Beyond the call of duty free
Lotte has been tempted to invest heavily in Thailand, and they are not the only ones attempting to break King Power’s virtual monopoly at the country’s biggest airports By Nanchanok Wongsamuth
Giant billboards advertising Lotte Duty Free surround the 150,000 square metre shopping and entertainment complex on Rama IX Road, opposite the Grand Tulip Hotel. The tourist-oriented complex is due to open in June, but behind the glass shopfronts where the duty-free stores are supposed to be, the interior is empty.
With more than 15 million tourists flocking to the country’s two largest airports each year, Thailand stands as one of the world’s most lucrative duty-free markets. But the tourists have had but one source for duty-free products under a controversial concession that gives King Power Group an ironclad monopoly over retail at Thailand’s largest airports.
Owned by Sino-Thai magnate Vichai Srivaddhanaprabha, King Power maintains nine stores, earning 56 billion baht last year from its two main companies, Department of Business Development records show, servicing travellers hungry for low-price perfume, booze and cigarettes.
That was expected to change in December 2014 when Lotte Group chairman Shin Dongbin, who was among leading South Korean businessmen who met Prime Minister Prayut Chan-o-cha in Busan, received an invitation to invest in Thailand. Lotte operates Lotte Duty Free, one of the major duty-free operators at Incheon International Airport.
Lotte met with Transport Minister Prajin Juntong a month later in Bangkok in the hope of gaining approval from Thailand’s military strongmen to compete in the growing duty-free segment. But King Power was already locked into long-term contracts at the two biggest airports — Don Mueang and Suvarnabhumi — both overseen by the Airports of Thailand (AoT), in a deal that effectively freezes new entrants out of the market. ACM Prajin, however, reassured Lotte that it could set up pick-up counters in any international airport in Thailand, according to a follow-up letter the company sent to the minister in March.
By then, the company’s request to set up a 7,000 sq m duty-free store on Rama IX Road was approved in principle. The problem then was setting up airport pick-up counters, where customers retrieve their duty-free products to take out of the country. With pick-up counters at airports, tourists can purchase goods at downtown duty-free shops and collect them on departure.
The AoT rejected Lotte’s request to set up a pick-up counter at Don Mueang. Until now, Lotte has not received any response from Suvarnabhumi despite several attempts to follow up. So far, it has secured only one pick-up counter: nine square metres of space at U-tapao airport in Rayong, which operates very few commercial flights.
Lotte is not the only retailer wanting a share of the lucrative duty-free pie. Last year it teamed up with the Mall Group and Central Group* — two major retail giants that have yet to break the monopoly — to set up an association of dutyfree companies. Together, they sought help from Rawittha Pongnuchit, a tax law expert and retired Finance Ministry official, to take on the David and Goliath battle.
ON THE OUTER
While companies need to bid for the rights to operate duty-free stores at airports, any majority Thai-owned company with registered capital of at least one million baht, along with a few other qualifications, can set up a duty-free store elsewhere.
After receiving a nod of approval from ACM Prajin, Lotte Group, under its subsidiary Lotte Duty Free (Singapore), entered a joint-venture agreement with Show Asset Management and L and S (Thailand) to set up Lotte Duty Free (Thailand).
Its 6,940 sq m duty-free store is to be located inside the Show DC entertainment complex owned by Show Asset Management. Although the complex is set to open in June, the Customs Department has only approved Lotte’s request in principle, pending the establishment of a customs warehouse and IT system.
In order to allow tourists to pick up their dutyfree products on departure, Lotte asked the AoT to set up a pick-up counter at Suvarnabhumi and Don Mueang airports.
In February, Lotte’s request to set up a pick-up counter at U-tapao airport, operated by the
Royal Thai Navy, was approved within six days. The airport is located in the eastern province of Rayong and currently serves three airlines with regular flights, including AirAsia, Bangkok Airways and Kan Air.
The AoT eventually rejected Lotte’s request for a pick-up counter at Don Mueang, saying it could not allocate space for the company because Don Mueang is “very crowded”.
“The AoT already granted a licence for King Power Duty Free to operate duty-free stores and pick-up counters at Don Mueang’s Terminal 1, and since we cannot allocate any space, we rejected Lotte’s request to conduct business,” said the minutes of an AoT meeting dated Jan 27 seen by Spectrum.
Lotte fought back in a letter addressed to the AoT director dated March 16, arguing the decision is the equivalent of allowing King Power to have a monopoly over the duty-free business. Lotte added that once the renovation of Don Mueang’s Terminal 2 for international flights was completed, there would be enough space for the 50 sq m area Lotte requested. Don Mueang’s renovated Terminal 2 is due to start full operation next month.
DELIVERING A DEADLOCK
The key issue is the delivery of products. According to 2006 regulations set forth by the Customs Department, customers purchasing products from duty-free stores located outside airports are allowed to carry the items with them. However, this method requires the stores to implement a bar code or radio-frequency identification system to track each item to ensure it leaves the country.
The law also allows customers to receive their products by mail, and for duty-free operators to set up pick-up counters in locations approved by the Customs Department.
In practice, however, the term “location” is interpreted by the department to cover international airports.
“Allowing customers to carry the purchased products does not ensure it will leave the country,” Customs Department director-general Kulit Sombatsiri told Spectrum. “Since airports are a point of departure, most pick-up counters are located in airports.”
Mr Kulit declined to discuss the issue surrounding the obstacles that prevent new players in the duty-free market, saying it depended on government policy. He said last month that the department plans to raise the number of pickup counters in order to support the country’s tourism industry in addition to its plan to trim import duty on luxury items.
“This is where the law causes a deadlock,” said the tax law expert Mrs Rawittha, who is also president of the Thai Duty Free Shop Trade Association. “So what happens if [the Customs Department] approves only pick-up counters located at airports, only to end up with no space left?”
Lotte expressed concern over the government’s apparent flip-flop on the issue, and in a letter to ACM Prajin outlined the economic benefits Thailand would receive with the company’s two billion baht investment.
The company had estimated revenue of 2.5 billion baht this year for duty-free sales in Thailand, a figure projected to reach 3.5 billion in 2018.
ENDING THE MONOPOLY
King Power’s concession has been the subject of controversy since it was awarded by the AoT in 2004, under former prime minister Thaksin Shinawatra’s administration, which was ousted in a coup two years later.
The status of Mr Vichai — who was ranked by Forbes magazine as the ninth richest man in Thailand last year — as king of the duty-free stores in Thailand came under threat in 2007 when the AoT sought to terminate King Power’s concession contracts to exclusively operate dutyfree shops and manage the commercial area at Suvarnabhumi.
The move was made after the Council of State, the government’s legal advisory body, ruled that King Power had deliberately under-declared the value of the investment in each of the two contracts as being below one billion baht. This, the council said, meant the company avoided the greater scrutiny that would have been applied under the Public-Private Joint Venture Act, which requires a lengthy selection process for any private-sector investment in a state project worth one billion baht or more.
Not only did the deals bypass the Thaksin cabinet, but also the Suvarnabhumi airport development committee chaired by the then prime minister.
Under coup-appointed prime minister Gen Surayud Chulanont, the deal for the exclusive concession at Suvarnabhumi was ruled illegal by various government agencies in 2007.
Following the ruling, the AoT vowed to allow more operators to run duty-free shops at Suvarnabhumi airport to provide competition. But in 2011 the National Anti-Corruption Commission, under the administration of Yingluck Shinawatra’s government, dismissed graft allegations against AoT and King Power, and King Power was allowed to continue its monopoly at Suvarnabhumi.
King Power operates branches at Suvarnabhumi, Don Mueang, Phuket, Chiang Mai and Hat Yai airports. Its contracts at Suvarnabhumi expire in 2020 and at Don Mueang two years later. It also has four stand-alone duty-free complexes.
The AoT did not respond to Spectrum’s request for an interview. King Power executives were not available for comment, but said in a previous interview with the Bangkok Post they welcomed new duty-free operators, adding the sector was not really monopolised and that Phuket airport was open to new players.
“Most people like to say that King Power has enjoyed a monopoly. We’ve just done everything based on conditions in the concessions,” said Mr Vichai.
THE THREE MODELS
The question of who gets to operate dutyfree shops and the commercial areas in
airports — such as restaurants, convenience stores and pharmacies — has not been clear-cut and the process has changed over time.
According to a contract renewal signed on April 20, 2004, the AoT agreed to extend King Power’s duty-free shops to Suvarnabhumi due to the company’s previous business performance in Don Mueang.
The decision, which considered the pros and cons for the AoT, was reached despite the risk of “creating a perception that negotiations with one business operator would be considered lacking competition from a bidding contest”, said the contract seen by Spectrum.
The 20,000 sq m commercial area in Suvarnabhumi is also operated by King Power, which won the bid. In 2005, a contract relating to the commercial space was signed with the AoT that did not mention the pick-up counters, which are located in these areas.
“The bidding process for the operator of the commercial area did not include the pick-up services, but it was interpreted by the AoT as being located in the commercial area,” Mrs Rawittha said. “As a state enterprise, AoT needs to realise the consequences this interpretation has.”
Critics say the AoT’s decision was clearly designed to benefit King Power.
In 2012, when King Power won the bid to operate duty-free shops at Don Mueang, the contract specifically included pick-up counters as part of the operation.
The auction for the commercial area at the Phuket International Airport started last month, with King Power and The Mall Group as bidders. The winner will be announced this month.
While the duty-free stores and pick-up counters are operated by King Power, the company is obliged to lease the area for pick-up counters to all duty-free stores. While critics say this is the best model to date, they say it is the government which should be responsible for operating pickup counters to ensure fairness.
OPENING UP
The issue surrounding pick-up counters was debated at a meeting with the Finance and Tourism ministries, as well as the private sector, in December. A resolution is expected to be reached on Feb 22.
A key person in the discussions is Mrs Rawittha, who represents three members of her association: Lotte, The Mall and Central Group.
“Many others want to open up the duty-free business in Thailand but they are concerned that they will encounter a problem with pickup counters,” said Mrs Rawittha, a former government official at the Revenue and Customs departments, the latter where she served as deputy director-general, retiring in 2010 as an inspector-general.
Mrs Rawittha, who formerly went under the name Paitoon Pongkesorn, was among seven state officials who faced investigation for possible malfeasance in connection with tax payments by the Shinawatra family over its sale of Shin Corp in 2006. She was later cleared of all allegations.
Mrs Rawittha said the only way to solve the problem is for the Customs Department to increase the amount of pick-up counters. This can be achieved by intervention from the Finance Ministry, which holds a 70% share in the AoT: by asking the AoT to take back not more than 300 square metres of commercial area, the space can then be reallocated to duty-free operators for their pick-up counters.
“The AoT must keep the benefits of the country and its shareholders. But why don’t they do it? What are they benefiting from?” she asked.
It is unlikely that King Power will allow such a move, as this could violate the contracts it has with the AoT. But Mrs Rawittha pointed to a clause in the contract which allows the AoT to have the final say in any dispute that arises from the interpretation of the contract. The AoT, she said, could compensate King Power for the remaining amount of time left in the contract.
“It’s challenging,” she said. “It’s like opening the rusty doors of our country to equality under the law. No one wants to take on the giants.”