(Han Joo-hyung)

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South Korea’s Lotte Duty Free has become the first in the industry to halt all transactions with daigou, or Chinese traders who bulk-purchase Korean duty-free goods for resale in China and Southeast Asia. The decision marks a significant turning point for the company, which has relied heavily on these traders for the past seven years.

According to industry insiders on Sunday, Lotte Duty Free informed major Chinese traders in late 2024 that it would cease selling duty-free items to them starting in January 2025. Daigou traders have long been a critical part of Korea’s duty-free industry, buying goods at discounted rates and reselling them abroad.

These traders account for about 50 percent of Lotte Duty Free‘s total revenue. The company’s decision to end these transactions reflects a determination to prioritize profitability, even if it means losing half of its revenue.

The daigou influence surged in 2017 when a diplomatic row over Korea’s deployment of the U.S. Terminal High Altitude Area Defense (THAAD) system led China to restrict group tourism to the country. Their role became even more dominant during the Covid-19 pandemic, which nearly halted international travel and led duty-free retailers, who are dependent on it, to clear excess inventory.

During this time, duty-free stores sold products to daigou at discounts of 40 to 50 percent off regular prices, effectively refunding the difference as fees. While this allowed daigou to generate significant profits, the duty-free stores often incurred losses on each sale.

Recognizing the unsustainability of this model, Korean duty-free retailers began reducing fees in January 2023, lowering them to around 35 percent. However, this rate is still higher than the 20 percent threshold needed for profitability. Compounding the issue, post COVID-19 trends show a shift toward independent travelers who prefer local retailers like CJ Olive Young and Daiso over traditional duty-free stores.

The weakening won against the dollar has added further strain, threatening the viability of duty-free retailers. The combined operating loss of Lotte, Shilla, Shinsegae, and Hyundai’s duty-free units totaled 135.5 billion won ($92.18 million) in the first three quarters of 2024, with annual losses for 2024 projected to approach 200 billion won.

The decision to halt transactions with daigou is reportedly part of a broader restructuring effort led by Lotte Duty Free CEO Kim Dong-ha, who assumed the role in December 2024. This bold move underscores the company’s commitment to reshaping its business model for long-term sustainability.