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Losses for South Korean duty free could mount up following Chinese ‘travel ban’

It seems that travel bans are all the rage these days. As well as Trump’s revised six-country Executive Order which targets inbound individuals from Muslim-majority markets, China has told its national travel agencies to stop offering its outbound nationals group packages to South Korea.

March 2017 | by Julia Padgett, Communications Director

The reasoning is very different: Trump’s is based on undefined security concerns about potential terrorists entering or targeting the US, while China is angry about South Korea’s decision to allow the US to deploy an anti-ballistic missile system called Terminal High Altitude Area Defense (THAAD).

Lotte Group – hugely reliant on Chinese duty free shoppers – has become embroiled in the latter skirmish because it allowed a land swap with the Korean military to allow the missile deployment. As a result, it has suffered scathing criticism in the PRC – an entirely predictable outcome.

The stakes are considerably higher…

At CiR, we recently looked at how the Trump ban might play out. Here we examine the South Korean situation – which from a duty free and travel retail perspective is a much higher-stakes game.  

Not only is the South Korean market the biggest in the world for DF&TR sales ($10.6bn in 2016 up by +30.9%), but the Chinese drive it. Some 80% of foreign duty free sales in the country are to Chinese passengers.

In the first two months of 2017, the Chinese accounted for almost half of arrivals traffic into South Korea (46.8%) so they remain critically important to tourism and DF&TR.

The travel ban has been instigated by the China National Tourism Administration, and covers both online and offline travel agency bookings. According to Jing Daily it is being applied across group travel, individual travel, and cruises, and some analysts have predicted up to a 70% drop in Chinese arrivals.

At CiR we believe it is too early to forecast future numbers, but the DF&TR industry should be concerned. We know from our own Chinese Shopper Study, that one in every three Chinese book trips abroad as part of a group. With the Chinese ban (on new trips only) focussed on this form of travel, the consequences could be far reaching.

Analysis from our own CiR Business Lounge to the end of last year shows that Chinese passenger travel into South Korea, had not been affected by the political row (which has been brewing since last summer).

Traffic was up +15.6% versus 2015, with more than 5.3m Chinese passengers travelling to South Korea in 2016. While impressive at face value, it must be remembered that growth rates last year had a favourable year-on-year comparison due to the hit from the MERS virus during July and August 2015, when traffic dipped to the tune of -30%. Stripping out the MERS months, Chinese traffic to South Korea rose by +8.5% YoY (see chart above). 

Softening and declining demand

However, looking at CiR Business Lounge seat capacity forecasts for the first seven months of 2017, there is a considerable softening of traffic demand from China to South Korea.

Scheduled seat availability remains flat versus the same period in 2016 and four of the first seven months are set to record YoY declines (see chart below).

Using our monthly forecast data, the chart below shows a possible impact prediction of the ban on group travel for Chinese travelling to South Korea. Taking into consideration responses to other similar situations globally, we can assume there will be a gradual slowdown in traffic to begin with, as those Chinese who have already booked travel will go ahead with their planned trips.

The real impact in passenger numbers will not be seen until the second quarter and the popular holiday months of July and August where we could expect to see declines of anywhere up to about -25% YoY. In the 18 months to June 2018, CiR expects to see South Korea welcome up to 1.3m fewer Chinese passengers (-14.3%) than may have been the case prior to this ban, assuming that the dispute has not been resolved in the meantime. These declines will translate to significant dollar losses.  

$20bn in the balance – but there is a silver lining…

A report from state-run Korea Development Bank says that the DF&TR and tourism sectors, could contract by $11.7bn, with a further loss of $8.3bn in other industries if the Chinese action in intensified. It will be retailers like Lotte that will be targeted most heavily – and DF&TR as a channel could stand to lose $5.3bn. The report also adds that beauty is the most vulnerable product group and that Korean cosmetics companies could take a combined hit of $1.43bn.

Whilst this is a serious impact, it could be counteracted to some degree. Taiwan, which was also hit with a similar ban, actually saw international tourism rise having courted traffic from other Asian countries – this is something that South Korea could do if it acts swiftly.

There is some evidence pointing to domestic tourism to places like Jeju Island increasing, following the news that Chinese tourist numbers may fall. But it will be a big ask for the Korean tourism authorities to make up any Chinese shortfall with other international nationalities in so short a time.

A positive lesson from the MERS crisis was that when it ended in 2015, traffic rebounded rapidly. The same could happen this time if there is a resolution and the travel ban is dropped. The difference, however, is that there is a political dimension to the current dispute and that may colour the views of PRC nationals coming to South Korea in the future. Even with the ban removed, Lotte may well have a lot of PR to do to regain credibility in the eyes of many PRC Chinese travellers. 

Date Source: CiR Business Lounge

NB. PAX Source: CiR Business Lounge | Advanced Analytics Tool - Data based on Scheduled departing international passengers only. Data displayed for nationalities is based on residency through place of ticket purchase