It is now looking increasingly likely that Airport Authority of Hong Kong (AAHK) may need to tender one or more of the three Hong Kong International Airport (HKIA) anchor duty free concessions held by DFS Group earlier than expected – with these consisting of liquor and tobacco, perfume and cosmetics and general merchandise.

 

AAHK is known to have held discussions with several leading DF&TR operators to sound out their interest should DFS decide that it does not wish to take up its HKIA retail extension options on any one, two, or all three of its individual contracts on the current contractual obligations.

 

TRBusiness understands that such a scenario is looking increasingly likely if AAHK decides it wishes to hold the retailer to its existing or improved terms on current or improved guarantee levels, regarding these contract extension periods.

 

Airport Authority is obviously acutely aware that the expiry dates on all three of DFS’ five-year contracts fall due at the end of this year and into 2018, with TRBusiness understanding that the L&T licence expires in November 2017, followed by General Merchandise in December 2017 and P&C in early 2018.

 

 

SPENDING LEVELS ARE UNDER PRESSURE AT HKIA

Despite this seemingly long lead time, the clock is certainly ticking fast, since DFS is likely to be required to give at least one year’s notice it if decides to resign some – or all – of these concessions, which would suggest sometime later this year. This would certainly explain why Airport Authority has had recent meetings with a number of leading travel retailers.

 

Such notice would obviously give AAHK the time it would need for an orderly tender process involving its most important retailers – should this prove necessary. The very latest unconfirmed rumour is that AAHK may be looking to announce that the relevant tender(s) will be issued in November 2016, for an April 2017 award and announcement, followed by a November 2018 takeover.

 

Various sources also suggest that the concessions will continue to be split into individual contracts, as they are today.

 

As reported at the time, DFS won all of these anchor concessions by outbidding 11 other bidders who proposed some 20 different offer permutations back in 2011. This suggests that some companies who were not successful the last time around will doubtless be interested in participating in any new selection process again.

 

 

DFS CONTRACTS STILL VALID FOR OVER A YEAR

As major anchor contracts, these three aforementioned concessions have obviously formed the backbone of Hong Kong Airport’s retail offer since they began four years ago – and for decades. However, Hong Kong Airport’s retail business is clearly not as attractive as it once was in ‘sales profitability terms’, since Mainland Chinese customers are simply not buying as much – or as regularly – as they have in the past.

 

To be fair, DFS also bid very competitively to win these contracts in better times back in 2011, when customer spending levels were much better. By contrast, today’s trading environment has toughened considerably, with unhelpful exchange rates exerting even more pressure on retailers and thus translating into lower savings for the retailer’s often savvy customers.

 

Naturally, Airport Authority management is well aware of all this, as well as how profitable or otherwise its retailers might be, since it obviously has all of its retail tenants’ audited sales reports. But AAHK is not noted for charitable acts when it comes to contract renegotiations and it has been known to point out in the past that retailers do not queue up to offer it more money when times are good, so why should it give better terms when trading becomes tougher?

 

 

NEITHER AAHK OR DFS IS COMMENTING…

Although DFS’ HKIA sales across all three contracts are not broken down or public, TRBusiness estimates they were close to $750m to $800m last year – alongside the additional $100m to $150m estimated contribution in additional traditional retail sales made by all other retail outlets at HKIA.

 

A good proportion of DFS’ annual sales – almost certainly +45% – will also almost certainly have been payable to Airport Authority and fallen within its aforementioned all encompassing retail and commercial income segment of HK$8,760m/$1,129m.

 

This total obviously includes percentage contributions from all retail streams, such as retail licence fees, advertising, car parks, F&B, bureau de change, plus other ancillary revenue.

 

Meanwhile, it should be noted as a matter of good order here that even though Airport Authority Hong Kong and DFS Group do not comment on contractual matters, both were contacted directly on this matter. We contacted Cissy Chan, Executive Director, Commercial, Airport Authority Hong Kong who is responsible for the commercial function at Hong Kong International Airport (comprising retail and advertising) but received no response.

 

FAST TRACK DUTY FREE

However, DFS Group’s spokesperson did respond, albeit in part: “We cannot comment, due to the confidentiality of our agreement with HKIA. However, we are working very closely with the Airport Authority on improving the passenger experience overall, with several renovations ongoing in the East Hall.”

 

Meanwhile, while the Hong Kong Airport situation is focusing the minds of several big retailers, there are also those who are also keeping a very wary eye on the Mass Transit Railway duty free border store business in Hong Kong and especially considering this is due to go to tender in exactly ten days time (18 July).

 

As reported, there are two MTR contracts up for grabs, comprising the shops at the Lo Wu and Hung Hom railway stations in one package and Lok Ma Chau station as a standalone separate contract.

 

Lo Wu has historically been the busiest duty free station shop on the Hong Kong side of the border with China, although the Lok Ma Chau station operation is now said to be catching up in sales turnover terms.

 

Once again, these contracts – currently held by Anway/Sky Connection – are being tendered by MTR more than a year ahead of their expiry dates, although there are no extension clauses in either of these contracts.

 

BIG ‘AIRPORT-STYLE’ CONTRACTS

The largest covers Lo Wu and Hung Hom, which begin on January 1 2018. As is known, Lo Wu remains Hong Kong’s most heavily used immigration control point for passengers travelling to and from Mainland China. Duty free sales at Lo Wu last year were HK$2bn ($257m) although the minimum guarantee MTR is looking for is 40.2% based on 2015 sales.

 

Lok Ma Chau is a separate contract where tenders are due to close on July 28 2016, with the new contract set to begin on August 15 2017. This tender was released in the first week of May 2016 and the minimum acceptable monthly bid is HK$77m ($9,916,591) or 42% of sales – whichever is higher.

 

Duty free sales at Lok Ma Chau are also understood to have been around HK$2bn ($257m), so the minimum guarantee rent MTR is asking for is equivalent to 42.3% of 2015 sales.

 

As is well known, the sales mix at this very busy border business is heavily 70% dependent on cigarettes. As such, some sources have told TRBusiness that any threat to the inbound cigarette allowance in Mainland China during the course of these contracts would therefore have a devastating impact on future sales.

 

 

WHERE HIGH SPEED MEETS LOW SPEED…

Some sources also point to the ‘small matter’ of four months security deposit and an advance guarantee of eight months of the fifth year rent’s for these border shop contracts.

 

Meanwhile, companies looking at bidding for these shops are also likely to be wary of the much delayed high speed Hong Kong-China rail link, which is now predicted to open in 2018.

 

As reported, the original tender for this business was postponed when it was discovered that mountain tunnelling work on the Hong Kong side was way behind schedule in the final leg of laying the railway line into Mainland China. This proved very embarrassing for the Hong Kong SAR Government under the gaze of the Beijing administration at the time, although it has now completed this work.

 

POTENTIAL OFFER DUPLICATION..?

The reason why some opt to tread warily is that this high speed Hong Kong-China link will stop at the very same stations where the other aforementioned duty free contracts will be operating (Lo Wu and others).

 

This new high-speed service is scheduled to operate at the West Kowloon Terminus – currently under construction – with the potential duty free offer already attracting keen attention of several leading international duty free operators.

 

Unlike the other MTR duty free businesses, the West Kowloon Terminus is expected to resemble much more of a European main station-style layout, featuring duty free and multiple duty paid specialist shopping units, plus food and beverage facilities.