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DFS: State’s guidelines
for duty-free bid
are harmful

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By Russ Lynch
Star-Bulletin

Would-be bidders for the upcoming airport duty-free contract are raising serious arguments over information the state airport system wants, saying it will cost millions of dollars and untold man-hours to prepare information that isn't needed.

While questions have been raised by a number of potential bidders, state documents indicate that the present concession holder, DFS Hawaii, is the major objector. But the state has rejected the arguments, saying that there is so much state revenue at stake that every bidder for the rights to sell imported goods without import duties to international travelers must make full financial disclosures and comply with other detailed requirements.

The duty-free contract, which gives exclusive rights to one operator to run duty-free shops at the airports and at off-airport sites such as Waikiki, in recent years has brought in about 60 percent of all airport concession revenues and nearly 40 percent of all the operating revenues of the state Department of Transportation.

DFS has been paying more than $100 million a year for rights to sell duty-free goods to international travelers at the airports and in Waikiki without customs duties and is likely to bid again for the new contract, which requires at least $60 million a year for five years.

The bid process is highly confidential and airports division officials yesterday declined to say who raised the objections. DFS also declined to make any comment, but the language of the questions makes it clear that the major ones are coming from DFS.

The financial disclosures required are information well beyond the operation of the duty-free business itself and can only help competitors, possibly causing serious harm to those who bid, the objections say.

The airports division answered that all bidders must comply, but great care will be taken to protect confidential information. The state also rejected a number of other arguments apparently made by DFS, which has had the duty-free contract since 1968.

One objection was that to be allowed to bid, a company should have to demonstrate that it has experience at running a duty-free business that generates at least $50 million in revenues from off-airport shops. Also, it should have proven expertise in marketing to the Japanese, the objection said, an argument that obviously came from Japanese-oriented DFS.

Taking qualifications that far, the state said, would severely limit the number of potential bidders and Japanese skills are not needed. "The state believes that while experience in serving Japanese customers is useful, it is not absolutely critical to the success of this concession," the state said in a document mailed to those who picked up bid documents.

One statement that clearly came from DFS was that a bidder understands the state's "legitimate needs for information" but, "as presently written, the state's documents would require a lessee such as DFS to give away tremendous amounts of hard-earned proprietary information that could seriously damage the company worldwide." "This is a risk that DFS cannot accept," the filing said.

Bids for the duty-free contract, which is designed to pay the state at least $300 million over the next five years, are scheduled to be opened on Jan. 10.

The state had set Dec. 4 as the deadline for would-be bidders to submit written questions arising from their reading of the complex bid proposal. Bidders won't be allowed to participate unless they submit financial statements and other information in an "intent to bid" package that must be filed by 4 p.m. tomorrow.

The main objector, apparently DFS, said in its filing the requirements "force the lessee to risk destruction of its business by placing in the public record extremely sensitive detailed information about the lessee's business and strategies." "We don't believe any company would give its information away in the fashion requested as it would leave the company extremely vulnerable to its competition," the statement said.

The same objector also said that "the level of detail specified in the lease is so minute that no bidder will have a system capable of generating the reports without expenditure of millions of dollars and thousands of hours on computer programming" and related work.

The state said it has carefully reviewed the comments and what it is asking for is not unreasonable, given the importance of the contract to the airports' revenue stream, but it is willing to make a few reductions in the number of items it will require bidders to report.