Three retailers, Lotte, Shilla and Heinemann, contest Changi Airport liquor & tobacco tender; shock as DFS Group opts not to bid

Reduced field reflects risk adversity, regulatory concerns and troubled global climate

When the Changi liquor & tobacco contract was last tendered in 2013, six retailers contested the bid – DFS; Nuance-Watson (now Dufry); Lotte Duty Free; King Power Group Hong Kong; World Duty Free Group (now Dufry) and Sky Connection.

This year’s field has been halved, reflecting cost concerns, the regulatory changes referenced below by Ed Brennan and a deeply uncertain global climate against the backdrop of an escalating US-China trade war.

The growing Chinese government determination to maximise domestic consumption of Chinese travellers by enhancing duty free opportunities at home (including pre-order facilities for Chinese consumers at CDFG’s fast-expanding downtown store network) and enhanced ‘offshore’ duty free on Hainan Island is another factor making international travel retailers increasingly nervous.

For its part, however, Changi Airport Group only needs one winner and all three bidders have strong credentials. That compact line-up brings together the world number two (Lotte), three (Shilla) and six (Gebr Heinemann), according to The Moodie Davitt Report Top 25 Travel Retailers league.

Lotte lacks neither motivation nor funding. Highly profitable at home but facing increasing competitive pressure and highly exposed to any Chinese customer downturn, the Korean number one can now call on its international liquor & tobacco experience with late 2018 acquisition JR/Duty Free (as well as in Guam and Vietnam). History suggests that it may be prepared to bid ultra-aggressively, especially as such a victory would advance its aim to become world number one travel retailer.

Shilla has similar strategic motivation and financial clout. This contract could be seen as an insurance policy in the event of the company losing its recently extended Changi perfumes & cosmetics contract when that ultimately goes to bid. And it has certainly proven its credentials to Changi Airport Group since its surprise win in early 2014.

Gebr Heinemann is a class act and its acclaimed duty free operation at Sydney Airport shows what everyone in Europe already knew, that it can run large, complex concessions with success and flair. The German powerhouse would like to extend its currently modest Asian presence, especially as it is likely to face competition for the Sydney Airport contract, which is due to expire in August 2022. Traditionally a conservative company in terms of financial exposure, its bidding strategy versus two such aggressive competitors will be interesting to watch.

So, not the size of field that Changi Airport Group would have hoped for but given the qualifications of all three contenders, the group will still be confident of achieving its dual financial and quality goals.

SINGAPORE. A smaller than expected field of three leading travel retailers has submitted bids for the Changi liquor & tobacco concession, for which offers closed today, The Moodie Davitt Report can reveal.

Three industry heavyweights, Lotte Duty Free and The Shilla Duty Free of South Korea and Gebr Heinemann of Germany tabled proposals.

In a surprise development, long-term incumbent DFS Group did not bid (see the company’s statement below). Nor did other travel retail powerhouses Dufry, Lagardère Travel Retail or China Duty Free Group, all of whom had expressed interest earlier. [Look out for our analysis of the bidding line-up, and its repercussions for the travel retail sector, in this week’s edition of The Moodie Davitt eZine].

At stake is a business that The Moodie Davitt Report estimates generated around S$590 million (US$430 million) in sales last year, around S$400 million of that in departures, the balance from arrivals duty free. For tobacco, the entire business was in departures. Spirits represented around 61% of departures sales, wines & Champagne about 7% and tobacco about 32%. In arrivals, spirits accounted for about 74%, the balance coming from wines & Champagne.

In a statement supplied to The Moodie Davitt Report, DFS Group Chairman and CEO Ed Brennan said: “After careful consideration, DFS has decided not to bid to retain the liquor and tobacco concession operations at Changi Airport. As a result, we will withdraw from this concession on its expiry in June 2020.

“Our decision not to bid was based on our unique understanding of the business environment as the current operator of this concession at Changi. Specifically, changing regulations concerning the sale of liquor and tobacco, against a global context of geopolitical uncertainty, meant that staying in Changi was not a financially viable option.

“Although this decision is the right one for our business, it was not taken lightly. DFS has held the concession at Changi Airport since 1980, and during this time we have exceeded all expectations for what travel retail can offer in an airport environment. We are proud of our achievements and deeply appreciative of the efforts of many talented people who have contributed to our success.

“We sincerely thank the Changi Airport Group for their past support, and extend our best wishes as they take the liquor and tobacco concession operations forward in partnership with a new operator.

“Our luxury concessions at Changi, our downtown operations at T Galleria by DFS, Singapore, and our Singapore Cruise Centre business will operate as usual and are unaffected by our decision to withdraw from the liquor and tobacco concession.”

Ed Brennan: “Staying in Changi was not a financially viable option”

Assessing the cost of entry

The Changi Airport liquor & tobacco concession represents a grand prize in one of the world’s most illustrious airports and one that consistently ranks best-in-class for its wines & spirits (especially) and tobacco offer. But in travel retail, grand prizes don’t come cheap and the costs of entry and high risks involved have deterred a number of expected bidders, including most obviously the incumbent DFS Group.

Concerns do not relate simply to the concession fee, but also a S$28 million (US$20.5 million) initial deposit (and related bank guarantees) and heavy capital expenditure commitments over the contract term.

On top of a monthly basic rental, bidders had to table a ‘Base Offer’ for ‘Monthly Additional Rental’. This varies by category as follows:
• Spirits: No less than 46%
• Wines and Champagnes: No less than 35%
• Tobacco: No less than 40%

The retailer must pay either those amounts OR

• A minimum monthly guarantee per passenger of S$4.15 (US$3.04) based on total traffic movements for terminals 1, 2, 3 and 4 for the relevant month.

In short, the successful bidder will pay the higher of the two calculations above in the form of Monthly Additional Rental. The concessionaire will declare each month’s sales directly to CAG.

Tenderers must propose a step-up in Monthly Additional Rental for each year of the concession.

Provided they table the compulsory Base Offer, bidders can make ‘Alternative Offers’. These can propose variations to any aspect of CAG’s requirements in areas such as product range and store design.

DFS Group’s acclaimed Changi Airport Terminal 3 duplex store. The retailer’s decision not to bid brings down the curtain on a near 40-year incumbency.

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