DFS Group has won a three-year contract at Mumbai International Airport (MIAL) offering a minimum guarantee of $63m over three years and signalling its entry into the Indian duty free airport market following MIAL's termination

of ITDC/Aldeasa's contract for failing to open on time.

MIAL consortium owners GVK Power confirmed the award in a statement to the Bombay Stock Exchange yesterday, adding that the contract will run for three years with an option on MIAL's side to extend it by another year.

The possible termination of ITDC/Aldeasa's contract was covered by TREND last Sunday, along with the rumour that DFS – as the second highest bidder for the contract – might be awarded the business by default. Other bidders for the contract back in February included the Nuance Group, the AG-Shoppers? Stop joint venture, the Alpha Airports-Future Group joint venture and the Dufry-Interglobe joint venture.

As already mentioned in TREND, MIAL has shown remarkable patience with the ITDC/Aldeasa JV which was supposed to have opened its stores back in June, but which has been stalling in the hope of renegotiating the guarantee down.

The ITDC/Aldeasa joint venture had bid around 571 crore ($145m) for the three-year contract, but only months afterwards ITDC – no stranger to controversy – was already questioning whether it had bid much too high for the 24,541sq ft of duty free space. Meanwhile, between the supposed opening date for the shops in June and the present MIAL has lost millions in guaranteed revenues because of this delay. However, to its great credit it has rejected any notion of holding closed door post-bid renegotiations with the joint venture and quite rightly awarded the contract to the second highest bidder DFS.

According to a statement from DFS, the retailer will now be responsible for designing and building the shopping environment, sourcing a wide range of international luxury brands and developing a strong promotional strategy for duty free shopping at Mumbai's Chhatrapati Shivaji International Airport (CSIA) with a start date set for January 2008. MIAL is a consortium of GVK Power & Infrastructure Ltd, the state-run Airports Authority of India and Airports Company South Africa Ltd with Bidvest Group.

COMMENT: DFS' entry into the Indian duty free market can only raise the standard of duty free retailing at Indian airports. The retailer's credentials are unquestioned and it will doubtless impress when it opens its facilities next January. But having said this, it should also be noted that there will be major challenges ahead, even though DFS' guarantee is less than half that offered by the ITDC/Aldeasa joint venture.

First and foremost it will need to push the sales considerably if it is to make money from this contract and especially considering that Mumbai Airport accounted for just $12m or 35% of ITDC's total duty free sales in its last full year 2004/5 [compared with Delhi's 40% or $13.7m-Ed]. This annual sales level is not thought to have increased much in 2005/6 when ITDC was operating 11 shops in two terminals (eight departures/three arrivals) under a month-to-month contract. Having said that, there is no meaningful comparison between the abilities of ITDC and DFS, with the latter obviously being a much more sophisticated and efficient.

But at the same time, DFS faces both a challenge and a great opportunity, since it will need to address the image of duty free shopping in India which has hit virtual rock bottom after years of indifferent retailing from ITDC. Most Indian passengers currently make their purchases overseas, ignoring the duty free shops at India's two main airports of Mumbai and Delhi.

But having said that, DFS is a great retailer and the addition of what is currently a heavily-skewed duty free liquor and tobacco operation will help the retailer's buying power in these categories – and particularly if they grow. The degree to which DFS can expand the offer gradually to persuade Indian travellers to buy additional other goods will also be a very interesting scenario worth monitoring.