STAR-BULLETIN / APRIL 2003
As part of a settlement with the state, DFS Hawaii's duty-free contract was put up to bid three years early.
Low duty-free bid: $40M
With declining sales at DFS Hawaii's duty-free operations in Hawaii's airports, the state has opened bidding to anyone who wants to go up against the 40-year-entrenched DFS for the exclusive right to sell tariff-free goods to international travelers.
The minimum bid works out to $40 million a year, as spelled out in a rent-dispute settlement between the state and DFS that reopened the contract nearly three years before it was supposed to end. However, the two-inch-thick bid document is crowded with formulas and calculations, making it extremely complex.
The bottom line is that bidders are only asked to say what they would do in the first year of the contract, and that they must bid at least $26.7 million in concession fees for the eight months from Oct. 1, 2003, through May 31, 2004. An adjustment is built in for the first full year, bringing the 12-month total to $40 million.
But the minimum depends on performance, with a 15 percent reduction dropping the annual minimum to $34 million if sales don't meet targets.
Bids will be opened at 10 a.m. Sept. 25 at the Department of Transportation offices atop the interisland terminal building at Honolulu Airport. Until then, the process will be sealed.
In the complex bid document, available only at the Airports Division office at Honolulu Airport for $25 cash, conditions other than the minimum bid are detailed. For example, any new entry would have to produce proof the state could collect a $45 million bond if the concessionaire should default on contract terms.
DFS has disclosed its detailed financial figures in confidence to state attorneys, to prove how 9/11 hurt international tourism to the point where DFS could not pay its $60 million annual minimum under the existing contract.
But the bid documents confirm that DFS Hawaii does around 80 percent of its duty-free business at off-airport locations, primarily its DFS Galleria Waikiki The documents also disclose a revenue picture that shows business falling off sharply after 9/11.
In the year ending May 31, 1998, for example, DFS Hawaii had duty-free sales of $271.7 million, with $222.2 million coming from off-airport operations and $49.5 million from airport locations.
In the 1999 contract year, total duty-free sales dipped to $192.4 million. That year involved Asian economic setbacks that cut into its core business of selling to Japanese tourists. The 2000 year showed a pop up to $229.4 million in sales but there was a relatively small dip to $215.3 million for 2001.
Then, less than seven months into the next reporting year, 9/11 struck and the 12-month sales figures dropped more than 30 percent, to $150 million. The year through May 2003 crawled back only slightly to $158.9 million.
Under the terms of its settlement with the state, DFS has to be a bidder for the new contract and if it wins, will start paying new rent Oct. 1. If it should lose, it must maintain its existing operations until a new contractor takes over the concession.
Under the concession rights, the duty-free operator is allowed to run "dummy" stores that are not on airport property but can take orders from foreign travelers for tax-free goods such as jewelry and bottles of liquor.
The goods are held without import duty in a bonded store and delivered to the buyers only after they are outside U.S. Customs control at the airport or aboard an aircraft. The goods technically never clear into the United States and are not subject to import duties and other taxes.
Hawaii concession rules say that duty-free prices must be lower than retail prices for similar goods at department stores in Hawaii and comparable with duty-free prices in other countries.
DFS has chosen to develop major retail operations that are not part of the duty-free concession and can sell to any customer, domestic or foreign, with full duties included. It has operations at the airports and in Waikiki and other tourist centers, but its business historically has been based on the duty-free business.
For the past several contract renewals, DFS Hawaii has been the only bidder.
Only once in the past four decades did it lose to a newcomer and that did not last more than a few months because the challenger, part of what was then Host International, could not come up with the minimum rent it promised.
