's Dongwha Duty Free enters into partnership agreement.” 6 September, 2016. Wanda Group.

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Dongwha Duty Free

“Dongwha Duty Free boasts various brands from around the world.. and the price is cheaper than the others.”

“Very convenient location as it is close to Gwanghwamun subway station; there are bus stands for major local buses and airport buses too. ”

Ms. Zhu A tourist from China

“The duty-free store is well-structured and tastefully done. Inside the building there are cafés and restaurants where I can rest my feet for a quick snack and coffee.”

Ms. Wu A student from Taiwan

Mr. Lai A tourist

from Hong Kong

Contacts

Asia Distribution and Retail

Teresa Lam

Vice President

Tel: (852) 2300 2466

Email: teresalam@fung1937.com

Tracy Chan

Senior Research Analyst

Tel: (852) 2300 2480

Email: tracychansy@fung1937.com

Fung Business Intelligence 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: (852) 2300 2470 Fax: (852) 2635 1598 Email: fbicgroup@fung1937.com http://www.fbicgroup.com/

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