GENEVA -- Dufry, the world's largest duty-free store operator, is set to grow its business in Asia, after winning a five-year contract to run stores in a new station in Hong Kong that is part of a controversial new high-speed railway connection with mainland China.
Under the contract announced on March 26, Dufry will operate duty-frees shops with total floor space of 1,500 sq. meters on both the departure and arrival sides of the West Kowloon terminal for the Guangzhou-Shenzhen-Hong Kong Express Rail Link, scheduled to be fully operational by the end of this year according a plan by the local government.
The Swiss company pursued the deal on the expectation that demand for duty-free retail services will grow among Asian travelers, especially the Chinese. In addition to airports, Dufry aims to open outlets in train stations, on cruise ships and in other locations in Asia frequented by travelers.
The new stores at the Hong Kong train station represent "another important milestone" in the company's drive to expand in Asia, and "a great opportunity to showcase Dufry's capabilities in the highly competitive market of Hong Kong," said Andrea Belardini, head of Dufry's operations in Asia, the Middle East, Australia and Eastern Europe, in a statement. The stores will sell beauty products, liquor, tobacco, confectionery and fashion accessories, among other things.
Dufry operates more than 2,200 shops in 64 countries and regions under the brands World Duty Free, Hudson and others. It is the world's largest operator of duty-free shops in terms of sales, followed by Lotte of South Korea and DFS of Hong Kong, according to the Moodie Davitt Report, a U.K. journal on the duty-free and travel retail industries.
The new West Kowloon station is part of a 140km express rail link operating between Guangzhou in the south of mainland China and Shenzhen, which is adjacent to Hong Kong. Construction on the Hong Kong side is more than 90% complete. The new railway link is supposed to cut travel time between Hong Kong and Guangzhou roughly in half, to about 50 minutes, bringing an expected rise in tourist and business traffic, though neither of its terminals are located in the central business or commercial districts of the cities.
However, the high-speed railway plan faces staunch opposition from pro-democracy groups, legal bodies and concerned citizens in Hong Kong, as the proposed arrangement will effectively allow mainland authorities to exercise immigration procedures in accordance with mainland laws on Hong Kong soil. The Basic Law, or the mini-constitution of the territory, which was enacted under the principle of "one country, two systems" upon the handover of sovereignty to China from the U.K. in 1997, prohibits the application of mainland laws in Hong Kong, with a few exceptions.
The bill to enable the operation of the new railway link has come under scrutiny in the local legislature, with the Hong Kong Bar Association issuing its latest opposition to it on March 29. In a statement, the association said, "there is nothing in the arguments of the [Hong Kong] government that could provide even an arguable constitutional and legal basis for the bill. The arguments are both wholly unconvincing and unsatisfactory."
Apart from the controversy over the rail link, the business environment for duty-free stores is likely to remain healthy for the time being in light of strong global demand for travel.
Dufry's earnings have been growing steadily. In mid-March, it posted 8.4 billion Swiss francs ($8.73 billion) in sales for 2017, up 7% from the previous year, and an 8% rise in earnings before interest, taxes, depreciation and amortization to 1 billion Swiss francs.
In the business year ended in December, sales from Asia, the Middle East and Australia accounted for 10% of Dufry's total sales. The company divides the global market into five areas, with the one that includes Asia the smallest, suggesting potential for an increased presence in the region.
As more than 90% of Dufry's sales come from stores at airports, the company is opening more outlets beyond airports due to a diversification in how people travel, and the increased risk of airport closures from terror attacks and natural disasters.
In September 2017, Dufry announced it would jointly operate a duty-free store in a shopping mall in the Malaysian capital of Kuala Lumpur with a local company, selling products including watches and cosmetics to foreign tourists.
Cruise ships are also attractive duty-free markets, as passengers are often wealthy, and middle-aged or older. The company now operates duty-free shops on 17 cruise ships, including the Norwegian Joy, a large vessel that caters primarily to Chinese tourists. Julian Diaz Gonzalez, chief executive of Dufry, said in a statement in the company's annual report on March 15 that this new arrangement was among "the most relevant ones [in the] expansion of our cruise ship business," as the ship had been "built exclusively for the Chinese market and [was] mainly sailing the Asian seas."
According to industry trade body Cruise Lines International Association, the number of cruise ship passengers has increased steadily in recent years to an estimated 25.8 million in 2017, up 4% from the previous year.
Dufry has built its strong market position through an aggressive strategy of mergers and acquisitions. Describing its future strategy in the annual report, the company said it expected "to capitalize through M&A on such small and mid-sized opportunities that may arise in the future, with a focus on Asia and the Middle East". The management recognized that the travel retail industry remained relatively fragmented, with the top 10 players controlling just over half of the market despite consolidation in recent years.
The challenges facing the industry include the growth of online shopping, and travelers spending less time at airports as check-in and other procedures become streamlined. Duty-free stores may need to respond by expanding their product offerings and incorporating information technology.
Nikkei Asian Review Chief Business News Correspondent Kenji Kawase in Tokyo contributed to this story.