Duty-free shops have been the biggest cash cows of Lotte Hotel and Hotel Shilla for years, thanks to the sharp increase in tourists from China and Southeast Asia.

But with political movements to make duty-free shops donate 1 percent of their revenue as public funds and restrict conglomerates’ further expansion in the business, Lotte and Shilla are turning their eyes abroad.

Lotte Hotel and Hotel Shilla netted over 80 percent of their revenue last year, which topped 3 trillion won and 2 trillion won ($2.7 billion and $1.8 billion) for the first time, respectively, from duty-free retail.

In Korea, Lotte Hotel runs three intracity duty-free shops, another three in airports and an online duty-free mall. Chinese customers swamp them throughout the year to buy luxury goods for which they have to pay extra taxes at home.

Japanese tourists declined due to the yen’s plunge, but the Chinese and Southeast Asians are filling the gap.

Having grown explosively at home, Lotte aims to become the world’s second-largest duty-free business by 2015 by bolstering marketing towards foreign tourists in Korea and entering other Asian markets.

Hotel Shilla chief executive Lee Boo-jin announced at a shareholders’ meeting in March her determination to keep expanding the duty-free business abroad.

“By beefing up our overseas business, Shilla will grow into a prestigious global retail and service company,” she said.

Adding momentum to their overseas stretch are the looming regulations against conglomerates in Korea.

Chaebol such as Lotte, Shilla and SK have dominated the duty-free market here while paying practically nothing for their prerogative, state-granted license, which was beyond reach for small and medium-sized firms until recently.

The Lotte Duty-Free Shop in downtown Seoul, for instance, paid only 900,000 won in license fees to the government in 2011 while it raked in over 1 trillion won in sales.

The Korea Customs Service revised rules late last year to allow SMEs to enter new biddings.

With the government underscoring shared growth among small and large firms, conglomerates are likely to be in a tight spot in the bidding scheduled for late 2014 to renew contracts at the Incheon airport. The current contract period for duty-free shops at Incheon airport ends in early 2015.

Competition will definitely get more intense with new players such as Shinsegae in the business.

Against this backdrop, Lotte and Shilla, the world’s fourth- and eighth-largest players in the duty-free business, have been competing against each other to go abroad since 2011.

The two vied over rights to run duty-free shops in Hong Kong, Los Angeles, Thailand and Guam. Currently, they are both competitors in the biddings in Singapore and Bali airports as well.

In April, Lotte was selected as the preferred bidder to run a duty-free shop in Guam’s international airport for 10 years through 2022. Lotte beat not only Shilla but also DFS, the world’s No. 1, which had run the duty-free shop in the Guam airport for the past 30 years.

The Guam shop will sell everything from perfume, cosmetics, fashion accessories and watches to liquor and tobacco. Lotte expects some 1 trillion won in annual revenue from the shop over the next 10 years.

Korean, Chinese and Japanese travelers account for 60 percent of the 1.48 million who use the Guam airport each year.

“The duty-free market is most developed in Asia as the U.S. and Europe have other dominant retail channels such as outlets,” said Kim Dong-hoon, spokesman for Lotte duty-free Shop.

“Growth is limited in China where the government runs the duty-free business. Japan has duty-free shops only in airports. This leaves Korea, Indonesia and Thailand as the markets with biggest growth potential.”

Last year, Lotte opened a duty-free shop in Indonesia’s Soekarno-Hatta Airport in January, followed by two shops ― one that sells local products and another that sells fashion accessories ― in Singapore’s Changi Airport in May and November, respectively.

Lotte is scheduled to open another one in downtown Jakarta on June 22.

Shilla opened its first overseas duty-free shop in the third terminal of Changi Airport early this year. Shilla’s store, which sells handbags, wallets and other accessories, is located on the second floor of the departure and transit lounge where all the luxury brands are clustered.

Lotte and Shilla lost the bids in Hong Kong, L.A. and Bangkok airports in 2011, but they are widely considered to have better marketing and sales know-how compared to global rivals. The two are the only ones that have proper membership systems.

Lotte is the leading duty-free shop operator in Soekarno-Hatta Airport, taking up 40 percent of its duty-free sales, more than DFS (34 percent).

By Kim So-hyun (sophie@heraldcorp.com)