South Korea's duty-free retailers are cutting the reference exchange rate they use to price domestic goods for the second time in a month, marking the fifth such adjustment in the past year. Given that the rate was previously revised roughly once every several years, the industry says it is facing an unusual degree of currency uncertainty.
The country's four major duty-free operators — Lotte, Shilla, Shinsegae and Hyundai — will lower the reference rate applied to domestic brand products by 50 won, to 1,350 won per dollar from 1,400 won, according to industry sources on the 9th. Lotte Duty Free and Hyundai Duty Free will apply the new rate from the 10th, while Shilla Duty Free and Shinsegae Duty Free will do so from the 11th.
The move comes just a month after the rate was cut from 1,500 won to 1,400 won in early July. It follows a slide in the won-dollar exchange rate from the 1,560-won range in early June to the 1,330-won range as of the 9th.
The intervals between adjustments have grown shorter, and reversals in direction more frequent. The industry lowered the reference rate to 1,350 won from 1,400 won in June last year, then raised it by 50 won on three separate occasions — in November of that year and in March and July of this year. What had been a four-month cycle has now compressed to one month. "Until before the COVID-19 pandemic, currency stability was such that the reference rate was revised only once every three to four years," an industry official said. "But swings have widened recently and the direction has shifted abruptly, so the cycle has shortened to an unusual degree."
With the currency moving so sharply, operators are weighing the consequences. The industry says this latest cut largely reverses the dollar-denominated prices for domestic goods that had been marked down to cope with a weak won. The reference rate is the exchange rate duty-free stores apply to set dollar selling prices for domestic brand products supplied to them in won. The lower the reference rate, the higher the dollar price. A Korean cosmetic product priced at 150,000 won works out to $100 at a reference rate of 1,500 won, but $111 at 1,350 won.
"When the won weakens, duty-free stores lose price competitiveness and foreign tourists increasingly shift to department stores or to Olive Young, Daiso and Musinsa," another industry official said. "Raising the reference rate served to defend the price competitiveness of domestic goods. But that comes with margin pressure, so this is now a matter of normalizing an increase that had been too steep."
The stronger won itself works in favor of domestic shoppers. As recently as last month, duty-free prices for major imported brands were running above those at department stores — a price inversion that is now steadily unwinding. The Dior Lady Bag Mini, priced at $5,500 at duty-free stores, converted to 8.38 million won at the exchange rate of three months ago (1,524.5 won), or 880,000 won more than the 7.5 million won list price at department stores. At the rate on the 9th (1,336.1 won), it comes to 7.35 million won — 150,000 won cheaper than at department stores. The industry expects demand to pick up as prices feel lower to domestic customers.
For foreign shoppers, the effect runs the other way. The dollars they hold are worth less, cutting their purchasing power in Korea, and the reference rate cut also pushes up dollar prices for Korean cosmetics and other domestic goods.
There are also concerns about profitability. Inventory bought when the won was weak now has to be sold with the currency stronger. "Whether the rate is high or low, it needs to move steadily for us to forecast, and wider swings mean a heavier burden," an industry official said. "What merchandisers are wrestling with right now is when and how much inventory to secure."
