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The Honolulu Advertiser
Posted on: Friday, November 2, 2001

State must deal wisely with airport retailers

Call it a symbiotic relationship: The state needs income from the airport concessions — DFS Hawai'i, by far the largest, pays a minimum of $60 million a year under its current contract — and DFS would have no enterprise at all without the airport.

DFS currently is asking the state to let it off the hook from its contractual obligation, citing a business decline in excess of 50 percent. That's understandable, considering that its prime customer is the Japanese tourist with a predilection for Gucci handbags, Hermes silks and VSOP brandy, which they ordinarily flock to buy duty-free from DFS outlets. The company says it is now losing millions of dollars a month on its state contract — in contrast to its normal position as one of DFS Group's biggest money-makers.

At one level, the state must be realistic. This would be the third time it has had to renegotiate the DFS obligation during economic hard times. On the two previous occasions, to its credit, DFS eventually came through, with interest. Certainly the state's interest would be ill-served by having DFS close its doors; it must be in business to generate the income to later pay its debt. And Hawai'i needs the money.

But the state must have a long memory when it comes time to put the airport concession out to bid again. That's what the state did the last time. Risk-free business is an oxymoron, but the state was beginning to worry that DFS was counting on making big money during good times, while relying on the state to bail it out during bad times. Could that explain why it felt able to bid higher than its competition?

So in its last contract, the state prohibited the company from seeking adjustments as a result of unforeseen catastrophes and situations, including war. That was smart, certainly, but in hindsight, maybe a bit simplistic.

What it failed to recognize, perhaps, is the corporate "firewall" that is said to separate DFS from its majority owner, the luxury giant LVMH Moet Hennessy Louis Vuitton SA. DFS is not ready to explain why LVMH shouldn't stand behind the DFS obligation, but it clearly doesn't intend to stand behind it.

The state is going to have to reach an accommodation with DFS for now because it needs the income from the airport concession. Where it needs to toughen up is when the contract next comes up for bid.

The state must take a closer look at the competition to DFS in light of past performance. And in negotiating a new contract with DFS, the state must insist on future backing by LVMH if DFS should win the contract.