Lotte Group is under pressure on two fronts - a possible decline in Chinese tourism and South Korea's ongoing political scandal.

SEOUL — Retailers here are likely to be severely impacted after the Chinese government reportedly issued instructions to travel agencies in Beijing to cancel group tours and trips to South Korea.

On Thursday, travel agencies received instructions to halt sales both online and offline for packages to South Korea, according to Yonhap News.

The tightened travel ban is cited by Korean media as the latest in a series of retaliatory moves against South Korea’s decision to deploy the Terminal High Altitude Area Defense (THAAD) anti-ballistic missile system.
China has repeatedly expressed disapproval of the decision since July 2016, when Seoul and Washington, D.C., revealed the agreement to deploy THAAD in South Korea.

At a press conference on Monday, Geng Shuang, a spokesman for the Ministry of Foreign Affairs of the People’s Republic of China, warned that THAAD would severely disrupt the region’s strategic balance, gravely jeopardize the strategic security interests of neighboring countries, and was not conducive to peace and stability on the peninsula.

Experts believe that the Korean economy will be seriously impacted by any drop in Chinese tourism, which comes as leading luxury groups have said they have begun to see a turnaround in the Chinese market, both domestically and in terms of tourist spending. According to the Korea Tourism Organization, if Chinese tourism decreases by the estimated 50 percent, South Korea’s tourism revenue could drop by about 1.11 trillion won, or $9.63 billion at current exchange.

South Korea’s duty-free shops including Lotte Duty Free and Shilla Duty Free, which saw sales of 12.27 trillion won, or $10.6 billion, last year, will also experience a sharp drop in revenues with the predicted decline in Chinese tourism. According to local media, purchases by Chinese tourists account for 80 percent of duty-free sales in Korea.

“I think the ban is very much related to the political issues between the two countries,” said Kang Soo-min, a retail analyst at LIG Investment and Securities. “The bans [on travel and Korean cultural imports] are affecting the cosmetics, fashion, casino and leisure sectors in Korea.”

“The 2017 market expectation for duty-free revenue growth was somewhere around 15 percent, some who were bullish in their forecasts even anticipated 17 to 18 percent growth, and now it’s looking like single-digit growth. Some might even predict it to be minus growth,” said Kang.

“This issue is not going to be resolved in a short period of time,” she said. “This has been going on for more than six months now…[Companies should try to] find some other markets other than China, try to lessen the dependency on one single market.”

Among those firms dependent on Chinese consumers is Lotte Group, which has total sales of 30 billion won, or $2.6 billion, in China. Lotte has upset China because of a THAAD-related agreement the retail group has reached with the Korean government.

The group confirmed this week that it will hand over a golf course in Seongju County to be used by the Korean government for THAAD deployment, in exchange for other land.

Since the announcement, Lotte’s products and Lotte Mart sections have disappeared off of prominent shopping web sites in China including, Baidu Waimai and Meituan.

On Thursday, Lotte’s Chinese language duty-free web sites were reported to have been hacked by unidentified parties. Korean media speculated that the job was done by Chinese hackers.

On the same day, Lotte’s retail arm, Lotte Shopping Co Ltd., saw a 7.8 percent drop in it shares price.

“That’s a big drop, 7 percent in a day,” said Kim Jin-ill, an economist and professor at Korea University. “Given that there was no big internal event within the company, it’s huge — even for an external event.

“In China, Lotte didn’t do as well as they did in other places,” said Kim. “But they did better than retailers like [the Shinsegae-owned] E-mart, and Wal-Mart. So they were relatively successful because they didn’t close down at least.”

While the firm faces an increasingly uncertain future in China, Lotte is also undergoing intense scrutiny at home. Among the country’s other leading conglomerates — including Samsung, CJ Group and SK Group — Lotte is under investigation for alleged corruption. The group is suspected of bribing foundations run by Choi Soon-sil, impeached South Korea President Park Geun-hye’s accomplice, with donations in return for being granted one of three prized duty-free licenses last year.

With the upcoming high-profile trial of Samsung Group vice chairman Lee Jae-yong, who is being held under charges of bribery and embezzlement, local reports speculate that Lotte Group chairman Shin Dong-bin could be next to come under questioning by special prosecutors

“[A trial] will definitely have an effect on the group’s overall performance,” said Kim. “It poses a huge risk because of their [top-down] chaebol [operational] structure.”

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