Following the January 11 briefing and ahead of the February 9 deadline, various companies are now crunching the numbers to try and put together competitive bids for the three-year S$242m ($157.4m) Changi Airport duty free

liquor and tobacco contract. But it will not be easy, as Doug Newhouse notes in this special report.

DFS Group has long been recognized as a quality operator at Singapore Changi Airport, having held the duty free liquor and tobacco concession and defended this business in various tenders for very many years.

The well documented fact that the Civil Aviation Authority of Singapore (CAAS) has decided to create a super tender for this business, which includes several duty free departure and arrivals shops across four terminals (1,2,3 and the Budget Terminal) adds a new dimension to this latest tender however.

The total retail space on offer in this new tender actually equates to approximately 5,214 square meters across all four terminals and the three-year contract will run from January or February 2008, with a further two-year extension possible at the discretion of the CAAS.

Companies eligible to bid are only those with an annual sales turnover in excess of S$100m ($65m) who possess the following attributes: Good management ability; Ability to provide high customer service; Ability to provide a wide range of products; Offer competitive prices; International standards of shop design; and Adequate financial resources.

On the face of it the numbers supplied by CAAS to bidders also look pretty healthy. In 2005 DFS Group?s sales of liquor, wine and tobacco reached S$242m ($157.4m) at DFS? shops located in Terminals 1 and 2. This sales turnover is understood to have reached S$226m in the 11 months to the end of November 2006, with the December figure still awaited by potential bidders. Traditionally December is a very big month however, so it seems unlikely that sales for the year will come in at much less than S$250m ($162.4m) for the full year.

At the same time, passenger arrivals at Changi numbered 15.36m in 2005, with departures reported at 15.35m and transit some 17.1m. In the last week, Changi has updated those numbers reporting a new record of 35.03m (+8%) passenger movements in 2006, with the month of December (the busiest of the year) accounting for 3.42m (+10.1%) passengers.

But considering the large volume of transit traffic that passes through and which also originates at Changi Airport, the first question that remains unanswered is how has the operation been affected by the recent heightened regulations pertaining to the carriage of liquids/gel-based products by passengers intending to transfer in the EU or US?

According to bidders, this question has already been asked of the CAAS, but no clear answer has yet been forthcoming, although the suggestion from some is that the sales or revenue impact is somewhere between 5% and 7% on monthly sales volumes since the new security regulations came in last November.

Whether that is accurate or not is obviously important, since a rough breakdown of DFS? annual sales does not leave that much left to play around with. While the number has not been revealed, some potential bidders are working on the premise that DFS is paying CAAS at least between 45% and 50% for the existing contract.

If this is true then it would be reasonable to presume another 10% on top of that for operating expenses (staff etc), besides bank guarantees and the $3m to $4m that any winning bidder will have to pay to build, relocate and refit new shops.

This will be required when Terminal 1 is refurbished in the third quarter of 2007. According to the CAAS, the shops here will need to be refitted twice due to relocation and the concessionaire will have to bear all these costs.

In fact, the CAAS is setting down minimum spends it thinks are appropriate for the standard of furnishing in all of the terminals. For example, for the Terminal 1 pre-renovation fit out it is stipulating a minimum spend of S$1.4m ($0.9m); another S$1.27m ($0.8m) for the post renovation shop fit in Terminal 1; and S$3.9m ($2.5m) for the shops in terminals 2 and 3 and the Budget Terminal.

Then, of course, there is the minimum monthly (not annual) guarantee that must be offered which can be as high as any bidder sees fit, along with a percentage of sales offer or each individual category ? whichever sum is higher.

According to the CAAS the percentage for liquor (excluding wine and Champagne) shall not exceed 40%, for wines and Champagne the upper limit is 20% and for tobacco it is 25%.

In addition, the CAAS says it is looking for innovative retail concepts and the goods on sale should be priced no higher than at any shop within Singapore, duty free in Asia Pacific, or Europe. The winning bidder also has to participate in the double the price difference scheme where if prices are lower in another shop, a refund to the customer must be made.

In summary, the CAAS says its bid evaluation will be based on the following criteria: Bid for additional rental; Retail concept and design: innovative retail concepts; Experience; Product range; Competitive duty free prices; High level of customer service; Value for money for CAAS; and compliance with all tender specifications.

So who is likely to bid? Well this can only be surmised from those companies who turned up at the pre-bid briefing on January 11. These companies included: Aelia, Aldeasa, Alpha Retail, DFS Group, Dufry, King Power Group (Hong Kong), Lotte Duty Free, Nuance, Sky Connection and Valiram. Approximate rents and other expenses which are also payable are listed at the bottom of this article.

COMMENT: As the incumbent operator with significant infrastructure which supports its other businesses in Singapore, DFS Group obviously has some strong advantages over its rivals for this tender.

Firstly, it knows who its customers are at Changi and with the exception of Nuance, King Power Group (Hong Kong) and Dufry – who also have other businesses at the airport – other operators will need to consult the Singapore Tourism Board and other sources for the nationality breakdowns. Gone are the good old days of a decade-plus ago when this was primarily a Japanese customer-led business. Cosmopolitan is very much the order of the passenger mix at Changi Airport today.

The margins that suppliers are prepared to offer to support these rivals? in their pre-bid discussions will obviously determine the profitability level – or otherwise – for any new operator.

For obvious reasons, those companies with significant liquor and tobacco businesses elsewhere and with established margin structures with suppliers may find it easier than those who have no such arrangements to date.

But whoever wishes to seriously challenge DFS will need to be obtaining liquor margins that are closer to 60% than 50% to have any chance, along with lower but competitive 40% ball park margins on wines and Champagne (which account for 12.5% of the total liquor business at Changi) and also good margins on tobacco.

Any rival will also need to heed the good progress that DFS has made in growing the passenger L&T spend at Changi. The departures shops? spend across both terminals is understood to have grown by around 12% between the year 2000 – when the concession was last put out to bid – and last year.

Last but not least is the DFS factor itself and how much it is prepared to pay to retain the concession. The retailer has already declared that it won?t pay silly money for airport concessions and its actions over the last few years have borne this out. But the operator will also be mindful that Singapore Changi Airport is the engine room of its total liquor business.

At the same time, many of those companies interested in this liquor bid will also be well aware that the CAAS will shortly be tendering its fragrances and cosmetics mega contract at Changi (probably next month).

This will be followed by the Incheon International Airport tenders in the middle of this year (although there is no timetable here either). Add to that the duty free concessions at Hong Kong International Airport in a year?s time – including duty free liquor and tobacco – and all of these companies are in for a very busy time.

Changi Airport duty free liquor and tobacco concession approximate rent and other expenses:

AT TERMINAL 1:
– Basic rent: S$220 per sq m (USD.143.1)
– Service charge S$10 per sq m (USD.6.5)

Therefore Basic rental Terminal 1
– Prior to refurbishment S$1,063,253 (US.D691,736)
– Post refurbishment S$1,066,892 (USD.694,149)
– Total Service Charge S$13,720 (USD.8,925)

AT TERMINAL 2:
– S$242 per sq m (USD.157.3)
– S$10 service charge per sq m (USD.6.5)
– Total Basic Rent S$307,626 (USD.200,149)
– Total service charge S$13,983 (USD.9,098)

AT TERMINAL 3:
– S$220 per sq m (USD.143.1)
– S$10 service charge per sq m (USD.6.5)
– Total Basic rent S$399,566 (USD.259,997)
– Total service charge S$16,511 (USD.10,740)

AT THE BUDGET TERMINAL:
– S$110 per sq m (USD.71.5)
– S$5 per sq m service charge (USD.3.25)
– Total basic rent S$66,000 (USD.42,935)
– Total service Charge S$3000 (USD.1,952)

ENDS.