Amidst the current economic uncertainties with a looming full-scale trade war between the US and China, tourism stands out as one of the very few sectors with a bright outlook.
In 2016 Thailand attracted 32.6 million foreign tourists who generated 1.63 trillion baht of income. This sum is spread out over a broad range of sectors in the economy and to large- and small-scale businesses alike; be they 5-star hotels or smallish guesthouses on Khao San Road, Michelin-starred restaurants or papaya salad food stalls on the roadside.
The healthy growth in the tourism industry has been driven mainly by the surge in tourists from China. Roughly a quarter of inbound foreign tourists to Thailand is from China. Chinese tourists are well-known to be heavy spenders. According to Alipay, China's major online payment platform, Chinese tourists tend to splurge at duty-free shops and convenience stores.
Unfortunately, Thailand's duty-free shops are not attractive to tourists. According to Euromonitor, a leading global market research outfit, an average tourist spends only US$47 (1,500 baht) on duty-free items in Thailand, compared with US$260 on South Korea. As a result, the total duty-free sales in Thailand in 2016 was a mere US$1.9 billion compared with US$10.1 billion for South Korea. So, what explains the five-fold difference in the sales figure?
The main reason behind South Korea's booming duty-free industry, whose growth was 18% in 2017, is the government's promotion of competition in the market.
Twelve duty-free concessions were handed out at Incheon International Airport, the primary airport serving the Seoul capital area, whose size is comparable to that of Suvarnabhumi Airport.
At Incheon's Terminal 1, six concessions were handed out to different concessionaires based on location. In Terminal 2, another six concessions were granted to different concessionaires based on product categories such as cosmetics, liquor and tobacco, and fashion goods.
In addition, several duty-free shops can be found in Seoul and the provinces. In Seoul alone, there are more than 10 duty-free shops including larger outfits such as Lotte, Shilla and Galleria Duty Free and smaller ones such as Entras, SM Duty Free and Ulsan.
These stores not only facilitate easy access to duty-free purchases for tourists, but also serve as tourist attractions in various districts.
The duty-free market landscape in Thailand is diametrically opposite from that of South Korea. There is only one duty-free retailer in Thailand, King Power International Group, operating at international airports and downtown locations. No wonder the duty-free sales figure is so low.
The good news is that the duty-free concession at the Suvarnabhumi Airport and three regional international airports will expire in September 2020. So, there is a chance to open up this industry to competition for the first time. As this issue has important implications to the Thai economy, I do not think the government should leave it in the hands of the Airports of Thailand Plc (AoT) alone. It should announce a clear policy to promote competition in the duty-free market.
First, it should open bids for multiple duty-free concessions at Suvarnabhumi Airport. Experiences at leading airports reveal that dividing concessions by product categories such as liquor and tobacco, cosmetics or fashion goods not only result in a greater variety and quality of products, but also higher income for the airport.
This is because each product category has a different margin. For example, cosmetics carry a much higher margin than fashion products. Thus, aggregating high-margin with lower-margin product categories will likely yield lower concession fees. According to a study of the airports industry by Goldman Sachs in 2017, the duty-free concession fee collected by AoT – 17% of sales on average -- is markedly lower than in other comparable airports in the region, namely Incheon Airport at 40% and Singapore's Changi Airport at 46%.
Second, the government should license multiple duty-free stores in Bangkok and major cities such as Chiang Mai. However, this requires a central pick-up counter at major international airports so that tourists can pick up duty-free goods they bought from any downtown stores at the airport before leaving the country.
Currently, the pick-up counter is operated by King Power International, the sole duty-free concessionaire. Unlike in Thailand, the airport operator in some countries is required by law to provide a central pick-up counter service equally accessible to every duty-free operator. For example, Japan's Narita and Haneda airports operate duty-free pick-up counter service themselves.
Currently, Phuket Airport's duty-free concession requires that the sole concessionaire provides the pick-up counter service for other downtown duty-free retailers who will be operational in the future. However, this model is far from ideal as those operators will be unwilling to surrender details of their sales such as the products and their prices to a competitor. The pick-up counter should be managed by a non-partisan party.
News reports indicate AoT's preference for maintaining the current concession scheme because it is "easy to manage". While that is certainly true, one must ask whether the ease of management should come at the country's cost.
If duty-free sales in Thailand jumped five-fold on par with that in South Korea, the revenue from tourism will increase by US$8 billion. And if the average concession fee is 40% rather than 17% of sales, it will translate into an additional US$3.2 billion per annum for AoT.
Certainly, it is not a small sum of money. This may translate into a much larger transfer from the state-owned enterprise to the state coffer. In the 2018 fiscal year, AoT transferred roughly only US$270 million to the state coffers, a minuscule amount compared to the potential size.
I believe that any decision about the optimum scheme for managing duty-free concessions should be based on transparent and credible procedures. That means AoT needs to disclose its entire report that supports its decision to opt for the current concession scheme and details of a consultant hired to carry out the report. This could help the public scrutinise the accuracy of the information and the soundness of the assumptions and methodology used.
After all, the AoT is a state-owned enterprise that must comply with disclosure rules stipulated by the 1997 Public Information Act. The duty-free business involves a multi-billion-dollar stake for the country. We should not let it slip by quietly.