PHILIPPINES. Government-run Duty Free Philippines (DFP) has appointed Eastern Duty Free Management (EDF) to run its duty free confectionery and foodstuffs business, according to local reports.
The move has provoked some controversy. Local publication Business World magazine claimed that DFP was under fire for sub-contracting the business without an open tender.
The report claimed that outgoing Tourism Secretary Roberto Pagdanganan together with DFP General Manager Michael Kho were charged by Duty Free Philippines Employees’ Association president Alfredo Bautista, before Deputy Ombudsman Ernesto Nocos, for awarding the concession to EDF without the required public bidding.
However, the report did not have – or appear to have sought – any response from Kho or DFP and therefore should be treated with caution. Commercial matters are often much more complex than they first seem in the Philippines and duty free is historically a highly-charged and political subject there. A similar furore that threatened to break out last year over the sub-contracting of liquor operations (see below) quickly calmed down and this issue could go the same way.
“Once the dust has settled, it will be business as usual,” noted a local source familiar with the market.
Eastern Duty Free has enjoyed a long-term presence in the Philippines duty free arena and is well-known to those familiar with the market.
Under the contract, EDF, under Shau Fu Wong, will reportedly be allowed to operate the DFP chocolate and confectionery, snacks and local foods outlets in Fiesta Mall (downtown) the Ninoy Aquino International Airport terminals one and two, Mactan International Airport and the Waterfront Hotel. The contract runs for five years. EDF will pay 20% of the gross sales to DFP as net proceeds, the report said.
DFP General Manager Michael Kho
The contract, according to Bautista, was only made public when it was presented to the Philippine Tourism Authority Board for approval this week. He claimed the contract was negated by Tourism Administrative Order 89-04, which allowed DFP to permit private operation of its businesses only if it is experiencing losses.
“DFP is not suffering from the significant losses, hence, it should not enter into any contracting out of its business operation especially the lucrative portion of the business, chocolates,” Bautista asserted in his complaint.
DFP’s confectionery business represents one of the duty free sector’s biggest accounts. It is mainly based on sales to returning overseas Filipino workers. The Balikbayan business generates huge annual revenues for leading houses such as Masterfoods and Kraft [Editor’s note: Balik means to come back. Bayan means hometown or homeland. Put together it means someone who is coming back home]. The popular pasalubong bags are filled with various gifts, especially chocolate, a huge business for Masterfoods and Kraft, in particular. US company Hershey is the number one, however, due to the strong US influence in the Philippines.
According to the report, DFP’s chocolate business is estimated to generate US$40 million in gross sales annually. It comprises about 35% of DFP’s total annual sales, estimated at US$130 million. “With the 35% profit margin, DFP realizes gross profit of US$14 million,” Bautista said.
The Moodie Report has spoken to well placed sources at and near DFP this morning and can confirm EDF’s appointment. Sources downplayed the controversy surrounding the agreement and said that local paper and international trade media reports had been badly exaggerated. Further comment coming soon.
Last year DFP granted Colombo Management Hong Kong (CMH) a complex liquor supply and management contract. Under the terms of the agreement, DFP continued to handle actual sales through its cash registers, while CMH took over responsibility for all ordering, paying of suppliers, managing the physical inventory, and all promotional, sales and display activity.
“This is the only way we can guarantee that this category under any circumstances remains profitable,” Kho said at the time.
Kho is credited with having restored DFP to profit for the past three years, after being in deficit since 1996. Between 1997 and 2000 DFP recorded particularly heavy annual losses.
MORE STORIES ON DUTY FREE PHILIPPINES