DFS-Hawai'i faces crisis as 40th birthday nears
By Andrew Gomes
Advertiser Staff Writer
In a better world, DFS-Hawai'i president Bob Coe would be planning a 40th anniversary gala to celebrate one of Hawai'i's largest retailers. Instead, he's planning how to get the company to 41.
Deborah Booker • The Honolulu Advertiser
Coe is leading DFS-Hawai'i into its second major restructuring in four years, and the results will be critical for the company's San Francisco-based parent, DFS Group Ltd., which regards the operation here as the most important location for the world's largest travel retailer.
DFS-Hawai'i's glitzy Waikiki operations belie a starker economic reality that the retailer has faced since Sept. 11.
The restructuring also stands to affect the state, which relies on DFS-Hawai'i to pay two-thirds of the airport system operating budget — payments that have totaled $2.5 billion over 40 years. The company also employs 1,300 people and pays general excise taxes on more than $45 million of duty-paid sales.
But business has been down roughly 50 percent since Sept. 11, and the company's main customers, Japanese visitors, which DFS-Hawai'i relies on for 90 percent of its duty-free sales and more than 60 percent of regular retail business, show no signs of returning to the state in normal numbers anytime soon. The yen last week reached 134 to the dollar, its weakest level since October 1998, meaning more dampening of Japanese visitor purchasing power and DFS sales.
The situation has some analysts questioning whether DFS can recover from the Sept. 11 terrorist attacks that devastated duty-free retailing at airports around the globe.
"There certainly has been a lot of discussion that DFS may be an idea whose time has come and gone," says Joseph North, a retail vice president for Colliers International in Las Vegas.
Other analysts have raised similar questions about the viability of the duty-free model — selling imported merchandise to departing international travelers who avoid paying duties imposed on the goods.
They say the concept has been undermined by relaxed trade barriers, lower prices in Japan and competition from luxury retailers that supply DFS.
But Coe, an 18-year DFS veteran who is also responsible for worldwide marketing, says the company's business model has been evolving over the last several years and is fine. However, he acknowledges that the company faces its biggest challenge in history.
"We're in the survival mode right now," he says. "This is deadly serious."
Sept. 11 strikes at DFS core
The terrorist strikes on the Pentagon and World Trade Center more than four months ago discouraged people from traveling and disrupted the core of DFS, which operates 150 stores in 16 countries, including 40 stores in Hawai'i.
Company sales worldwide fell 33 percent in the fourth quarter, led by Hawai'i operations, where business is still more than 50 percent down.
"In the past, when we got hurt we got hurt in one location, and the other locations were OK," Coe says. "In this situation ... we're getting hurt everywhere else as well."
Hawai'i, Guam, Saipan, Singapore and North America locations have fared the worst. Stores in New Zealand, Australia, Bali and Hong Kong are not as bad, according to Coe.
Since the Sept. 11 attacks, DFS made the most drastic changes in its worst-hit markets, including shutting its Las Vegas operation after planning to double it, laying off an undisclosed number of employees in Guam and Saipan, closing the off-airport store in Los Angeles, and slashing 100 jobs and downsizing the off-airport store in San Francisco.
In Hawai'i, where DFS was losing millions of dollars a month, the company laid off 70 full-time employees and the equivalent of 300 workers through reduced hours.
The company also asked vendors to extend terms for payment, and postponed a plan to transform DFS shops at the Honolulu airport into an entertainment-based "award-winning shopping experience."
Earlier this month, the governor allowed DFS-Hawai'i to pay rent based on a percentage of sales instead of a promised minimum bid. The contract adjustment saved the company about $16 million in September-January rents and will continue "for the duration of the economic emergency."
Local DFS employees suspect more cuts are in the works as the company's majority owner, LVMH Moet Hennessy Louis Vuitton SA, plans to cut DFS costs by $80 million this year.
Coe says he isn't sure how the LVMH goal will affect DFS-Hawai'i, but he is evaluating ways to improve the bottom line.
"We have to do a lot of cost cutting," he says.
"We've been doing a lot, and we will continue doing a lot, and quite frankly the situation is more serious than we thought it was going to be. The world's not getting better."
DFS-Hawai'i sales in November were off 65 percent, says Sharon Weiner, DFS-Hawai'i vice president.
The company, which in June moved offices from the airport to three floors in the Waikiki Trade Center, is considering reducing its office space.
Coe says he cannot share plans for further restructuring because nothing has been finalized.
Because the company has little means to reverse its fundamental problem — a lack of Japanese visitors — the changes will involve more defensive moves, a strategy Coe says is unattractive but necessary.
"The worst thing for someone in the retailing business is to get defensive, because you can't create revenue," he says.
The cure, Coe says, is to entice visitors back quicker than they would naturally return.
"We've got to turn desire into demand," he says. "You're going to take the hurt in the short term, but you've got to get aggressive to bring people back."
The Hawai'i Visitors & Convention Bureau has been spending extra money to market the state since Sept. 11, and industry leaders want the Legislature to remove the $61 million cap on using hotel room tax collections for marketing tourism.
Duty-free losing its allure
Some observers suspect that DFS-Hawai'i is in for more troubled times, no matter when Japanese visitors return in force.
Laurence Vogel, a former president of DFS Group Ltd., the parent company of DFS-Hawai'i, who had been with the company since the 1960s and retired in 1991, says the lure of buying luxury goods like perfumes, jewelry, tobacco, liquor and fashion accessories without paying duties doesn't mean much today.
"Back then ... the problem was not selling (merchandise), it was having it on the shelf," he says. "Today it's the opposite. Today, DFS is nothing more than an ordinary retailer."
Local retail consultant Stephany Sofos said she expects DFS-Hawai'i's luxury business to suffer when the Waikiki retail townhouse 2100 Kalakaua opens in November with flagship stores for Gucci, Yves Saint Laurent, Chanel, Tiffany & Co. and five other global luxury retailers.
But she also notes that Japanese visitors today are into value retailing, which she says DFS doesn't provide.
The Galleria is entertaining, Sofos says, but it offers the same shopping — Maui Divers, Lassen Gallery, Crazy Shirts, Jamba Juice, Starbucks, and similar retailers — as other places. "It's just more of the same stuff at the same price ... with a different package."
Focus undergoing shift
Coe says the duty-free concept is not dead, and that DFS has bounced back from previous, though less severe, downturns in part because the company has become more of an entertainment-based travel retailer.
In August, DFS-Hawai'i was profitable, according to Weiner. "We were just getting to be where we wanted to be," she says.
But for September through November, DFS-Hawai'i duty-free sales in Honolulu dropped to $29 million, compared with $62 million for the same year-ago period.
DFS weathered the brief Persian Gulf War downturn in 1991 and the Asian financial crisis that erupted in 1997.
Following the Asian crisis, LVMH implemented a plan to slice about $200 million from DFS' budget and reduce its reliance on Japanese tourists.
As part of that restructuring, DFS-Hawai'i laid off 300 employees in 1998, closed its JaJa Fashions retail outlet and fell $50 million behind on rent owed to the state.
At the direction of Coe, who was made Hawai'i region president in 1999, the local retailer took other steps, including opening a short-lived discount outlet at Dole Cannery to unload inventory, and announcing plans for the $65 million Galleria.
The Galleria concept combined both duty-paid and duty-free shopping with entertainment aimed to connect travelers with the destination.
DFS has opened 12 Gallerias since 1994, but the last three in Guam, Saipan and Hawai'i have taken the concept to a new level, according to Coe.
He calls the Waikiki Galleria, which opened a year ago, "the best destination experience that exists in this market. It is a destination attraction. It is an authentic local connection for travelers."
Sales in a slump
Coe says the Galleria has helped offset some of the company's pain, but duty-free sales are still the main driver for DFS.
Annual duty-free sales in Honolulu for DFS-Hawai'i were regularly above $400 million in the early to mid-1990s, but hit a low of $192 million in 1998-99. Sales rebounded to $229 million in 1999-2000, but fell again in the 12 months ended last May to $215 million.
Duty-paid sales for DFS-Hawai'i at Honolulu, Kahului and Kona airports, which total about $45 million, have been stable over the last several years. The company does not disclose Galleria sales.
Coe says DFS is under pressure to earn a return for what has been an awful investment for majority owner LVMH.
"DFS is just an investment," Coe says. "We have to stand on our own. We need to be a good investment."
In 1997 when LVMH acquired a 61 percent interest in DFS, the company's new chairman set a goal to double DFS annual revenue to $5 billion. Instead, sales shrank from $2.7 billion in 1996 to $1.8 billion in 2000, according to trade reports.
Publicly traded LVMH continues to be profitable, but its earnings have been dragged down by the division to which DFS is the largest contributor.
The division lost 92 million euros (about $81 million at current exchange rates) in the first half of last year, more than quadruple its loss in the first half of 2000.
LVMH has stressed that it has no plans to sell the travel retailer, which it recently classified as a non-core business.
Amid clouds, hope endures
Swedish market research firm Generation Group says the $20 billion global duty-free and travel retail industry was flat for five years through 2000.
But in a report released before Sept. 11, the firm reported that the industry was "in good health and fully set to double" by the end of the decade.
That forecast, which assumed increasingly strong recovery from the Asian financial crisis, may be somewhat clouded today, though Vogel believes the travel retail as an industry will grow.
Either way, Coe expects to be there with DFS. "The environment always changes," he says. "We have to expect it. That's why we have been changing."
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
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Correction: Laurence Vogel is a former president of DFS Group Ltd., the parent company of DFS-Hawai'i. His former title was incorrect in a previous version of this story.
