China Tourism Group Duty Free to acquire DFS’s Greater China operations : Moodie Davitt Report

Snapshot

• China Tourism Group Duty Free (CTG Duty-Free) to acquire DFS’s stores in Hong Kong and Macau and intangible assets in Greater China
• CTG Duty-Free and LVMH to develop further collaborations
• LVMH and the Miller Family to subscribe to CTG Duty-Free’s H-shares

CHINA. In big breaking news, China Tourism Group Duty Free (CTG Duty-Free) is to acquire DFS’s travel retail businesses in Hong Kong and Macau and intangible assets in Greater China.

The definitive sale and purchase agreement was jointly announced today (19 January) by DFS – the luxury travel retailer owned by LVMH and DFS Co-Founder Robert Miller – and Beijing-based CTG Duty-Free.

Through this transaction, CTG Duty-Free will acquire the DFS retail stores in Hong Kong and Macau (except City of Dreams) as well as intangible assets encompassing a series of DFS brands and intellectual properties for exclusive use in Greater China.

CTG Duty-Free will conduct the acquisition through its wholly owned subsidiary, China Duty Free International Limited. The proceeds of the deal will be paid in cash. Following this transaction, DFS will continue to operate its other luxury travel retail operations worldwide.

In a complementary move, LVMH and the Miller Family will participate in a capital increase of CTG Duty-Free by subscribing to newly issued H-shares listed in Hong Kong. The subscription amounts represent only a small portion of the sale proceeds, and the subscription will be made upon completion of the transaction.

The transaction alters the global travel retail landscape and emphatically consolidates CTG Duty-Free’s dominance in Greater China 

CTG Duty-Free and LVMH also entered into a Memorandum of Understanding under which both parties aim to set up a strategic cooperation, notably in the retail sector where the strategies of both parties are aligned and in line with the current business model of the LVMH Maisons.

This cooperation will offer CTG Duty-Free and LVMH opportunities to leverage their respective strengths and forge further collaborations in Greater China to achieve mutual benefits – for example in product sales, store establishment, brand promotion, cultural communication, travel services or customer experience.

CTG Duty-Free Executive Director and President Luke Chang commented, “This move will further expand CTG Duty-Free’s service network across the Greater Bay Area, aiming to build a platform for promoting Chinese domestic brands globally and establish an international business mid-platform.

“CTG Duty-Free remains committed to providing high-quality travel retail experiences to both domestic and international tourists, fulfilling its responsibility as a central state-owned enterprise-controlled listed company to support the high-quality development of the retail economy in Hong Kong and Macau.

“Executed under the leadership of its parent company, China Tourism Group, this represents a significant step in accelerating CTG Duty-Free’s international business layout and actively implementing the Greater Bay Area Strategy and the ‘Chinese Brands Going Global’ strategy.”

DFS Chairman and CEO Ed Brennan commented, “The sale of our Hong Kong and Macau stores marks an important step for DFS. DFS’s well-established presence and operational excellence in Hong Kong and Macau is an achievement we take great pride in.

“The DFS shopping experience will be carried forward and enhanced by the new skills and perspectives that CTG Duty-Free will bring. We are proud of our journey in this region and grateful to everyone who has been a part of it.”

LVMH President North Asia Michael Schriver commented, “For decades, DFS has played a pivotal role in shaping Hong Kong and Macau into premier destinations for travel retail.

“As we look to the future, we consider China Tourism Group Duty Free to be the ideal partner to operate the DFS business in Hong Kong and Macau and to lead it into its next chapter, thanks to their expertise and proven track record in travel retail. This whole operation underscores our confidence in the long-term potential of the Chinese market.”

The completion of this transaction remains subject to customary closing conditions and is expected to close in around two months.

China Galaxy International acts as the sole financial advisor to CTG Duty-Free for this transaction; King & Wood Mallesons acts as the legal advisor to CTG Duty-Free; and Freshfields acts as the legal advisor to DFS and LVMH.

Comment: This is a story of truly game-changing importance. For both buyer and seller, of course, and for what it means for their respective futures; but also for the seismic change it spells for the global travel retail landscape.

For DFS, it augurs the end of its long-time Hong Kong and Macau empire, collectively one of the greatest – and boldest – stories in the history of retailing worldwide.

For China Duty Free Group parent China Tourism Group Duty Free, it is transformational, building on the state-controlled, publicly listed retailers’ domination of (an encouragingly resurgent) Hainan offshore duty-free, myriad Mainland China operations, and strong presence both on- and off-airport in Hong Kong and Macau.

BACKGROUND TO THE CREATION OF A RETAIL EMPIRE

The DFS story in the dual Special Administrative Regions is one of two ‘waves’, to use the term favoured by company Co-Founder, the visionary Robert Miller (still going strong at 92) – one Japanese, one Chinese.

The former began in Hong Kong in 1961 with the opening of a small store at the old Kai Tak Airport.

What was initially a small but steady business was transformed into the retail equivalent of a gold mine from 1 April 1964 when the Japanese government – in anticipation of the Tokyo Olympics that October – removed the shackles on outbound travel that had been imposed since the end of World War II.

With its geographic proximity, the Japanese were lured to Hong Kong’s myriad attractions. Among the greatest of which was shopping at DFS, whose duty-free prices represented astonishing value compared with the heavily protected Japanese domestic market.

Miller’s Tale, Martin Moodie’s biography of Robert (Bob) Miller, the Co-Founder and still to this day prominent shareholder of DFS, chronicles the entrepreneur’s far-sighted vision to invest in the China traveller market

First at the airport and soon after with the first of what would become several downtown shops, DFS built – and fiercely defended – one of its two initial strongholds (the other one being  Hawaii). No-one for years could live with DFS’s power, standards or allure to the Japanese. And those that tried were quickly crushed.

At one point in the late 1980s around 65-68% of travelling Japanese shopped in DFS stores. The company was a significant contributor to Japan’s US$10 billion tourism deficit.

On these two lynchpins the extraordinary DFS empire was built. But as the Japanese domestic liquor market began to open up from the late 1980s – initially through parallel import-sourced discount stores, the value proposition began to erode.

In 1996, Miller’s Co-Founder Charles (Chuck) Feeney, joined by minority shareholders Alan Parker and Tony Pilaro, sold to LVMH. Miller, after a bitter fight to keep the company independent, eventually stayed in. A combination of factors, including the declining Japanese appetite for duty-free shopping, the catastrophic Asian economic crisis of 1997, and the miserable post-9/11 slump of 2001-2002, sent the DFS business into a tailspin.

LVMH supremo Bernard Arnault’s decision to invest in the business was constantly questioned in the investment community while Miller himself was at one point plagued with self-doubt about his decision to retain his interest in the company he loved.

And then, in the early part of this century, the second wave. Miller started to note heavy spending by Chinese businessmen in DFS locations as far away as New Zealand.

As Chinese outbound travellers began to swell in numbers, so did their spending on duty free. In a mirroring of the Japanese dynamic that had served DFS so well, the price saving duty free offered over the punitively taxed Chinese local market meant that DFS stores – emblazoned with the famous ‘meatball’ logo – acted like a magnet for Chinese shoppers.

Sensing the need to be closer to the action, DFS boldly moved its executive office from San Francisco to Hong Kong in January 2004, a move proposed by Chairman and CEO Ed Brennan and ardently championed by Miller.

As with the Japanese, DFS quickly developed an acute understanding of the needs and desires of Chinese consumers. One of them wasn’t about shopping, it was gaming. And gaming meant Macau.

DFS duly concluded an agreement in March 2006 with Las Vegas Sands Corp. to open a Galleria in the mall at Four Seasons Hotel Macau.

Over the following years Macau would grow into an estimated US$2 billion-plus business at its peak, prompting DFS to open in  multiple locations, proffering a combination of luxury brands, impeccable service, high-class store environments and elegant best-in-class merchandising. These were the glory years for DFS – and vindication of Miller’s mid-90’s desire to stay involved.

The story ran and ran until January 2020 when reports emerged from Wuhan in Mainland China of a mysterious viral pneumonia. It would soon have a name, COVID-19, and although the post-pandemic bounceback in Macau came both early and strong, subsequent years have been harder thanks to the well-documented softening in Chinese spending.

Nonetheless, China Tourism Group Duty Free is buying a formidable business, including some of the best travel retail real estate on the planet and which fits superbly with the group’s ambitions, consumer focus and geographic strength.

The Chinese powerhouse will be rightly delighted while LVMH and Miller believe the timing of their exit is right, and in line with the prolonged rationalisation of the business over the past year. Robert (Bob) Miller will no doubt be saying tonight, “It was a hell of a ride.”