Remember the big food fight at Los Angeles International Airport a few years ago? The one that pitted local celebrity chefs against each other over who would get to broil burgers for travelers?
Get ready for another. Except this time, instead of a fight over restaurant and retail concessions, it’s a battle for the privilege to sell billions of dollars worth of duty-free booze, tobacco and clothes to free-spending foreign travelers over the next 10 years.
Most of the biggest duty-free retailers in the world are vying for that concession, which airport commissioners are expected to decide this summer. The retailers have hired well-connected lobbyists, inked cross-promotion deals with L.A. companies and secured the backing of big local names – all in a move to sway airport staff and commissioners, and City Council members, who must sign off on the eventual winner.
“I’m sure all of us will be able to build a case for why we should be the winners,” said one bidder’s lobbyist, who spoke on the condition of anonymity. “You’re going to see some people who aren’t happy. Especially once it gets into council hands, anything could happen.”
DFS, a unit of Paris fashion and spirits company LVMH Moët Hennessy Louis Vuitton S.A. and the world’s largest duty-free retailer, has run the duty-free shops at LAX for 30 years and wants to continue. But DFS faces more competition for renewing its concession than in decades past. Seven other bidders are in the mix, including two rival South Korean family-owned conglomerates, or chaebols: One has aligned itself with retail developer and potential mayoral candidate Rick Caruso and the other with Hollywood investor Stephen Bing. For its part, DFS recently announced a partnership with downtown L.A. entertainment powerhouse AEG Inc.
Why all the interest? International travel has grown sharply, pumping more customers and money into duty-free shops. The ongoing terminal improvements and construction at LAX, which will boost the duty-free shopping space by nearly 50 percent, makes the airport a particularly hot property. Duty-free sales at LAX were $118 million last year and could grow to upwards of $200 million annually over the 10-year concession deal.
What’s more, LAX is a key gateway for travelers from China and other Asian countries who spend more at duty-free shops than the average traveler. That makes the airport a coveted spot for duty-free retailers, said Martin Moodie, founder and chairman of London’s Moodie Report, a travel-retail trade publication.
“Japanese historically, Koreans and increasingly Chinese are disproportionately important to duty-free retailers because of their much higher spend per passenger than, say, Western Europeans or Americans,” Moodie said.
Big players
Duty-free shops specialize in selling items targeted by special excise taxes, such as alcohol and tobacco, and expensive merchandise such as designer clothes and cosmetics. By purchasing at a duty-free shop, travelers bound for destinations outside of the United States don’t pay domestic excise and sales taxes, and in most cases avoid import duties in their home countries.
But it’s a complicated business that requires relationships with luxury brands; knowledge of duties and import rules around the world; and the ability to work with a diverse, multilingual customer base. Also relevant is the status of LAX as the sixth busiest airport in the world by passenger volume and the top U.S. entry point for Asian travelers.
“Overall, it’s not an easy business,” Moodie said. “A bid as important as LAX will inevitably be dominated by the big boys.”
Officials at Los Angeles World Airports, the city agency that operates LAX, will only confirm that eight companies are bidding on the concession; they will not release the bidders’ names until bids have been reviewed and scored by agency staff.
However, it’s not hard to determine the companies. Eight duty-free operators have hired lobbying firms in Los Angeles, with all but one among the Moodie Report’s top 10 worldwide duty-free retailers.
They’re hoping to operate about 38,000 square feet of retail space in 11 locations across all nine LAX terminals. The new Tom Bradley International Terminal, set to open early next year, will have about 25,000 of those square feet, including a 14,000-square-foot main store, a smaller shop and several kiosks.
The other eight terminals, some of which do not serve international passengers but might over the 10-year concession period, have duty-free retail spaces ranging from 900 to 4,800 square feet. In terminals that don’t currently offer international flights, the shops will sell to domestic passengers who will have to pay all applicable taxes and duties.
Most of the companies spoke to the Business Journal and said their bids, submitted to LAWA in February, aim to show clear distinctions between themselves and their competitors. Companies claim they have the best track record of improving sales, can better tailor their operations to serve LAX’s travelers or will simply make more money for the airport, which gets a set percentage of revenue from the sale of different items.
LAX will get 35 percent of gross revenue from the sale of tobacco and alcohol, 25 percent on sales of electronics and clothes, and 30 percent on sales of all other goods. Last year, the airport brought in $35.3 million from duty-free sales.
Jack Driscoll, a former LAWA executive director now working for bidder Gebr. Heinemann SE & Co. KG, said the Hamburg, Germany, firm has the benefit of being family owned and focused solely on duty-free retailing, unlike DFS and other competitors.
“They’re not owned by an investment bank or a large corporation,” Driscoll said. “I think that’s a big difference in terms of how they approach the marketplace. They don’t make automobiles, they don’t make televisions. They’re duty free. Period.”
Padraig Drennen, North America director for World Duty Free Group, said his company plans to drive sales by providing in-terminal entertainment, including fashion shows and musical performances.
“Happy, engaged passengers at airports are big spenders,” Drennen said.
Different strokes
Several bidders also have announced partnerships with local companies and non-profits aimed at boosting their local marketing presence – and, as important, their local political muscle.
DFS in April announced a cross-marketing deal with AEG, the company that owns and operates Staples Center and L.A. Live. DFS officials said specifics of the deal are still being worked out, but it would generally involve promoting AEG properties at DFS locations and vice versa. It also amounted to an endorsement from AEG, a subsidiary of Denver’s Anschutz Co.
“DFS’s thorough knowledge of the behavior and practices of international travelers makes them the perfect partner for AEG as we look to attract more international visitors to Los Angeles,” said Tim Leiweke, AEG’s chief executive, in an April press release. AEG officials did not return calls for comment.
Caruso’s L.A.-based Caruso Affiliated last month announced a similar cross-promotion deal with a joint bid from Shilla Duty Free, part of Seoul, South Korea’s Samsung Group conglomerate, and Aer Rianta International, owned by Ireland’s Dublin Airport Authority.
Caruso, who years ago considered making a bid for the restaurant, retail and duty-free concessions at LAX, said he is supporting Shilla because it will help drive Asian tourists to Los Angeles – and to his mall properties in Los Angeles and Glendale.
“I have a vested interest, like every business in L.A., to promote tourism in Asia. I think they will do that the best,” he said. “They’re tapped into the Asian market like no duty-free operator is.”
Another Korean firm, Lotte Duty Free, part of Seoul retail and hospitality conglomerate Lotte Co. Ltd., has bid on the concession in a joint venture with Gardena exporter U.S. Foods International Inc., which has a U.S. military contract to provide food to American troops in Korea.
Lotte officials also said they plan to have Stephen Bing’s Shangri-La Entertainment LLC bring in Hollywood celebrities to advertise duty free shops.
Other concession hopefuls have promised to move their U.S. operations to Los Angeles, to partner with local non-profit agencies and to sell locally made or designed goods. At least half of the bidders, anxious to avoid labor problems, have reached out to hospitality workers union Unite Here Local 11, which represents current duty-free shop workers and other employees of airport concessionaires.
Competition
All those local arrangements and relationships could turn this bidding process into the same kind of political circus seen at LAX in 2010, when the airport called for a do-over of bids on restaurant and retail concessions for terminals 4, 5, 7 and 8.
After one bidder came in first, rivals protested and claimed conflict of interest. The concession contracts were awarded a year late, after airport board Chairman Alan Rothenberg resigned due to a conflict of interest with a bidder. Winning bidders were ultimately chosen by a special committee of the City Council, not by the Board of Airport Commissioners.
A consultant for one of the duty-free bidders said this selection process could be just as fraught.
“It’s going to be at least as competitive as 4, 5, 7 and 8,” said the consultant, who spoke on the condition of anonymity. “I expect there to be at least one if not more protests.”
Pauline Armbrust, founder and president of trade publication Airport Revenue News in Palm Beach Gardens, Fla., said such protests aren’t the norm, but they are more common when big contracts are on the line.
The process is expected to heat up after LAWA staff makes a recommendation to the Board of Airport Commissioners. Companies not recommended by staff will have a chance to protest the scoring and selection process. Any protests would be reviewed by City Attorney Carmen Trutanich, which could slow down the approval process. The LAWA board will vote on a recommendation, which must be approved by the City Council.
Bidders and their lobbyists are so far avoiding any attacks against competitors or the bidding process.
“I think the airport is going to make this decision, and I think they’ll make the decision internally based on the company’s experience and skill,” said Gebr. Heinemann’s Driscoll.
Denise Sample, managing director of LAWA’s commercial development group, said she does not know when staff will recommend a bidder to the LAWA board.
Still, she said airport officials want new duty-free offerings ready when the new Bradley West terminal opens early next year. The concession contract is set to take effect Jan. 1.
Bidders said they are hoping for a staff recommendation perhaps by the end of this month. Any later, and it might be difficult to get stores up and running in time for the opening, said Chris Lee, senior vice president of U.S. Foods.
“They have to get it done soon,” Lee said. “Otherwise it will be a mess.”
