Hotel Shilla's long-cherished project, the construction of a Hanok hotel, is in a situation where even discussions about resuming construction cannot take place. Revenue must be generated from the duty-free business, which is the company's cash cow, to initiate construction again; however, projections indicate that significant improvements will be difficult this year, following last year's disappointments.
The construction of Hotel Shilla's Hanok hotel started in 2011, but has been adrift for 14 years due to consecutive setbacks, such as the discovery of cultural properties, the outbreak of COVID-19, and poor performance in the duty-free business.
According to the retail industry on the 1st, Hotel Shilla's long-cherished project, the construction of a Hanok hotel, is stuck due to poor performance in the duty-free business, making it unlikely to even review resuming construction. Hotel Shilla’s consolidated revenue last year was 3.9475 trillion won, a 10% increase from the previous year. However, due to the impact of the poor duty-free business, the company recorded an operating loss and a net loss. The operating loss amounted to 5.2 billion won, and the net loss was 64 billion won.
The construction of the Hanok hotel is a long-cherished project that President Lee Boo-jin of Hotel Shilla has aimed for since his inauguration in 2011. At that time, Hotel Shilla announced plans to build a traditional Hanok hotel by investing a total of 300 billion won in a site where the Hotel Shilla building in Jangchung-dong, Seoul, and the Hanyangdoseong city wall are located.
Immediately, a permit was requested from the Seoul City government. However, it was not easy to obtain the permit. In 2011, Hotel Shilla submitted the construction plan for the Hanok hotel to Seoul City, but the Seoul Urban Planning Committee rejected the proposal twice. After delays in review, a modified construction plan was approved only in 2016.
After several ups and downs, the construction permit was granted, and work began in 2020, but this time, a large amount of relics was discovered on the site, causing construction to be temporarily halted again. Afterward, efforts to resume construction were met with the global outbreak of COVID-19, which blocked air routes and halted tourist arrivals.
An industry insider noted, "President Lee Boo-jin likely wanted to carry out the project as soon as he took office to elevate Hotel Shilla once more, but unfortunate timing and challenges began with the permit process." During this time, competitors such as Shinsegae and Lotte advanced their hotel offerings with properties like Chosun Palace in Gangnam, Seoul, and Signiel.
The problem is that even after air routes reopen, the duty-free business has not seen any improvement. If the duty-free business, which accounts for about 80% of Hotel Shilla's revenue, fails to generate profit, it will be difficult to resume construction. The business model, which has relied on the Chinese market for purchasing agents known as "daigong," is no longer effective. China is developing a strategy to redirect the revenue earned by international duty-free businesses back to the Chinese mainland to stimulate domestic consumption.
In response, President Lee Boo-jin stated at a recent shareholders' meeting, "We will focus on the essence of each business and improve profitability through optimal operational efficiency," and added, "We aim to overcome the crisis and lay the foundation for new growth through various bold attempts."
Regarding the duty-free (Travel Retail·TR) business, the president said, "We will strive for differentiation by proactively attracting various brands and products," and noted, "We will improve every process, including MD, marketing, and sales, to focus resources on target customers for each channel and recover profitability through restructuring business operations centered on sound management."
Given that improvements in the performance of the duty-free business (turnaround) are expected to take time, Hotel Shilla is redirecting its focus to consignment business opportunities. Since consignment business does not incur investment costs like securing land and building structures and involves sharing operational know-how, it can help improve cash flow. If successful, discussions for resuming construction of the Hanok hotel could be accelerated.
A representative of Hotel Shilla stated, "This year, we plan to expand our business focusing on consignment operations such as Shilla Stay and Shilla Monogram," adding, "We are also looking to enter the senior residence business, which mainly consists of consignment projects, thereby minimizing costs."