‘Too close to call’: Lotte and DFS head super six line-up for Changi liquor & tobacco bid – 14/02/07

SINGAPORE. Six of the industry’s leading players have offered bids for the blockbuster Singapore liquor & tobacco tender at Changi Airport, covering all terminals including the new Terminal Three to open early next year.

The incumbent, DFS Venture Singapore (DFS Group), has been joined by Hotel Lotte of South Korea, Nuance-Watson (Singapore), Aelia, Aldeasa and Sky Connection in contesting the blue-ribbon concession.

It’s a red-hot line-up for one of the liquor & tobacco sector’s most valuable opportunities. DFS Group’s liquor & tobacco sales at Changi Airport in 2006 reached S$252,100,000 (US$163,860,906.83 at current exchange rates), according to the Civil Aviation Authority of Singapore (CAAS) – see full sales chart below.

The highest bids in minimum monthly guarantee terms (MMG) have come from Lotte and DFS in that order. Both have topped the offers of Sky Connection, Nuance-Watson (Singapore), Aelia and Aldeasa. Nuance-Watson (Singapore), which holds the perfumes & cosmetics contract that is about to be tendered, offered a creative formula involving not only the MMG but an ‘incentive rent’ (see below).

Unusually, the CAAS has asked the three top bidders to provide further individual presentations. These will take place on 1 March.

It looks like a very tight contest. CAAS is traditionally attracted by the highest bid, but there have been notable exceptions. On a straight MMG basis, Lotte tops DFS in years one and two of the contract but DFS comes in marginally higher in year three. But DFS also adds a ‘bonus incentive’ to the CAAS if it can grow sales above certain stated thresholds. In year one, for example, CAAS would receive a further S$500,000 if the retailer can top S$320 million in total sales – admittedly a tough exercise in the current security-ridden climate and with so many terminal changes occuring.

Lotte’s aggressive bid comes as no surprise. The South Korean giant is determined to expand internationally and was a credible contender in last year’s big Sydney Airport duty free tender. It signalled its intentions loud and clear this time around when it hired experienced international retailers Adrian Murray, Steve Franklin and ex-Diageo executive David Marr as consultants for the bid (and the fragrances and cosmetics tender to follow).

But the CAAS knows the capabilities of the incumbent well and continuation of tenure will hold appeal, especially given the disruptive effect of the T3 opening and refurbishment elsewhere. DFS Group’s proven expertise in liquor & tobacco will also be a strong factor. Given how close the MMGs are, at this stage it is too close to call.

Here are full details of the six bids.

Aldeasa: An additional rental of either: (a) (i)40% of the total monthly gross sales for liquor (excluding wines/champagnes); (ii)20% of the total monthly gross sales for wines/champagnes; and (iii)25% of the total monthly gross sales for cigarettes/tobacco; OR (b) a minimum monthly guarantee of SGD5,186,361; whichever is the higher of (a) or whichever is the higher of (a) or (b)

Aelia: An additional rental of either: (a) (i)40% of the total monthly gross sales for liquor(excluding wines/champagnes); (ii)20% of the total monthly gross sales for wines/champagnes;and (iii)25% of the total monthly gross sales for cigarettes/tobacco; OR (b)a minimum monthly guarantee of SGD8,100,000; whichever is the higher of (a) or (b).

DFS Venture Singapore: An additional rental of either: (a)(i)40% of the total monthly gross sales for liquor (excluding wines/champagnes); (ii)20% of the total monthly gross sales for wines/champagnes; and (iii)25% of the total monthly gross sales for cigarettes/tobacco;OR (b) a minimum monthly guarantee of: (i) SGD10,166,667 for Year 1; (ii) SGD10,333,333 for Year 2; and (iii) SGD10,500,000 for Year 3; whichever is the higher of (a) or (b). PLUS Bonus incentive for increased sales: (i) An additional rental of SGD500,000 if annual sales exceeds SGD320,000,000 for Year 1; (ii) An additional rental of SGD750,000 if annual sales exceeds SGD355,000,000 for Year 2; and (iii) An additional rental of SGD1,000,000 if annual sales exceeds SGD385,000,000 for Year 3.

Hotel Lotte Co: An additional rental of either: (a) (i)40% of the total monthly gross sales for liquor (excluding wines/champagnes); (ii)20% of the total monthly gross sales for wines/champagnes; and (iii)25% of the total monthly gross sales for cigarettes/tobacco; OR (b) a minimum monthly guarantee of SGD10,486,000; whichever is the higher of (a) or (b).

Nuance-Watson (Singapore): An additional rental of either: [A] (i)40% of the total monthly gross sales (TMGS) for liquor (excluding wines/champagnes); (ii)20% of the TMGS for wines/champagnes; and (iii)25% of the TMGS for cigarettes/tobacco; OR [B] a minimum monthly guarantee (MMG) of: (i) S$8 million(M) for Yr 1; (ii) S$8.5M for Yr 2 and Yr 3; whichever is the higher of [A] or [B]. PLUS An annual incentive rent of: if sum of the MMG for the year (as defined in [B]) exceeds sum of the percentage rents for the year (as defined in [A]) the following incentive rent is payable: 45% of the total annual gross sales (TAGS) exceeding S$312M in Yr 1; 45% of the TAGS exceeding S$366M in Yr 2; 45% of the TAGS exceeding S$391M in Yr 3; If sum of the percentage rents for the year (as defined in [A]) exceeds the sum of the MMG for the year (as defined in [B]) the following incentive rent is payable: 30% of the TAGS exceeding S$312M in Yr 1; 30% of the TAGS exceeding S$366M in Yr 2; 30% of the TAGS exceeding S$391M in Yr 3.

Sky Connection: An additional rental of either: (a) (i)40% of the total monthly gross sales for liquor (excluding wines/champagnes); (ii)20% of the total monthly gross sales for wines/champagnes; and (iii)25% of the total monthly gross sales for cigarettes/tobacco; OR (b) a minimum monthly guarantee of SGD9,301,000; whichever is the higher of (a) or (b).