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DFS’ minimum
bid lands duty-
free pact

The sole offer of
$60 million a year represents
a 43 percent blow to the
state airports' coffers

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By Russ Lynch
Star-Bulletin

With a $300 million bid, DFS Group today won another five years as exclusive operator of the duty-free shops at Hawaii's airports and their related off-airport shops.

The company was the only bidder and offered the minimum set by the state, $60 million a year for a contract to last from June 1, 2001 through May 31, 2006.

The minimum bid represents 43 percent drop from the previous contract, which put $105 million a year in the state airports' coffers.

DFS, which does business here as DFS Hawaii, has held duty-free rights in Honolulu since 1962 but until the formal bid opening at 10 a.m. today could not be sure there would be no competition.

"It's a very strenuous process," Bob Coe, DFS Hawaii president, said after the short meeting in an airport conference room. "This is a very high-risk business."

Noting the fall-off in recent years in international visitors to Hawaii, DFS's only customers, Coe said the company will work with tourism and government leaders to attract more foreign arrivals.

DFS, now a wholly owned subsidiary of French luxury goods giant LVMH Moet Hennessy Louis Vuitton, still has to go through a final qualifying process before the formal award of the contract, but it has done that many times in the past.

There was a change with this contract, however. The duty-free contractor in the past used to be required to pay 20 percent of total gross sales revenue if that amount exceeded the minimum guarantee. That requirement is now up to 30 percent of off-airport sales, such as those at DFS Hawaii's big store in Waikiki, and 22.5 percent of airport sales. Coe said there is no way to know whether enough business will be generated to lift the payment to the percentage level instead of the minimum. But that has not happened in any of the last several contracts.

A duty-free store was started at Honolulu Airport in 1962 by the founders of what later became Duty Free Shoppers and now DFS, and they won the first formal bid for the business in 1968.

Since those early days, rent for the duty-free space has been a significant part of the income of the state airports system.

In 1998-99, the latest year for which details are available, the $108 million rent from DFS was more than 60 percent of all statewide airport concession fees and about 44 percent of the total revenues coming into the state airports division.

Duty-free shops sell mostly luxury items such as Swiss watches and international brands of liquor and tobacco, which can be sold free of taxes and import duties because they are technically never imported into the United States. Instead, they are brought in from foreign countries, held in a secure area, and made available to the buyers only when they are through the departure procedures and boarding aircraft bound for another country.

The duty-free business started to reach big money with the rise of tourism from Japan in the late 1960s. DFS, then known as Duty Free Shoppers, made headlines when it bid $1 million a year for the exclusive duty-free rights for 1968, 1969 and 1970.

In 1968 the company also broke new ground by opening the first off-airport duty-free store, a showroom on the second floor of the Waikiki Business Plaza, where travelers could order goods at leisure for delivery to their outbound aircraft. Off-airport business from the store in Waikiki and its other outlets is now about 80 percent of all duty-free sales.

By 1970, the business had soared and DFS won against bidding competition with the highest bid of $69.1 million for a 10-year contract for 1971-1980, or about $7 million a year.

By the end of that contract, however, the Legislature, worried over suggestions that one duty-free operator for the state might constitute an illegal monopoly, asked for bids for two separate spaces at Honolulu Airport.

This time DFS lost. In bidding for the 7.5-year contract to start Jan. 1 1981, a subsidiary of Host International offered minimums of $246 million for the larger space and $222 million for the smaller one. DFS bid $165 million and $150 million. Since one company was not allowed to have both, Host was awarded the larger space and DFS the smaller.

Host's victory was short-lived, however, since it could not make the required monthly installments on its minimum rent to the state. Eight months into the contract, Host walked away, forfeiting a $2.6 million bond. By the end of 1981, DFS had been awarded both spaces and, with state law clarified to allow a monopoly, it has been the exclusive operator since.

On Feb. 6, 1988, DFS made the biggest-ever bid in history, $1.1 billion for a five-year contract, beating out a Korean company doing business as Lotte Hawaii Inc., which bid $306 million.

Unfortunately for DFS, that was the beginning of a decline in international travel to Hawaii, particularly from Japan, and the company had trouble making its payments. At times it was allowed to slip into arrears but eventually made good on its promised minimum payments. Not only are fewer Japanese coming to the islands now, but their buying habits also changed.

DFS was the only bidder for the next contract, winning with a $100-million-a-year bid for the first three years and $101 million for the the last year. Next time around, DFS was again the only bidder, offering an average of $105 million a year for four years. That contract ends May 31.

State records show that Hawaii duty-free sales dropped from $426 million in 1995-96 to $229 million in 1999-2000.