Many a fortune has been squandered at Hong Kong’s famed Happy Valley race track. But it’s fair to say that picking a winner from the bidding line-up for the two core category tenders at Hong Kong International Airport (HKIA) some 30 minutes away is a far more difficult exercise than most events on the race card.
The likely bidder line-up for the first two core category tenders at HKIA, which we held off publishing until bids closed. Note: We understand Heinemann bid for liquor/tobacco/gourmet, not beauty & accessories.
When it views the submitted offers following the bid closure this afternoon, Airport Authority Hong Kong (AAHK) will no doubt issue a sigh of relief at both the depth and quality of the field it has attracted. With the financial difficulties at HKIA of incumbent DFS Group so well-documented, and Hong Kong’s tourism spending woes similarly familiar to potential contenders, the authority had the difficult job of talking up the tender while simultaneously trying not to deter potential bidders with superficial marketing hype.
As previously reported, the liquor & tobacco concession is being increased substantially both in terms of space and range, with the addition of liquor-related accessories and gourmet items
The perfumes & cosmetics concession will become a “beauty and accessories one-stop shopping destination”, including a minimum of 465sq m dedicated to fashion accessories
Confectionery, a big in-demand category, will enjoy its own dedicated concession. The tender will be launched in March or April.
Airport Authority Hong Kong believes that given the airport’s extremely strong line-up of speciality stores and mono-brand boutiques (its dazzling Chanel and Rolex duplex stores are shown left and right), there is no need for the airside general merchandise concession. Instead it has allocated the best-selling general merchandise categories to the other packages.
It set about that goal in an impressive manner, most notably by restructuring the concessions themselves. Out went Airside General Merchandise, in came gourmet foods (to liquor & tobacco), and in came key accessory categories to the pivotal perfumes & cosmetics concession. As revealed by The Moodie Davitt Report, confectionery, an attractive but specialised category, is being offered as a separate single concession.
The revamped tender model resulted from extensive dialogue between the Authority and the incumbent, other likely bidders and, most critically, consumers. Given the sheer weight and quality of ‘internal’ airport rivals to the general merchandise concession in the form of HKIA’s splendid line-up of stand-alone boutiques, the decision to scrap the all-embracing general merchandise category (and to move its best bits elsewhere) was highly astute.
This is how the 2012 bidding line-up looked. Nuance-Watson and World Duty Free Group have since been subsumed into Dufry, which did not bid last time around.
AAHK also emphasised time and again in the run-up to the tender (and in the documents) its whole-hearted commitment to its partners’ commercial success, via intensive physical and digital marketing, shared participation in promotional efforts and to driving HKIA’s passenger numbers.
The formula seems to have worked. A star-studded field comprising many of the most powerful players in The Moodie Davitt Report’s acclaimed annual Top 25 Travel Retailers League – increasingly the reference point for investors and airports studying the market’s strength and profile – has emerged. While the beauty and accessories concession has attracted greater interest – not surprising considering its greater certainty – there are still enough powerful contenders for liquor, tobacco and gourmet foods to suggest that the stakes there, too, will be similarly high.
What of the bidding levels? DFS’s sobering experience may have led to some wariness (certainly for the incumbent itself, though do not by any means count out its chances of retaining the beauty business on which it is bidding) but the prevalent market view is that the LVMH/Robert Miller retailer was unlucky in its last bid rather than over-ambitious.
After all, when The Moodie Davitt Report announced the retailer’s spectacular June ‘One…two… three’ concession victory back in June 2012 amid surging Chinese travelling and spending levels, who could have possibly contemplated what would have followed? What a list: Xi Jinping’s election in March 2013; his subsequent crackdown on corruption and conspicuous consumption; the sharp decline in Mainland Chinese visitors to Hong Kong in 2015 (driven by anti-Mainlander sentiment and the pro-democracy protests); and the meteoric growth of cross-border e-commerce.
Any one of those factors would have compromised an initially justifiable bid. Collectively they were enough to critically damage it, especially given the contractual premise of a MAG rising in line with increased passengers (as, for example, happened in 2015 and 2016) but where their actual spending (down) was not factored in. All in all, the perfect storm.
Despite the chastening effect of such an experience (hardly confined to Hong Kong), the individual and collective ambitions of the bidders still represents a heady cocktail of strategic justification, geographic focus (Asia generally, China particularly), overseas expansion, national pride, ‘face’, category expertise and – dare one say it – sheer need for success. All that suggests AAHK will not have to worry too much about any shortfall in its budget going forward.
So, with a nod in the direction of the race-card publisher down the road at Happy Valley (let’s call the HKIA racetrack Happy Value), here’s The Moodie Davitt Report’s view of the runners and riders in the great Hong Kong International Airport Duty Free Stakes (Note: several of these observations were made in our initial appraisal of the HKIA tenders back in July 2016. We have updated these where possible while respecting retailer confidentialities. All our comments were deliberately held back until just before the bids closed.)
Likely contenders for the Hong Kong International Airport (HKIA) contracts
Sky Connection: A certain bidder on liquor & tobacco, and a serious front-runner. The New World Development Company-owned retailer harboured deep disappointment over losing its long-time liquor & tobacco stronghold to DFS last time around, and is desperately keen to make a comeback. Well, not desperately – it’s a well-run company that insists on making money out of concessions – but you get the point. The company’s recent success in the MTR duty free bid augurs well and you can expect a highly focused, innovative, ambitious but not excessive pitch for the liquor & tobacco contract.
China Duty Free Group & Lagardère Travel Retail: What a blockbuster this combination, revealed on the day the tender closed by The Moodie Davitt Report, represents.
Deeply ambitious, and now part of the new Chinese tourism ‘super force’ created by China International Travel Service’s merger into China National Travel Service (HK), state-owned China Duty Free Group (CDFG) has made no secret of its desire to grow internationally. It’s off to a strong start in Cambodia (where it now has operations in Phnom Penh, Siem Reap and Sihanoukville) but its ambitions extend way beyond that. To use retail terminology, Hong Kong is a natural ‘adjacency’ to the Chinese Mainland operations; and CDFG’s powerful and complementary partnership with French partner Lagardère Travel Retail is a formidable one in anyone’s book.
CDFG’s stunning success at its Haitang Bay off-airport store on Hainan Island, as well as its expanding Mainland airport portfolio, has underlined its credentials for running such a blue-chip business as HKIA. Funding will not be a problem, especially given the Sino–French JV now in place.
For its part Lagardère Travel Retail sees Asia as pivotal to growth, and a blue-chip airport concession such as HKIA would provide a massive fillip. In 2011/12 it bid on perfumes & cosmetics and airside general merchandise; this time around it and CDFG are in for both contracts on offer. And they’re serious about both. International acumen, regional knowledge, combined strength: this is a force to be reckoned with alright.
King Power Group (HK): Managing Director and lead shareholder Antares Cheng has history here. He was part of the former Kiu Fat Investment Corp’s famous, albeit short-lived, contract victory over incumbent DFS at Hong Kong’s old Kai Tak Airport in 1987, the start of a commercial war that is enshrined in industry legend. King Power (no relationship to the Thai company of the same name) still operates half of the duty free business at Macau International Airport, as well as having a strong (and growing) presence at Shanghai Pudong, and it would dearly love to complete a Chinese trio – and a Hong Kong Airport comeback – here. Hong Kong-based Cheng is highly capable, ambitious and well funded. Expect a big play for both concessions.
Sunrise Duty Free: The privately held Mainland China retailer may be the most low-profile retailer in the industry but it is not shy in terms of growth ambitions. After all, this is the company that could have (and, some say due to its superior financial bid, should have) acquired World Duty Free ahead of eventual winner Dufry.
The retailer (partly held by Hong Kong-based Boyu Capital and ably led by Madam Fengyi Zhang) wants to diversify its portfolio outside of its Shanghai Pudong, Shanghai Hongqiao and Beijing Capital International airport operations, and no international gateway would appear better suited to it than HKIA. Last time around the company bid in vain for all three core category concessions. Five years on it is stronger, more experienced – and even hungrier.
Just as critically, through its Boyu shareholder base, it ticks just about all the social and digital media boxes that AAHK now deems vital to the future success of the airport retail business.
Recently, for example, Sunrise entered into a long-term alliance with Chinese Internet services company Tencent to accelerates its already rapid development as an online to offline (O2O) shopping provider. Besides its Sunrise investment Boyu has holdings in a glittering portfolio of companies in the Consumer and Retail, Financial Services, Healthcare, and Media and Technology worlds – including, get this, Chinese e-commerce giant Alibaba; China’s largest private express delivery player, SF Express; and the country’s leading online travel agency, 17u.cn. Boyu has also developed a close partnership with powerful travel booking provider Ctrip.com, listed in Nasdaq and with more than 250 million active members in Asia.
If it can channel those relationships – and its bid will certainly major on that prospect – Sunrise shapes as an entirely credible candidate to extend its impressive growth story. Expect a very strong proposal on beauty and accessories.
DFS Group: The incumbent must always be respected, in terms of insight, knowledge and experience. And when it’s such a class act as DFS, you had better throw in quality as well. There’s no doubting the importance that the retailer places on HKIA, one of the two spiritual homes (along with Honolulu International Airport) of DFS Co-Founder Bob Miller; and despite the battering the retailer has taken in recent years here, it is back pitching for the key beauty business, albeit no doubt seeking improved terms.
The big question is, how prudent can DFS afford to be without losing out to those who may have other motivations to bid much higher, even excessively? That whole weighing up of quality vs financials is set to play a vital role in the ultimate assessment.
Lotte Duty Free: If you were a fiction writer telling the story of Korean duty free over the past two years, critics would dismiss the plot as implausible. And Lotte is the central character in all the drama.
It first lost, then won back, its trading licence for the magnificent new Lotte World Tower Duty Free store and now faces the prospect of painful five-yearly (not ten as hoped) licence renewal bids for all its downtown businesses. Throw in a potential dilution of its Incheon International business if Korea Customs Service has its anti-chaebol way and you have the perfect incentive for a company to expand internationally. Fast.
Because of its heavy concentration of Chinese passengers, few airports would attract the Korean giant more than HKIA. For such a brilliant domestic operator with a frankly superb command of social and digital marketing to not have a bigger international presence is a real blot on the corporate portfolio.
Can it change things here? Lotte’s challenge, we suspect, is more cultural than commercial – it has to convince international airports that it can do the same job abroad as it does at home. What better place to start than HKIA? Then the domino theory might apply. Expect, therefore, a hugely robust bid for both contracts.
The Shilla Duty Free: The long-time perception that a Korean travel retailer couldn’t win a major airport duty free contract abroad was laid to rest by Shilla’s January 2014 triumph in the Singapore Changi perfumes & cosmetics tender (followed by a joint-venture victory with Sky Connection at Macau International Airport).
Life there has hardly been plain sailing since, following a difficult start-up and a series of big quarterly losses for its international businesses – overseas duty free sales increased by +9.9% year-on-year in Q4 2016 to KRW133 billion (US$114.4 million) but losses reached KRW8 billion (US$6.9 million).
But don’t be misled by those figures. Shilla knew what it was getting into at Changi, which it viewed as a foreign laboratory. The learnings were expensive – but crucial. Like its great rival Lotte, Samsung affiliate Shilla faces mounting and often absurd regulatory and political pressure at home. As the engine room of publicly listed Hotel Shilla, it simply must produce a growth story. In the face of ever-proliferating Korean market competition, escalating tour commission costs and regulatory chaos, it has no choice but to look abroad. Tenders and M&A. The former starts here with P&C and accessories.
Dufry: Last July we asked whether the industry’s equivalent of a Sumo wrestler would throw its considerable weight at the kind of tender that CEO Julián Díaz historically abhors. “Too much competition, too much likelihood of a ‘strategic overbid’, and too much risk to travel retail’s most robust P&L. And yet, and yet…” we wrote.
With the highly capable Andrea Belardini now in situ in Hong Kong as Divisional CEO for the key regions of Asia, Middle East and Australia, it was always likely that Dufry would come to the table. Remember that The Nuance Group, which it acquired in 2014, ran the beauty and general merchandise concessions here very successfully for years. Given the super-sized retailer’s disproportionately small presence in Asia we expect a positive play here, probably focused on beauty & accessories only.
Gebr Heinemann: The family-owned German company is another to have identified Asia Pacific as a key growth target. Last July we doubted that it would bid on Hong Kong given the difficult trading conditions and the stresses of the retailer’s deeply ambitious start-up at Sydney Airport. However the latter, buoyed by a hugely favourable swing in the value of the Aussie Dollar, has got off to a flying start – way beyond just about anybody’s projections. That, along with a desire to build on a small but promising Asian base, has prompted a serious review of this opportunity. And Heinemann does nothing in a half-hearted manner.
