JEJU-DO < invest Korea

According to Yonhap News,

(SEOUL=Yonhap News) Hotel Shilla's recent defeat to bigger rival Hotel Lotte in their competition to open a downtown duty-free shop on Jeju Island is likely to hurt the Samsung affiliate's profit in the short term, but any losses will eventually thin out as the market is growing in full force, analysts said Friday.

Last week, Hotel Lotte, which operates the country's biggest duty-free chain Lotte Duty Free, beat Hotel Shilla and Booyoung Group to win the operational rights to one of Jeju's two foreigner-only duty-free shops, which have proven to be a lucrative channel for retailers eager to cash in on a surging influx of Chinese tourists.

With the latest win, Hotel Lotte is expected to relocate its unprofitable duty-free branch in the island's southern district of Seogwipo to the island's city center to open a 6,270 square-meter store that will be directly competing with Hotel Shilla's 5,940 square-meter venue.

Analysts say the move is likely to hurt Hotel Shilla, which had dominated duty-free sales in the city's central district where demand for shopping has been soaring due to its proximity to the port, the island's main gateway that serves over 80 percent of foreign visitors.

"It's inevitable for Hotel Shilla's short-term growth and profitability to weaken as (Hotel Shilla and Hotel Lotte) are likely to expand their marketing rivalry to secure a market share at a certain level," said Park Jong-dae, an analyst at Hana Daetoo Securities.

The geographic superiority had so far helped Hotel Shilla trump its bigger rival, at least on the holiday island. Sales at Hotel Shilla's downtown duty-free store totaled 396 billion won (US$360 million) last year, nearly double Hotel Lotte's 204 billion won, according to Park.

The changed terms of competition from last week's results have dampened investor sentiment. Shares of Hotel Shilla slumped 4.04 percent on March 2, the first trading day following the Feb. 27 announcement by the Korea Customs Service.

Analysts, however, said the setback will not weigh on Hotel Shilla in the mid-to-long term as the island's duty-free market continues to grow at a blistering pace, thanks mostly to Chinese cruise travelers.

"Even if Hotel Shilla's market share, 62 percent in 2014, drops to 52 percent, sales are forecast to grow 5 percent from the previous year," said KB Investment & Securities analyst Kim Min-jeong.

Sales at duty-free shops on Jeju are estimated to have spiked 37.2 percent on-year to 1 trillion won last year, with sales of Hotel Lotte and Hotel Shilla accounting for 60 percent of the total. The number of Chinese tourists, the main force behind the shopping boom, soared 58 percent on-year in 2014 to 2.9 million.

Park of Hana Daetoo Securities also painted a rosy long-term outlook for Hotel Shilla, seeing room for still more growth in the duty-free market as Chinese travelers flock to the southern island.

He also noted that the two rivals, who dominate Jeju's foreigner-only duty-free market, are likely to refrain from excessive competition.

"They know that increasing marketing will only hike costs once their market shares are readjusted."

mil@yna.co.kr

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