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State lowers
minimum duty-
free bids

Concession operator
DFS Hawaii has
seen sales fall

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By Russ Lynch
Star-Bulletin

Faced with falling sales to overseas travelers, the state has lowered the minimum bid required from potential operators of Hawaii's duty-free shops by 40 percent to $60 million a year.

The current operator, DFS Hawaii, has been paying a minimum of more than $100 million a year for the past four years. It operates several duty-free shops at Honolulu Airport, a major duty-free operation in Waikiki, a small store in Hilton Hawaiian Village and off-airport stores on the Big Island, Maui and Kauai.

Documents issued today to those interested in bidding for the next contract show DFS Hawaii has seen its duty-free sales drop nearly in half since 1996. In the fiscal year June 1, 1999 through May 31, DFS Hawaii reported total duty-free revenues of $229.4 million, down 46 percent from $425.8 million in the 1995-96 year.

HEADING SOUTH Revenues at the duty free operations in Hawaii: Gross revenues Year (in millions) 1995-1996 $425.8 1996-1997 $355.6 1997-1998 $271.7 1998-1999 $192.4 1999-2000 $229.4 Source: State Department of Transportation

DFS Hawaii had committed to pay at least $106 million in minimum concession fee to the state for the past fiscal year, so it had to pay nearly half of its gross receipts in rent. The fee allows the operator to run duty-free shops at state airports and at off-airport locations.

For the next contract, to run from June 1, 2001 through May 31, 2006, bidders are required to offer at least $60 million for the first year and no more than a 15 percent increase in each of the following years. The state will open the bids on Jan. 16.

Despite the drop since 1995-96, the revenues did increase in the last fiscal year. The 1999-2000 total of $229.4 million was a 19 percent increase from $192.4 million for 1998-99.

The documents issued by the Airports Division of the state Department of Transportation break down DFS Hawaii's airport and off-airport revenues for the first time. The figures illustrate the success of the DFS Galleria operation in Waikiki because they show it as the source of about 80 percent of all duty-free revenues.

The new minimum bid shows the business is radically different from the boom days of the 1980s, when Japanese and other Asian visitors poured into the islands flush with cash. At its peak, DFS bid $1.15 billion in minimum concession fees for a four-year contract that started in 1989.

Tourist industry sources say the biggest buyers of duty-free goods, the Japanese, have changed their shopping habits. They used to buy name-brand liquor, perfumes and other luxury items at the duty-free store in Waikiki or at the airport shops in substantial quantities to take home as gifts. Now they are more likely to buy just for themselves. In addition, the Japanese travelers today are likely to have been to Hawaii at least once before and are now more savvy shoppers, aware of discount retailers where they can buy many of the same goods at prices close to or less than duty-free prices.

Duty-free shoppers avoid U.S. Customs duties and some other taxes. They select and pay for their goods at the DFS store in Waikiki or at the airport stores and they are delivered to the passengers either on the foreign-bound airplanes or in the overseas departure area of the airport.

DFS Hawaii has run the duty-free concession at Honolulu Airport since 1968, when it bid $1 million a year. Company officials could not be reached for comment on whether they intend to bid this time. DFS Hawaii is a subsidiary of DFS Group Ltd., which in turn is a wholly owned unit of LVMH Moet -- Hennessy Louis Vuitton.

Airport officials said they could not comment on the contract.

DFS was the sole bidder for the last contract. Its bid was $102 million for the first year, $104 million for the second year, $106 million for the third year and $108 million for the fourth and final year.

The contract required DFS to pay either the minimum or 20 percent of its duty-free revenues, whichever is greater. It has been paying the minimum since the start of the contract. The new bid requirement sets a higher percentage -- 30 percent of the on-airport revenues and 22.5 percent of the off-airport revenues.