South Korean authorities raided the headquarters and other offices of Lotte Duty Free Guam’s parent company in Seoul earlier this month.
The duty-free retailer sells an array of high-end products, from eyewear to liquor, to passengers who’ve passed through the airport’s security check.
“The airport is not concerned at this time with the news coming out of Korea about Lotte,” Airport Executive Manager Chuck Ada’s office said in a statement. “It has nothing to do with Lotte Duty Free Guam’s obligations under its specialty retail concession contract with (the A.B. Won Pat Guam International Airport Authority).”
Lotte Duty Free Guam is a wholly owned subsidiary of Hotel Lotte Co. Ltd., which is based in South Korea. Hotel Lotte and other companies under the Lotte Group have been the subject of a widening investigation by South Korean authorities, according to media reports.
The news about the raids came after an audit, released in February, indicated Lotte Guam was facing financial problems.
The most recent audit of the retailer’s financial statements showed Lotte Guam posted $14.3 million net loss at the end of last year. Lotte Guam also recorded a $14 million loss at the end of 2014, and an $8.9 million loss in 2013.
In January 2015, Lotte Guam asked the airport for a temporary reduction in rent. Ada denied the request, saying it would affect the agency’s ability to pay its debts, according to letters between the airport and Lotte.
An email and phone calls to Lotte legal counsel Cesar Cabot were not returned.
Ada was unable to comment on whether Lotte had made a subsequent request for reduced rent.
In 2013, Lotte Guam signed a contract to pay the Guam airport agency $15 million a year for 10 years, and the airport used these future payments to enhance its ability to borrow more money from bond investors.
In light of the reports of the investigation into Lotte’s parent company, the airport “has to do their own due diligence,” said Guam’s Public Auditor Doris Flores Brooks.
However, Brooks said it’s too soon for her to comment whether there’s reason to be concerned about the airport’s future finances.
The Wall Street Journal reported that according to South Korean media, the raids were triggered by an investigation into whether a local cosmetics company paid bribes in exchange for floor space at Lotte’s duty-free retail outlets in that country.
Lotte’s South Korean office confirmed the raids occurred, but the company declined to comment regarding the specifics of the investigation, according to the Wall Street Journal.
Lotte Guam is part of the worldwide Lotte Group’s duty-free enterprise, which reported more than $4 billion in annual sales in 2015, according to the statement from Ada’s office.
“The airport has confidence that with Lotte’s experience and vast financial resources that it will abide by and meet the terms of our 10-year agreement,” the statement said.
If Lotte Guam fails to make a payment, the airport agency said it’s protected by a letter of credit of more than $15 million. A letter of credit is issued by a bank as a backup source of payment.
When asking for the rent to be reduced, Jung Min Lee, chief executive officer of Lotte Guam, wrote that sales “have not met projections, and are not even near the estimated levels based upon available economic data.”
“Lotte respectfully requests GIAA’s kind consideration in order to survive this temporary rough patch of adversity and market events that are beyond Lotte’s control,” Lee wrote. The request cited the weakened value of the yen and the ruble against the U.S. dollar as a reason for the dismal sales.
Guam’s tourism industry has seen a dip in Japanese visitor arrivals and steep plunge in tourist arrivals from Russia, and those challenges continued this year.
Lotte Guam’s net sales of $15 million weren’t enough to cover all of the duty-free retailer’s bills last year, including: $15 million in rent to the airport; almost $4 million in payroll and employee benefits; and $3.3 million in professional fees, the 2015 audit report showed.
The airport agency doesn’t want to increase airline fees to cover losses from duty-free concession revenues, Ada wrote in his letter denying the rent reduction. When the airport raises airline fees, airlines could pass on the cost to the traveling public.
Lotte’s $15 million rent payment to the airport in fiscal 2015 made up nearly 25 cents for every $1 of the airport agency’s operating revenue that year, a separate government audit report shows.
Lotte Guam and the airport agency continue to fight luxury goods retailer DFS Guam in Superior Court over the duty-free shop spaces at the airport.
DFS was the duty-free concessionaire for 30 years until the airport awarded a 10-year concession agreement with Lotte in 2013.
Lotte has paid $20 million for projects to improve the look of the duty-free concession areas at the Guam airport terminal, according to the airport agency.
“There is no question that the Lotte concession has been of tremendous benefit to the airport and the people of Guam,” the agency said in a statement.