Price is not right for DFS

PUBLISHED : Sunday, 25 May, 1997, 12:00am
UPDATED : Sunday, 25 May, 1997, 12:00am
 

IS DUTY Free Shoppers (DFS), the global monolith of the industry whose market-leading position was built from humble foundations in Hong Kong, losing its touch? There have been plenty for detractors to draw on in the last week. On Monday, DFS lost the bidding battle for three highly prized licences at the new airport at Chek Lap Kok - one that included the rights to sell duty-free alcohol and tobacco, a second comprising the rights to sell perfume and cosmetics and the third allowing the winning bidder to retail general merchandise.


The failure to win the alcohol/tobacco licence was seen as a blow to DFS, given that a winning bid was expected to attract revenues of HK$2 billion a year.


DFS's inability to lure any of the licences comes as a surprise, and has analysts divided on whether the US$4.2 billion empire simply refused to pay more than what it regards as a fair price for airport licences or was losing out in the lobbying stakes.


The Airport Authority's decision capped a turbulent few months for the group, marked by the bitter battle between the company's two founders, Robert Miller and Charles Feeney, over the sale of a majority stake to luxury goods giant LVMH Moet Hennessy Louis Vuitton.


Mr Feeney sold his 38.75 per cent stake in DFS to LVMH last year, while Mr Miller has so far held out against formally selling out.


In the wake of DFS's latest problem, senior company representatives declined to talk directly to the press.


DFS did, however, release a brief statement where it conceded the loss of the licences was a disappointment, but said that in Hong Kong - and increasingly, internationally - it was channelling its duty free efforts into other areas.


The company claims to be increasingly targeting city and specialty retailing anyway, and that its inability to win the licences would not be a major barrier to its future success locally.


Significantly, DFS said it bid what it described as 'a realistic price given our knowledge of the business'.


It is this point which leads many to believe DFS was not out-lobbied in the bidding process, but chose not to pay too much for the various rights on offer.


The figures involved are reportedly huge - with some suggestions that the royalties paid by the winning bidder for the alcohol and tobacco franchise, a Lai Sun/New World consortium, could be upwards of $600 million.


This would represent about a third of the $2 billion a year in revenues expected from this franchise.


Nick Hillyard, until three months ago the managing director of the Australasian operations of DFS's biggest rival, Allders, the world's second largest duty free chain and now a consultant to the aviation industry, is in a good position to judge.


The consortium that Allders is effectively part of, Nuance-Watson (HK), won two of the 'big three' licences - those for perfume and cosmetics, and general merchandise.


'DFS have only ever bid to make money - they are not known for their maverick bids,' he said. 'Nobody knows the market better than DFS does.' It was a dangerous strategy to run an airport shop just to keep other players out of the airport, Mr Hillyard said.


'You make bids to make money, not to shut out other bids,' he said.


Mr Hillyard believes DFS will retain its leading position in Hong Kong despite the rebuff on the airport licences.


'They have a very, very shrewd understanding of where the market is going,' he said. 'I would go far as to say they will still be the number one player [in terms of travellers].' Mr Hillyard believes the loss of the tender could help DFS in Hong Kong, in that it will avoid the pitfalls and space constraints associated with doing business away from the airport by establishing central stores.


'If it's the best store in town, they're going to get an awful lot of business,' he said.


He said DFS had increasingly made its stores 'destinations in themselves', particularly for Japanese tourists.


'You can have a bus load of 40 Japanese office ladies who insist on stopping off at a DFS store,' he said.


There is another route DFS could possibly take at the new airport, even though it has lost out on the main duty free licences.


The duty free giant or its new parent company, LVMH, could perhaps bid for specialist shops at Chek Lap Kok, Mr Hillyard believes.


For instance, LVMH could look to start a specialist shop in watches or accessories, he said.


There was a potential for specialist shops to take away at least part of the business from the general merchandising licensees, in particular - given that this licence gives an overall right to sell watches, jewellery, fashion accessories, sunglasses, ties, scarfs, electrical and photo goods.


Many of these goods are also likely to be handled by speciality shops.


But a presence at the airport is far from central to DFS's future success, because the nature of the group has changed into being a general and city retailer, rather than being a duty free chain, as its name would suggest.


As Mr Hillyard notes: 'There is a reorganisation going on regarding what exactly constitutes a DFS.'

Share

 

Send to a friend

To forward this article using your default email client (e.g. Outlook), click here.

Price is not right for DFS

Enter multiple addresses separated by commas(,)

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive