Doubts are growing over the future of Dongwha Duty Free, as industry speculation grows that it is unlikely to meet an extended debt repayment deadline amid heated competition among duty-free stores in central Seoul.

The country’s first downtown duty-free store, which opened its doors in 1973, is currently in crisis, as it has failed to meet a December deadline to pay back Hotel Shilla in a put option.

In May 2013, Hotel Shilla acquired a 19.9 percent stake in Dongwha Duty Free with a put option that it exercised last year. According to the agreement, Dongwha was obligated to pay Hotel Shilla 71.5 billion won ($61.8 million) by Dec. 19. When Dongwha could not repay the debt, Hotel Shilla disclosed on Dec. 25 that the deadline would be extended to Feb. 23 with an additional 10 percent penalty, bringing the total to 78.8 billion won.

If Dongwha cannot come up with the funds, it will have to hand over an additional 30.2 percent stake to Hotel Shilla instead. That would give Hotel Shilla a 50.1 percent majority stake in the company.

However, Hotel Shilla currently has no plans to acquire Dongwha Duty Free.

“Right now, our main concern is being paid back for the original investment,” a spokesman said.

Some news reports have suggested that Dongwha is seeking a third company to acquire its shares to pay back Hotel Shilla, but Dongwha Duty Free has officially denied that it is up for sale.

Industry watchers view Dongwha’s current predicament as the beginning of a downhill stretch for smaller duty-free operators, who face stiff competition from large conglomerates.

Although duty-free sales nationwide grew 33.5 percent on-year to 12.3 trillion won in 2016, according to the Korea Customs Service, that market has become fragmented as the government granted additional licenses to duty-free operators for two consecutive years. By the end of 2017, there will be 13 duty-free stores in Seoul alone.

Having additional duty-free stores operated by conglomerates poses major threats to smaller operators. These smaller operators must lean heavily on travel agencies in countries like China to bring in large tourist groups, spending up to 30 percent of sales as agency fees. Smaller companies also have trouble retaining attractive luxury brands such as Louis Vuitton, which are big draws for tourists, as the brands move their business to stores run by larger companies.

Louis Vuitton and Gucci terminated their contracts with Dongwha early this year.

Concerns for smaller operators are amplified by the tensions between the Korean and Chinese governments over Korea’s decision to allow the installment of a THAAD anti-missile battery here, which appears to be holding back tourism from China. Chinese tourists are major spenders driving sales at duty-free stores in Korea.

“The government is being irresponsible if it thinks that simply granting more licenses to smaller operators will make them viable,” said an official at a duty-free operator who asked to remain unnamed. “Larger companies will find the funds to keep them afloat even if sales are down. For smaller companies, there’s no backup plan.” 

By Won Ho-jung (hjwon@heraldcorp.com)