DFS pays dearly for reliance on Japanese

WITH the flood of tourists turning to a trickle, and what few tourists there are looking to shop elsewhere, analysts are asking what the future holds for struggling retailer Duty Free Shoppers Hong Kong (DFS). DFS, which last month reported it had made its first loss since setting up in Hong Kong 38 years ago, is bearing the brunt of the regional slowdown due to its reliance on Japanese shoppers. The retailer, the Hong Kong division of United States-based DFS Group and controlled by France's LVMH Moet Hennessy Louis Vuitton, has cut 320 jobs and shut down a third of its Hong Kong stores. Indosuez WI Carr Securities Asia associate director Alan Wong Tin-lun said: 'DFS taps almost entirely the pockets of Japanese tourists, because Hong Kong residents rarely buy there. 'Hong Kong people know well that Hong Kong has been a free port for the past 100 years. As the number of Japanese visitors plunged by more than 60 per cent in the past few months, no wonder it is suffering.' Fleets of coaches carrying tourists to DFS stores were nowhere to be seen, he said. At the Hankow Road store, to be shut down by the end of the month, US-based Filipina tourist Corazon Pimentel window-shopped with her sister-in-law. They did not buy anything, because she thought the prices were 'outrageous'. 'I don't think this is a good place to shop, given abundant choices around this area [Tsim Sha Tsui]. I am here because the tourist guide brought me here,' she said. She said a cotton T-shirt with a dragon design and the words 'Hong Kong' cost $150 at DFS, but she could pay half that amount for the same type of shirt on Nathan Road. On nearby Peking Road, where there is another DFS store, an Iranian tourist, Andie Yaganh, was intrigued by the perfume counter. 'Well, I'm just comparing the price of a Calvin Klein perfume. It's unlikely I will buy here, because I found a cheaper price next door at Strawberry,' he said. Barry Lam, manager of the in-bound tour arm of Miramar Group, said retail sales had not been given a boost, despite recent discounted air tickets. 'Most tourists visiting Hong Kong recently have been taking advantage of discount tickets. But they don't have much spare money for shopping,' he said. Until the onset of the region's financial crisis, the success of DFS was built on the strategies of co-founders Robert Miller and Charles Feeney. But the partners fell out two years ago over the US$2.5 billion sale of a large part of DFS to LVMH. Mr Feeney and another co-founder, Alan Parker, decided to sell their combined 58.75 per cent to LVMH, but Mr Miller opposed the deal in the courts and tried to buy them out himself. The dispute eventually ended with LVMH owning 61.25 per cent of DFS and Mr Miller holding the remainder. Mr Miller and Mr Feeney built up DFS by paying tour guides commissions to shepherd tourists into their stores, which grew to six in Tsim Sha Tsui and one on the Peak. It was shrewd management, capitalising on the Japanese gift-buying psychology. Mr Wong said: 'Japanese like shopping in comfortable shops with air-conditioning, and they like fixed prices. DFS fits their requirements.' DFS also mopped up lucrative monopoly concessions in prime locations such as airports and in Tsim Sha Tsui, leading to profit margins of up to 20 per cent and generating a large portion of the DFS Group's US$3 billion worldwide sales in 1996. Now that tourist arrivals and the retail industry have slumped, rents in prime locations are a heavy burden. DFS senior executive Shirley Wong Mo-shu admitted a fortnight ago the company last year slipped into an undisclosed loss, from a profit in 1996. In the first quarter, the loss was far worse than expected, she said. The poor performance is prompting DFS Group to trim its exposure in Hong Kong, and it is also closing three stores in Canada, New Zealand and Hawaii. In Hong Kong, it has shut down two of its six stores, and its concession at Kai Tak Airport expires in a few months' time. The group suffered a setback last year when it failed to win the main duty-free concessions at Chek Lap Kok. It did, however, win the right to operate two food outlets there. Analysts said a DFS recovery would depend mostly on a rebound in tourism and retailing - and neither was expected to take place at least until the end of next year. Mr Wong said: 'DFS has survived for the past 40 years, and there must be some reasons for its survival. I believe Japanese tourists will come back later. It's a question of when.' DFS store operations vice-president Philip Kung and president Fred Chiu refused to comment last week on the company's prospects, as it was undergoing 'a sensitive period'.