Fallout from the decline in Japanese visitors continues to mount, with travel retailer DFS Hawaii yesterday announcing that it is temporarily reducing work hours for the majority of its 1,200 employees.

The company also will temporarily cut store hours beginning tomorrow at the DFS Waikiki Galleria, opening at 10 a.m. rather than 9 a.m.

The changes reflect the impact of the declining Japanese visitor market, which is down 7 percent this year through April, according to state figures. Preliminary numbers for May and June suggest arrivals from Japan are continuing to fall.

Japanese visitor arrivals began falling late last year, dampening sales at businesses that cater to that market. DFS is the largest retailer so far to take steps to offset the decline.

"Business is very difficult right now," said Sharon Weiner, DFS U.S. Group vice president. Japanese visitors account for 90 percent of DFS Hawaii duty-free sales and more than 50 percent of its traditional retail business.

However, the measures being taken are relatively minor compared to cutbacks DFS Hawaii made in past years when Japanese visitor arrivals were hit by the Sept. 11 terrorist attacks, the SARS outbreak and the start of the Iraq war.

"I've been through this three or four times in the six years I've been here; you kind of weather the storm," Weiner said. "The last thing you want to do is lay people off. That's why the reduction in hours."

Weiner said the current decline in Japanese visitors will not affect DFS Hawaii's contracts with the state. "We make the best of what we can do," Weiner said. "We have financial obligations to the state, of course. So we have to meet those obligations."

DFS Hawaii has an exclusive contract with the state to sell duty-free goods to departing foreign travelers. The company also sells goods at more than 30 traditional airport retail stores under a contract expiring May 2008, plus at an entertainment-themed retail complex connected to its flagship duty-free store in Waikiki.

Under the two contracts, DFS pays the state about $50 million a year, Weiner said. The revenues have historically represented a significant part of the state airports system's operating budget.

Following the Sept. 11 attacks, the Hawai'i Legislature in late 2001 gave airport retailers an eight-month reduction in rent, and DFS Hawaii was also allowed to rebid the last 32 months of its five-year duty-free contract, which has since been extended a year to May 2007. 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 in Hawai'i.

Weiner said duty-free sales so far this year are down about 14 percent compared to last year. She declined to say how much of total DFS Hawaii revenue is from duty-free sales. The airport retail concession sales are up 2 percent because of Mainland customers, she said.

DFS Hawaii, in a memo to employees last week, said it views the change in hours as temporary and that it will review the hours allocation within 30 days. The company is reducing scheduled work hours for full-time employees by five hours and for part-timers with benefits to 20 hours a week. The reduction, to affect all areas except those with staffing shortages and other business requirements, took effect Sunday.

"During the past three months we have experienced a challenging business environment due primarily to the limited amount of international visitors traveling to our destination," the memo said. "All of you have been extremely supportive by offering to help out and work flexible shifts as well as taking voluntary leave of absence. We have also taken other cost cutting measures to reduce our expenses."

Weiner said: "We've examined every single cost of doing business. We have cut out all of our community contributions to the end of the year. We have taken a look at how to cut back on electricity in the stores."

"It's a painful decision to have to reduce people's work hours. ... We know that people have obligations, and it's painful."

Industry officials have pointed to several factors contributing to the fall in Japanese visitor arrivals, including a decrease in the number of air seats from Japan, more expensive hotel rooms and a less favorable yen-dollar exchange rate.

But the largest factor appears to be airline fuel surcharges, said Yujiro Kuwabara, director and general manager of JTB Hawaii. The surcharge can add about $130 to $140 per ticket to Hawai'i, he said. Flights to other destinations, such as Korea and China, have lower surcharges, he said.

Kuwabara said business in June "was bad, and July is also kind of slow." August looks more promising, but it's too early to tell how business will be beyond that, he said.

Reach Lynda Arakawa at larakawa@honoluluadvertiser.com.