Bidders weigh terms as booming Chinese spend underlines US$500m allure of Hong Kong tenders

HONG KONG. Supporting information for the core category travel retail tenders at Hong Kong International Airport underlines the extraordinary impact on sales of the Mainland Chinese travel boom in recent years.

Potential bidders are now evaluating the opportunities closely after Airport Authority Hong Kong issued the long-awaited documents last week.

As reported, three contracts are up for grabs: liquor & tobacco (currently held by Sky Connection), perfumes & cosmetics and airside general merchandise (both run by Nuance-Watson HK). As reported, all three concessions will begin in November/December 2012 and run for five years, with an optional three-year extension.

Several retailers have now confirmed their certain participation in one of more of the bids to The Moodie Report. They report that last year’s annual sales in each of the three categories were as follows:

Liquor & Tobacco: HK$1,553 million (US$200 million)
Perfumes & Cosmetics: HK$1,320 million (US$170 million)
Airside General Merchandise: HK$843 million (US$108 million)

That represents a collective US$478 million business and one set to rise sharply amid the continued surge in Mainland Chinese travel and spending.

From 2005 to 2010, sales of liquor & tobacco (collectively) rose by +88% while perfumes & cosmetics were up by nearly +105% over the same period. Airside general merchandise rose +44%. Those figures are far in excess of passenger growth over the period of +25%.

While the revenue opportunity is huge, so the cost of entry will be demanding. Bidders for liquor & tobacco must offer a minimum provisional MGR per month of HK$63 million (about US$8.1 million) and the following minimum percentages of annual gross revenue: liquor 46%, cigarettes 46%, wine & beer 34% and cigars and pipe tobacco 50%.

In perfumes & cosmetics the minimum provisional MGR per month is HK$44.4 million (about US$5.7 million) plus a minimum 35% of gross revenue.

For the diverse airside general merchandise concession, bidders must offer a minimum provisional MGR per month of HK$22.5 million (about US$2.9 million) and a minimum 35% of gross revenue.

Bids for all three categories close on 28 October, with awards expected in the first quarter of 2012. The new or incumbent retailers will begin the various contracts on a series of phased dates beginning in August 2012.

As reported, the biggest field in industry history is set to contest the tender, The Moodie Report believes. The incumbents Sky Connection and Nuance-Watson (HK) are set to fight hard to retain their contracts but will face intense competition. The major Mainland China-based travel retail companies, China Duty Free Group and Sunrise are likely to bid, while Hong Kong-based DFS and King Power Group (HK) will also be to the fore.

Korea’s powerful duo, Lotte Duty Free and The Shilla Duty Free, have confirmed to The Moodie Report that they are studying the opportunity, while many of the top international companies – including Autogrill, Lagardère Services Travel Retail, Gebr Heinemann, Dufry (subject to strict evaluation of the tender structure) and Duty Free Americas – are all evaluating the opportunities.

Look out for this week’s edition of The Moodie Report e-Zine, in which we consider the financial expectations of Airport Authority Hong Kong and the cost of entry.