DFS Group awarded 10-year contract for duty free concessions at Los Angeles International Airport
06-Aug-2012 Los Angeles Board of Airport Commissioners today approved a Duty Free Merchandise Concession Agreement with DFS Group L.P. to develop and operate duty-free and duty-paid merchandise concessions in all passenger terminals at Los Angeles International Airport (LAX) for a period of 10 years with three additional one-year options. The agreement is forecast to produce revenue to Los Angeles World Airports (LAWA) of over $100 million for the first fully developed year, and an average of over $150 million annually over the initial 10-year term. DFS will be required to invest no less than $25 million in initial improvements and $17 million in mid-term refurbishment improvements.
Under the terms of the Duty Free Merchandise Concession Agreement, DFS will be required to design, construct and operate all the duty-free merchandise concessions throughout LAX, including a total of 13 stores consisting of approximately 37,600 square feet. Notably within that square footage, the New Tom Bradley International Terminal (New TBIT) currently under construction is expected to have a single 14,000-square-foot store and a 9,900-square-foot multi-unit in the core (or great hall) area of the terminal. Terminal 2, the next busiest international terminal at LAX, will have an area totaling approximately 4,800 square feet. Terminals 3, 4, 5, 6 and 7 will each have one duty free shop with an average 1,160 square feet. DFS also will have shops in Terminals 1 and 8 under the agreement, but these shops will begin operations as duty-paid retail stores until airlines schedule international departing flights from these terminals. DFS also will have approximately 7,900 square feet of storage space in the ramp level of TBIT.
The agreement calls for DFS to market and sell traditional duty-free merchandise, such as spirits and wine, fragrances, cosmetics, and tobacco products. In addition, DFS will have electronics and fashion-branded boutiques, as well as high-end, specialty duty-free stores offering international brand-name merchandise.
Revenue to Los Angeles World Airports will be the greater of a Minimum Annual Guarantee (MAG) or a Performance Rent, which is comprised of a Percentage Rent and a Contingent Rent. For each year under the agreement, the MAG will be the greatest of the following: (1) $30 million per year in each of the first two years and, thereafter, $33 million increasing by an annual consumer price index (CPI) adjustment; (2) 90 percent of the prior year's rent payments to LAWA, unless, beginning in the third year, international enplaned passengers at LAX decrease by more than 20 percent from the prior year; or (3) $6.25 per enplaned international passenger beginning in the third year and, thereafter, increased by an annual CPI adjustment. Under the Performance Rent methodology, a Percentage Rent, based upon the aggregate sum of the total gross sales in each of five product categories multiplied by each product category's percentage rate, is added to a Contingent Rent, which is equal to 10 percent of the gross sales exceeding $175 million in any given year.
Eight proposals were received and evaluated by a panel of five LAWA executives on criteria that included: qualifications and experience; financial capability; marketing and merchandising plan; improvements and investment plan; management and operations plan; financial return to LAWA based on a proposed guarantee, a 10-year pro forma including proposed Percentage Rent on duty paid, and Contingent Rent.
The Board-approved agreement is subject to approval by the Los Angeles City Council.