[비즈한국] Hotel Shilla000877 has decided to return its duty-free shop license for the DF1 zone at Incheon International Airport. This decision stems from its inability to bear the high rent. As a result of returning the license, Hotel Shilla must pay a penalty of 190 billion won. With improving profitability cited as a key task since last year, the payment of this 190 billion won penalty makes it realistically difficult to achieve profitability improvements this year. This may also lead to a decline in the evaluation of CEO Lee Boo-jin, who promised to improve profitability last year.
At the Hotel Shilla general shareholders' meeting in March of last year, CEO Lee Boo-jin stated, "To ensure continued growth, securing profitability is more important than anything else, so I will focus my capabilities on improving profitability," adding, "We will strengthen our product power and quality through investment and innovation in human resources and processes, and solidify 'The Shilla' brand."
Contrary to CEO Lee Boo-jin's intentions, Hotel Shilla's profitability has not improved. While revenue increased by 10.62% from 3.5685 trillion won in 2023 to 3.9476 trillion won in 2024, operating profit turned into a loss, moving from an operating profit of 91.2 billion won in 2023 to an operating loss of 5.2 billion won in 2024. Profitability has not particularly improved this year either. While the company recorded an operating profit of 39.8 billion won in the first half of last year, the operating profit for the first half of this year was a mere 6.2 billion won.
Hotel Shilla's business divisions are largely divided into the TR (Duty-Free) division and the Hotel & Leisure division. It is assessed that the TR division has significantly impacted Hotel Shilla's poor profitability. The TR division recorded an operating loss of 75.7 billion won last year and another 19.8 billion won in the first half of this year. This stands in contrast to the Hotel & Leisure division, which remains profitable.
The overall atmosphere in the domestic duty-free industry is grim. According to the Korea Duty Free Shops Association, domestic duty-free sales fell by 8.60% from 1.0065 trillion won in July of last year to 919.9 billion won in July this year. Conversely, the number of customers purchasing at duty-free shops increased from 2.36 million to 2.58 million during the same period. While the number of visitors increased, the volume of purchases decreased. This is attributed to a decline in group tourists and an increase in backpackers.
Amid this situation, Hotel Shilla has been in conflict with Incheon International Airport Corporation (IIAC) over rent. In April and May of this year, Hotel Shilla and Shinsegae004170 Duty Free filed for mediation with the court, requesting that IIAC lower the duty-free shop rent. Since 2023, IIAC has been calculating rent based on the number of passengers using Incheon International Airport. However, since an increase in passengers does not necessarily translate to an increase in duty-free sales, the burden on Hotel Shilla and Shinsegae Duty Free has intensified.
The court proposed a mediation plan to reduce Hotel Shilla's rent by 25%. However, IIAC rejected the proposal, citing fairness toward other duty-free operators and the possibility of a breach of trust. Because court mediation is not legally binding, there was no other way for Hotel Shilla once IIAC rejected it.
Ultimately, on the 18th, Hotel Shilla made the extreme move of returning its duty-free license for the DF1 zone at Incheon International Airport. Hotel Shilla originally planned to operate the duty-free shop in the DF1 zone until June 2033. Terminating the contract early incurs a penalty of 190 billion won. As of the end of June this year, Hotel Shilla's cash and cash equivalents stood at 483.2 billion won. The company is in a situation where it must pay nearly 40% of its cash holdings as a penalty. However, the amount of the penalty could potentially be reduced if the company files a lawsuit.
While the slump in Hotel Shilla's TR division is notable, the performance of the Hotel & Leisure division is also lackluster. Revenue in the Hotel & Leisure division decreased by 1.48% from 346.1 billion won in the first half of last year to 341 billion won in the first half of this year, while operating profit fell by 15.73% from 26.8 billion won to 22.6 billion won during the same period. At least, the expectation for performance improvement in the second half of the year remains, as Chinese group tourists will be allowed visa-free entry starting from the end of September.
At the shareholders' meeting in March this year, CEO Lee Boo-jin said, "Beyond overcoming crises and surviving, we will lay the foundation for new growth." If Hotel Shilla fails to improve its performance this year as well, it could affect CEO Lee's leadership. For this reason, the business world is focusing on whether CEO Lee's gamble of returning the duty-free license will lead to improved performance.
A Hotel Shilla official explained, "Since the contract for the Incheon International Airport duty-free operation license in 2023, the duty-free market has seen rapid environmental changes due to shifts in consumption patterns and reduced purchasing power of key customer groups. Accordingly, we requested rent adjustments from Incheon International Airport Corporation, but it was not accepted." The official added, "The losses are too large to continue operations at Incheon Airport," and "We made the inevitable decision to return the Incheon Airport duty-free DF1 zone license based on the judgment that we need to improve our financial structure and enhance corporate and shareholder value."