DFS back on feet after troubled times

By Andrew Gomes
Advertiser Staff Writer

The flagship Waikiki DFS store was the company's largest in sales until the Sept. 11 attacks, the SARS outbreak and the Iraq war. Honolulu duty-free concession sales have fallen from 10th in the world to 15th. Rebecca Breyer • The Honolulu Advertiser

Beaten down repeatedly by destabilizing waves of misfortune, from the decline in Japanese visitors to the Sept. 11 terrorist attacks, to SARS and the war in Iraq, the battered business has come out of its defensive position.

DFS-Hawai'i also appointed a new area president recently, resumed normal store hours and is expanding its main airport store at a cost of $3.5 million.

Later this year, the company plans to reinstate its annual holiday party — not held for two years — in another sign the roughly $200-million-a-year Hawai'i retailer is headed for a rebound that some analysts doubted was possible.

"We are not in a growth mode, but we are certainly in a recovery mode," said Sharon Weiner, DFS-Hawai'i vice president. "We are focusing on returning to the business practices we've had to forgo during the cutbacks required to survive."

Weiner said the company still faces challenges, and only "time will tell" whether DFS-Hawai'i can return to profitability.

To some residents, the business once known as Duty Free Shoppers is mostly an unfamiliar, off-limits store with high-priced merchandise. But the retailer, which has an exclusive contract with the state government to sell duty-free goods to departing foreign travelers, is an important source of airport operating revenue and a giant employer.

The company also sells about $30 million in goods at about 40 traditional airport

retail stores under a five-year,

$45 million contract, plus an entertainment-themed retail complex connected to its flagship duty-free store in Waikiki.

Japanese visitors account for

90 percent of DFS-Hawai'i duty-free sales and more than 60 percent of its traditional retail business. Based on revenue and work force, the company is estimated to be one of the state's 25 largest.

Its recovery therefore stands to help the state, which would receive higher rent if sales increase substantially, and it is improving employee morale.

The majority owner of parent company DFS Group Ltd., LVMH Moet Hennessy Louis Vuitton SA, forecasts that San Francisco-based DFS Group will break even this year, thanks to cost-cutting and improving travel trends.

Still, it has taken two years for DFS-Hawai'i to make up just half the loss in business since Sept. 11, 2001. "We have a lot of lost ground to make up," Weiner said.

The 40 DFS-Hawai'i stores are among roughly 150 in 16 countries for DFS Group, the world's largest travel retailer. The Waikiki DFS store was the biggest in size and sales, but the Sept. 11 attacks, SARS and the Iraq war toppled it from its paramount position.

According to Swedish research firm Generation DataBank, duty-free concession sales in Honolulu fell from 10th-highest in the world in 2000 to 15th last year, losing ground to Tokyo, Hong Kong, Frankfurt, Seoul and Dubai.

Annual duty-free sales for DFS-Hawai'i in Honolulu regularly were above $400 million in the early to mid-1990s, but fell to $192 million in 1998-99 after the Asian financial crisis, according to state Transportation Department records.

Revenue rebounded a little in 2000, but fell to $150 million for the year June 2001 to May 2002, with the Sept. 11 attacks.

Sales for June 2002 to May 2003 improved to $158 million, but that was still 26 percent lower than the year before the terrorist attacks.

After the SARS outbreak and start of the Iraq war in March, duty-free sales in Honolulu began another slide, falling below monthly levels of last year.

To help weather the setbacks, DFS-Hawai'i cut store and employee hours, including 70 layoffs, for savings equivalent to 300 full-time positions.

The Hawai'i cuts were among the most severe, but other DFS Group operations also took hits. In Las Vegas, a store scheduled for expansion was closed. There were layoffs in Guam and Saipan. Off-airport stores were closed in Los Angeles and San Francisco.

Other savings came from rent breaks. The Hawai'i Legislature in late 2001 granted airport retailers an eight-month reduction that saved DFS-Hawai'i $16 million, and the company recently was allowed to rebid the last 32 months of its five-year duty-free contract, saving as much as $65 million in base rent.

DFS Group also negotiated rent relief at other airports, including Singapore, San Francisco, Los Angeles and San Jose, Calif., for a savings of more than $150 million, Weiner said.

Now the company is trying to rebuild, restoring work hours cut, resuming normal store hours and recruiting for empty positions.

The holiday party has been an especially welcome return. "It's a huge morale booster," Weiner said.

Other positive changes have been the hiring in July of 16-year DFS veteran Julian Levy to head Hawai'i, Guam and Saipan operations.

Levy, 42, was born and raised in Britain and has worked for DFS there, in Australia and most recently as president of the company's North America region. He replaces Bob Coe, who left in January amid restructuring.

Under Levy's leadership, DFS-Hawai'i is building a new duty-free store at the Honolulu airport near the Japan Airlines check-in area. The $3.5 million operation mandated in the new contract will replace one of two duty-free shops at the airport, but at 10,000 square feet is nearly twice as large as the one it replaces.

DFS Group also opened a new store and plans a second in Okinawa, and moved a store to a larger location in Singapore.

Even the dollar-yen exchange rate is helping. Last week, the yen was trading at about 110 to the dollar, giving Japanese travelers the strongest buying power they've had in Hawai'i in more than two years.

"It's nice that things are recovering," Levy said. "It's coming back slowly, but it's coming back from way down."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.