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The Honolulu Advertiser

Posted on: Friday, September 26, 2003

DFS wins $95M contract

By Kelly Yamanouchi
Advertiser Staff Writer

Visitors browse in the DFS Galleria store in Waikiki. A portion of the store, which caters primarily to Japanese tourists, is designed to look like an ocean liner.

Eugene Tanner • The Honolulu Advertiser

Sole bidder DFS Group Ltd. yesterday won a new 32-month state concession contract allowing it to continue operating duty-free shops at Hawai'i airports and in Waikiki.

The company bid a minimum of $94.7 million over the life of the agreement.

Under the contract, DFS will pay the state at least $26.7 million for the first eight months, based on a $40 million annual minimum rental guarantee, and $34 million for each of the next two years.

"We're very pleased that it worked out this way after almost two years of legislation and negotiation," said DFS Group Vice President Sharon Weiner.

"Close to 1,000 people in our company are just thrilled," Weiner said.

The state historically has relied on the duty-free contract to pay two-thirds of the airport system's operating budget.

DFS could pay more than the minimum if sales exceed a threshold set in the agreement.

The rebid of the duty-free contract was part of an agreement between the state and DFS Group to settle a dispute over $49 million in back rent covering duty-free shops around the state.

After worrying about whether DFS would lose its contract with the state, "the relief is that people can get on with their lives," Weiner said.

But DFS is not yet on solid ground.

"What we need is more Japanese people coming to Hawai'i," said Keith Harrison, DFS Group senior vice president. "This (the new contract) mitigates it, but doesn't make it profitable."

A sharp decline in Japanese visitors after Sept. 11 sent duty-free sales plummeting, and DFS fell behind in its payments to the state.

In the agreement announced in August, the state granted about $15 million in waivers to DFS. The state also dropped a lawsuit against the company that charged that the company had transferred $100 million in loan repayments to its owner, LVMH Moet Hennessy Louis Vuitton, when DFS claimed to be unable to pay its state debts.

The state agreed to lower DFS' current annual minimum rental guarantee to $40 million from $60 million and required DFS to bid on the new concession contract that runs from Oct. 1 to May 31, 2006.

Weiner said that bidding for the contract under the terms set in the settlement would have been very challenging for anyone other than DFS.

A new concessionaire would have to pay for airport improvements and put down a large deposit for a relatively short 32-month contract.

"Given the short term of the lease, it's hard for people to make the investment," Weiner said.

Department of Transportation property manager Ross Smith said about a dozen people picked up bid documents for the contract. In the end, DFS was the only bidder.

The state can reinstate its lawsuit if DFS defaults on its lease.

In withdrawing the suit last month, Hawai'i Attorney General Mark Bennett said the state took into account DFS' ability to continue operating and the possibility it would file for bankruptcy protection.

Travel to and from Asia has been in crisis because of SARS, said Antonio Belloni, group managing director of LVMH Moet-Hennessy Louis Vuitton, in a conference call earlier this month.

Belloni said that to adapt, DFS wanted to restructure its concession obligations.

The Hawai'i' agreement is one of the company's most important contracts, he said.

DFS' gross receipts have declined from more than $400 million per year in the mid-1990s to less than $150 million in the year from June 2001 to May 2002, according to state figures.

Reach Kelly Yamanouchi at 535-2470 or at kyamanouchi@honoluluadvertiser.com.