By Glenn Scott
Advertiser Staff Writer
DFS Hawaii yesterday won the five-year state contract to be the exclusive retailer of duty-free products in Hawaii, but the minimum bid is 43 percent lower than previous years. And because the duty-free concession pays for much of the states airport operations, officials said they will need to review ways to make up the difference.
DFS, the sole bidder for the duty-free concession at airports and elsewhere, will pay the state at least $60 million a year, about $45 million a year less than the average annual $105 million the company has paid during the past five years.
DFS said the lowered amount reflects a drop in spending by overseas tourists, primarily Japanese visitors. With Japans economy in a continued slump, duty-free sales since 1995 have dropped 46 percent to $229.4 million last year, according to state statistics.
But the state has estimated that DFS payments have accounted for close to 60 percent of the cost of running Hawaiis 15 airports. And yesterday officials said the big drop in the contract payment signals that the state will need to make major revisions in the way it finances the self-sufficient operations of its airports.
Airports' financial condition strong
Airports Administrator Jerry Matsuda said the state will consider a variety of methods, from refinancing bond issues and raising parking fees to delaying some capital improvement projects to free up $60 million to $80 million during the next three to five years.
He said the state should manage to make up the difference in operational costs without sacrificing services and without raising air carriers landing fees significantly.
"Fortunately for us, our airports financial condition has been quite strong," he said.
State officials will be meeting with airport tenants to work out a new funding system, he said. One key group will be the Airlines Committee of Hawaii, which represents 22 airlines serving the Islands.
Executive Director John Thatcher said yesterday that the group meets regularly with airport officials to adjust costs, including those for landing fees. The airlines, he noted, have a standard industry agreement dating back to 1962 in which they guarantee funding for airport operations and maintenance.
He said the new DFS contract will affect the airlines money levels, but the extent was not clear.
State officials had agreed to lower the minimum bid for the new contract after DFS struggled to keep up with payments in recent years. In 1999, DFS paid more than $50 million in back rent, interest in late fees that had accrued as a result of declining sales. By the 1999-2000 contract year, however, sales picked up from $192 million to $229 million.
Bob Coe, DFS Hawaii president, said the retailer would work to strengthen Hawaiis marketing to increase sales and to build up what he called the important partnership between the private sector and the state.
"We have to be competitive," he said. "We have to market Hawaii aggressively."
Indeed, even though a record-breaking resurgence in Mainland visits last year powered the local economy, that domestic growth does not help DFS, which sells only to foreign buyers. Thus, the contract is premised on the eventual increase of foreign visitors and in their willingness to buy luxury items on DFS shelves without paying customs fees or most taxes.
Details of contract still to come
As part of the new contract, DFS will pay either the $60 million annual minimum or a figure calculated from percentages of total gross sales revenue. The latter figure is based on 22.5 percent of airport concession sales, and 30 percent of sales at off-airport locations, such as the new Galleria set to open in Waikiki next month.
Details of the contract, which takes affect in June and runs through May 2006, were not released pending final legal review. But Matsuda said that if DFS sees steady growth in sales it could be paying up to $100 million a year by the end of the contract.
To get there, though, Japanese buyers will need to feel more confident about the financial scene at home. "Right now," said Coe, "theyre conservative and scared for their own economic well-being."
Another problem is the declining strength of the Japanese yen, which reduces visitors buying power. The Thomas Cook Currency Service was charging 130 yen to the dollar at Honolulu International Airport yesterday.
DFS does extensive market research among Japanese travelers, its primary market here, and Coe said visitors these days are spending roughly 60 percent of the amount they spent 10 years ago. One reason is caution about the weak economy at home.
Another is Japans gradual opening of its domestic markets to foreign businesses, such as high-end retailers.
The government also has started to drop its huge import taxes on foreign-made liquor, long a key component of duty-free sales.
Despite all that, Coe has helped lead the charge to revitalize the tourism market here.
DFS, a subsidiary of French luxury goods giant LVMH Moet Hennessy Louis Vuitton, began operating in Hawaii in 1962, and Coe said yesterday that the new contract means the company has another five years to move forward.
"The big deal for us today," he said, "is that we have 1,400 employees who were depending on this."
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