Lotte duty-free ambitions hinge on South Korea store license

Five bidders covet three lucrative downtown duty free licenses to be issued by South Korea on Saturday, and arguably none is more desperate for a win than Lotte Duty Free.

The world's No.3 duty-free retailer's ambitions to one day become the world���s biggest operator were thwarted this year by a criminal investigation that forced its parent Lotte Group to scrap a multi-billion-dollar IPO.

A win on Saturday would allow the beleaguered South Korean conglomerate to reopen a Seoul mega-store and revive its goal of global duty-free dominance.

Failure would not only keep the store shuttered, it would curb enthusiasm for the planned $4.5 billion initial public offering of Lotte Group's hotel business, designed in part to help fund expansion in duty free.

"If Lotte is chosen, it's expected to have a positive influence on Hotel Lotte's planned IPO, which is the centrepiece of Lotte Group's announced target of turning into a holding company structure," said Yang Ji-hye, retail analyst for Meritz Securities.

South Korea's customs agency will decide the winners of three new duty-free licenses for large companies in Seoul on Saturday, adding new stores to the world's largest duty-free market worth $7.9 billion last year.

Other participants in the auction include Samsung Group's Hotel Shilla Co Ltd <008770.KS> joint venture, Shinsegae Inc <004170.KS>, Hyundai Department Store Co Ltd <069960.KS> and SK Networks Co Ltd <001740.KS>.

South Korea's fifth-largest business group, Lotte has invested a huge amount of energy in regaining the license that it failed to renew six months ago, around the time that prosecutors revealed they were investigating the group.

Group Chairman Shin Dong-bin, his father and 20 other current and former officials now face charges including embezzlement and breach of trust in one of the highest-profile investigations of a South Korea company's dealings in recent years.

Shin, who denies any wrongdoing, unveiled a major restructuring of the conglomerate in October to boost confidence among consumers and potential investors.

But the scandal had already derailed the hotel IPO just as money was draining out of the duty-free business. Lotte has bled 3 billion won ($2.6 million) a month since July to manage the now-empty Lotte World Tower store, which is about twice the size of a football pitch and once boasted about 700 brands including Louis Vuitton, Chanel and Hermes.

The closed store generated 611 billion won in revenue last year, about half the revenue raised by the vast mall surrounding the group's new Lotte World Tower skyscraper in Jamsil, southeastern Seoul, Lotte Duty Free says.

The store is key to the group's ambition to become the world's biggest duty-free operator. Lotte Duty Free, with 3.75 billion euros turnover in 2015, is currently ranked third globally following Dufry and second-ranked DFS Group, a unit of LVMH .

"We can reopen the store within a month because the space has been left open. All we have to do is shift the merchandise from our other locations," a Lotte Duty Free spokesman said.

South Korea overtook the United Kingdom as the world's largest duty-free market in 2010, and has seen duty-free sales nearly double in the past four years to 9.2 trillion won in 2015.

($1 = 1,163.3000 won)

(Reporting by Joyce Lee; Editing by Miyoung Kim and Stephen Coates)