Duty-free pact
up for grabsDFS Hawaii finds out today
when bids are revealed if it
gets to keep its Hawaii
airports concession contract
The snick of a letter-opener today will reveal whether DFS Hawaii gets to keep its 41-year-old concession to sell duty-free goods at Hawaii airports to outbound international travelers.
CORRECTION
Saturday, Sept. 27, 2003>> Anthony Pilaro is not a partner in DFS Group, the business that won a new contract Thursday to sell duty-free goods at Hawaii airports. A 41 percent share is owned solely by Robert Miller, with the 59 percent majority held by LVMH Moet Hennessy Louis Vuitton. Also, the new contract will run from Oct. 1 through May 31, 2006. A story on Page C1 Thursday said incorrectly that the new contact would be backdated to June 1.
The Honolulu Star-Bulletin strives to make its news report fair and accurate. If you have a question or comment about news coverage, call Editor Frank Bridgewater at 529-4791 or email him at fbridgewater@starbulletin.com.
The arrangement produces one-third or more of the operating revenues for the state airport system.
DFS had to bid for a renewed contract under an agreement with the state to resolve a rent dispute. Citing financial hardship, DFS withheld fees under the previous contract in which it was supposed to pay the state a minimum of $60 million a year. DFS agreed to bid at least the $26.7 million minimum required for the first eight months of a new 32-month contract. This time, the state Department of Transportation sought bids only for the first eight months, but set out a formula that should require at least $40 million in each of the following two years.
Not until the bids are opened at 10 a.m. today at Honolulu Airport will it be known how much DFS bid or if there were any other bidders. The last time the contract was up for grabs, DFS was the only bidder and bid the minimum amount, $300 million for a five-year contract.
The state Department of Transportation would not say whether any other potential bidders had qualified. The deadline for bids is just before the bid opening.
The new contract will be backdated to June 1 and will run through May 31, 2006.
DFS has some 17,000 square feet of sales, display and storage space at Honolulu Airport, as well as facilities at Keahole Airport in Kona. Some 80 percent of its sales, however, are made at its DFS Galleria Waikiki, where space is set aside for international travelers to look at merchandise and place their orders.
That prime property on Kalakaua Avenue would seem to give DFS a head start in the bidding. The contract terms provide that if another bidder displaces DFS, the company could keep going as it is for as long as six months while the newcomer finds space and gets settled.
The contract doesn't specify that a bidder must have a Waikiki showroom, but it says sales revenues will be calculated as if 80 percent of the business is "off-airport." The only way DFS has been able to develop that ratio was by having a Waikiki operation.
DFS Hawaii, under different names, has had the duty-free concession since its founders opened a small store at Honolulu Airport in 1962. It is part of San Francisco-based DFS Group, which is owned 59 percent by French luxury-goods giant LVMH Moet Hennessy Louis Vuitton and 41 percent by early DFS partners Robert Miller and Anthony Pilaro. It has duty-free shops at West Coast airports and in Asia and the Pacific.
Since it won the first Hawaii duty-free contract in the 1960s, DFS has paid the state a total of about $2 billion for the exclusive right to sell "in-bond" good to travelers heading for foreign destinations.
The goods -- the most popular being prestige-brand liquors, watches and cigarettes -- are brought to Hawaii and held in-bond, meaning they don't legally enter a U.S. Customs area and therefore do not incur import duties or other taxes.
When they are sold to travelers, the goods are loaded on to foreign-bound aircraft and leave, still without incurring any of those duties or taxes. While travelers may be charged duties when they get home, most countries allow people to bring in some goods duty-free if they are for personal use. That can mean big savings on luxury items.
Since international travel volume plummeted after the Sept. 11, 2001, terrorist attacks, DFS has not had sufficient revenues to pay the $60 million annual minimum it promised under the previous contract, which went into effect June 1, 2001, and was to last until May 2006. The state said DFS owed $49 million in back rent and insisted that it pay all of it before officials would consider rewriting the terms. DFS said it would go broke and be forced to shut down if it did so.
DFS had been paying 5 percent to 10 percent of the minimum. In April, the state sued DFS and the company paid $25 million to delay the legal action while it worked out a settlement. That was achieved and the state attorney-general's office announced Aug. 1 that DFS had agreed to pay an additional $18 million for 2003 rent. The state dropped its claims and agreed to open the contract early for new bids at a lower minimum rent of $40 million a year. The new contract contains provisions that could cut the rent by 15 percent if sales fall below current levels.
The task facing DFS next was to estimate how much more than the $26.7 million minimum, if any, it might have to bid to beat any other bids, if there were any.
In the 12 months through May 31, DFS had duty-free sales of $158.9 million, according to disclosures in the pre-bid documents issued by the state.
At the peak of travel from Japan, DFS had several years in the late 1980s and early 1990s when its duty-free business in Hawaii had revenues of well over $400 million.
In the 2002 fiscal year, the state airports division had operating revenues of $182.9 million and the DFS contract produced $60 million, or a little less than one-third of the total. In many previous years, the duty-free contract paid for more than 60 percent of the airports' operating costs.
In recent years, DFS has paid only the minimum amounts due, but the language in the contract could require it to pay more if its revenues rise above certain level.
The new contract terms would require the concessionaire to pay 30 percent of all on-airport revenues and 22.5 percent of off-airport revenues, instead of the minimum, if combined annual sales exceed $200 million.
Another contract provision requires the operator to sell its goods at prices lower than those charged for equivalent items in Oahu stores and the same as, or less than, those charged by duty-free stores in the Pacific Rim area "including, without limitation, Guam, Saipan, Singapore, Hong Kong, Los Angeles and San Francisco."
The concessionaire will set the prices but the state reserves the right to order them cut if it considers them excessive.
