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27 October
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Asia

"Big three" of international luxury brands will not allow their duty free items to sell in local market

The sell-off of duty free inventory through alternative channels in order to assist travel retailers hit hard by the COVID-19 crisis is proving increasingly controversial at home and abroad

Seoul Photo: Hermes

/NOVOSTIVL/ Hermes, Chanel and Louis Vuitton - will not allow duty-free firms here to sell their products in the local market. This article appeared in Korea Times.

The Korea Fair Trade Commission (KFTC), the country's top antitrust regulator, said it needs evidence like a "written contract" between a luxury brand and duty free company or a whistleblower's file of complaint to start an investigation on the three luxury brands' alleged breach of the Fair Trade Act.

In late April, the Korea Customs Service decided to loosen regulations allowing duty free firms like Shinsegae, Lotte and Shilla to sell their luxury goods inventory in the local market after they saw a plunge in sales owing to the COVID-19 pandemic that made countries ban international travel.

Contrary to customers' high expectations for the chance to buy clothes and handbags of their three favorite luxury brands, Hermes, Chanel and Louis Vuitton have refused to allow sale of their products here.

Such an act could be ruled a violation of the Fair Trade Act, as duty free firms buy luxury items from the brands to sell them at duty free stores here, and they have the right to re-sell the products they purchased.

According to the KFTC's resale price maintenance banning policy, suppliers cannot intervene in fixing a retailer's price of their items.

"This can be subjected to several violations of the Fair Trade Act. If local duty free firms want to sell their stocks but the three luxury brands have applied pressure to not allow it, then it becomes a problem," a KFTC official said.

However, we have to look at the contracts first that have been signed by the two players. Also, we will start an investigation if a duty free company requests us to do so," the official said.

However, duty free firms are not in a position to complain about not being able to openly sell their best and steady-seller luxury items in the local market, because luxury brands suppliers could retaliate.

Starting today, Shinsegae announced it will sell four luxury brands' duty free products through its fashion firm, Shinsegae International's online shopping mall. Hermes, Chanel and Louis Vuitton are not on the list.

Shinsegae's duty free firm said their luxury goods inventory will also be released in other distribution channels but it is unlikely that their customers will find Hermes, Chanel and Louis Vuitton products.

Hotel Lotte, which operates Lotte Duty Free, said it has not been finalized but it is unlikely to sell the three luxury brands' products in its department store or online mall.

"Everything has been decided a month ago, that Hermes, Chanel and Louis Vuitton will not sell their duty free items in the local market. This is because of their brand image and reputation. They have never allow discounts for their clothes or handbags. They are the superpowers. This is why they can increase the price of their products whenever they want," an industry source said.

A Lotte Duty Free official said some luxury brands are accepting refunds of their products due to the pandemic.

"Of course, they will not refund the full amount we paid in the first place. But at least it's better than letting them rot in the warehouse unused. Luxury brands will take them back and sell them in their outlets in Europe," the Lotte Duty Free official said.

However, Hermes, Chanel and Louis Vuitton do not sell their products outside their own boutique stores or official online malls, which means they are not the brands giving refunds to local duty free stores.

The KFTC said it doesn't have to be a local firm that requests an investigation. It can be a third party like the Korea Duty Free Shops Association (KDFSA) that takes action as long as it can provide evidence.

"The KDFSA can launch an internal probe and report to us by phone or email. If they think the luxury brands are violating the law, we can start an investigation," a KFTC official said.

However, the KDFSA said it works for the benefits of local firms and so far no duty free companies have filed complaints related to this issue.

Hermes, Louis Vuitton and Chanel all declined to comment on the issue.

Meanwhile, Lotte Department Store will sell other luxury brands' duty free products starting in July giving 10-50% discounts of original prices.

One leading travel retailer said: “We never expected to sell those luxury brands or any other luxury brands because of the conflict [with the local market]. The luxury brands have a return policy where if products are not sold than they are returned to them. The frustrating part is that the price paid for what is returned is a small fraction of what was paid originally by the duty free retailer – it differs by brand in terms of when the inventory is returned and for what price, but it can be one season or 2~3 years. In terms of the price they pay to get that back, it could range from 30%~50% of the original price that the retailer paid.”

Another senior retail executive said, “We never said we would be able to sell the luxury brands [through domestic channels]. Your original article outlined how retailers will focus on selling contemporary luxury and masstige brands and that is what we still expect. The high-end luxury brands all have strict return policies and they really take time out to attend to their inventory. So we can’t decide on the discounts or what to do with the inventory even when it’s not sold.”

Ming Yong Jung comments: “The innate pricing conflict with other channels in Korea is a major stumbling block. Remember, different agents supply the retailers across duty free and department store channels, so it’s very difficult for the duty free products to simply be sold into the local market. The reason why Shinsegae International has found it easier to do so is because they are the supplier of the products to both Shinsegae’s duty free and department store businesses.”

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