Some 44 years ago a. DFS Galleria. Okinawa sets new travel retail benchmark. inside this issue

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1 DFS Galleria Okinawa sets new travel retail benchmark Travel Retail Intelligence ISSUE TEN MARCH 2005 Business commentary and analysis of key developments in the global duty free and travel retail industry for readers of The Moodie Report The Moodie Report PLUS is published by Moodie International. Please direct any comments to Martin Moodie by Back issues can be found at inside this issue A poignant return for Robert Miller...1 Entering the world of DFS...3 Bringing brands alive the beauty area...4 A palatial experience luxury boutiques...5 Homing in on the range...6 Editor s introduction: On 13 March DFS Group opened the latest addition to its retail portfolio, the DFS Galleria Okinawa. Uniquely, this elegant downtown luxury environment allows Japanese domestic travellers to purchase goods duty free. The Moodie Report was on hand as DFS s senior management and owners gathered on the island of Okinawa for the Galleria s Grand Opening in the company of dignitaries and brand partners. We also walked the store with the most knowledgeable of guides, DFS Merchandising President Michael Schriver (for a fuller report on the store see The Moodie Report print edition, mailed worldwide later this month and also published online at Come with us on a brief tour of this extraordinary shopping experience. Some 44 years ago a young American entrepreneur called Robert ( Bob ) Miller first visited the Japanese island of Okinawa, intent on developing a business supplying American troops based there. It was the early 1960s, and Miller along with his fellow ex-cornell University student Charles ( Chuck ) Feeney was in the throes of creating the retailing empire that was to dominate the travel retail industry for the next forty years Duty Free Shoppers (now DFS Group). In March of this year, Bob Miller made an emotional return to the island. It was a very different era and very different circumstances. Still a 38.75% shareholder in DFS (the balance, including Feeney s holding, was acquired by LVMH in 1997) he was on hand this time for the Grand Opening of the DFS Galleria Okinawa, the ambitious new downtown shopping complex that enjoys legislatory dispensation to sell duty free items to Japanese domestic travellers. The past, present and future of DFS: Robert Miller (right) and Ed Brennan at the Grand Opening DFS s senior management, headed by Chairman Ed Brennan, knew the significance of Miller s presence. He and Feeney weren t so much ahead of their times in our industry they virtually defined them. What began as an innovative business selling duty free goods to American

2 Besides its co-owner s personal links, the new Galleria s very existence reaches out to the company s roots in other ways. Here the retailer has worked with local legislators to create an opportunity out of nowhere and secure an unchallengeable long-term position, just as it did long ago in locations such as Guam. The legislation part of the Law on Special Measures for the Promotion and Development of Okinawa enabled DFS to open what has become a highly-successful domestic duty free operation at Naha Airport in May Ed Brennan (centre) leads the ceremonial cracking opening of the sake barrel to signify good luck troops abroad took on a whole new dimension from 1966 when the Japanese government lifted travel restriction on its citizens. From that moment DFS was there to greet the Japanese wherever they travelled, creating a diverse, acutely-targeted retail empire that spanned the Asia Pacific region from Hong Kong to Honolulu, Guam to Australia s Gold Coast. With the Okinawa opening, the modernday DFS was saying: We ll even be here for you when you travel domestically. And plenty of Japanese do the island attracted over 4 million domestic visitors last year, all permitted to purchase at the Galleria or DFS s shop at Naha Airport, opened in Bob Miller may have entered his 70s but he appears to be going stronger than ever. As recently as 2003 he created a record-breaking time for a transatlantic crossing in a monohull yacht and he maintains a hectic social and business diary. Speaking entirely in impeccable Japanese, he told guests at the Grand Opening: Today is a very special day for me. When I came to Okinawa for the first time it was 44 years ago. This place has much significance in the development of DFS in Asia. Through our steady hard work, DFS has grown to be the first of its kind. I am very proud of this record and our people. Today in Okinawa we have the grand opening of this Galleria. This is a testament of our commitment to Okinawa and our belief in its potential for development in the future. Ed Brennan described the retailer s hopes for the store. The vision was to transform Okinawa s already successful tourism business into a truly luxury retail business. Those of us involved believed that Okinawa could generate more tourism growth if it developed luxury shopping. He pledged DFS Group s commitment to becoming part of the Okinawa community and praised the role of local and central government, particularly Customs and the Governor of Okinawa. We have 14 Gallerias, he said. But I can honestly say today that this store is the finest in our portfolio. That s some claim, for DFS has long set the quality benchmarks in the travel retail industry. But even hardened DFS veterans such as Mark Daley (President DFS Asia), Julian Levy (President President US Group) and Luis Samaniego (Vice President GMM, Luxury and Boutiques) are especially proud of the new offering though equally determined to better it when they open the company s next major development, the revamped Tumon Bay Galleria in Guam in But downtown lies the big prize. The DFS Galleria Okinawa, located adjacent to the Omoromachi monorail station enjoys total floor space of 40,000sq m, with around 13,000sq m dedicated to sales. Crucially from a footfall perspective the store is connected by walkway to the monorail station and also houses the island s only consolidated rental car facility outside the airport. Most Japanese visitors to Okinawa hire cars for their vacation and to access their vehicles, and again after drop-off, they must pass through the store. That traffic base expected to grow rapidly as visitors become aware of the new facility is boosted by tour group passengers brought in by a complementary shuttle bus service that operates daily to eight Naha City hotels. It s a classic DFS formula with nothing left to chance and no punitive airport concession fees to pay. It s already paying rich dividends. Just three months after its soft opening, the Galleria was teeming with shoppers during The Moodie Report s visit and top-end items already enjoy the highest share of mix at any DFS location. Vitally too, travel to Okinawa traditionally holds up whenever there is a blip in Japanese overseas travel, for example during the SARS scare. Okinawa is a safe bet in a travel-related business portfolio that is always prone to sudden downturns caused by external events. For Merchandising President Michael Schriver and others among DFS s senior management on hand for the Grand Opening, this Galleria sets new standards in vision, merchandising and overall store execution. I worked for Macy s and, for the times, we were very innovative. But nothing like this, he says. We are all like proud parents. 2

3 Entering the world of DFS The Lobby From the moment the Japanese shopper enters the reception area, DFS Galleria Okinawa epitomises elegance and tranquility. A giant water feature, much favoured by the Japanese, flows down a stone wall under a Bvlgari motif, peacefulness and luxury neatly harmonised. A high-profile promotion point, currently featuring a Dior makeover demonstration, hints at what lies within. But for the moment, that s all in terms of brands. It doesn t hustle you, Schriver explains. We figure that you re just off the plane, and you re just getting your car, so we don t want to overwhelm you with product immediately. The resultant effect is refined and understated. This lobby area is equal to any five-star hotel in the world, says Schriver. It was designed by Los Angeles-based international architecture, engineering and planning firm RTKL. Creatively they were probably the best we ever worked with they were spectacular, continues Schriver. They ve worked on the Venetian in Las Vegas and other major projects. And David Gester the lead architect on the project, is one of the most creative people I have ever met. It s creative but it s creative functionally David really understands retail. Within this area the passengers select their rental cars and DFS in turn takes their bags, puts them on an airport-like conveyor to the car pick-up point located, naturally, on the other side of the store. This is the walk through concept at it best not only do the customers have to traverse each department but they carry an electronic tracking device so that their cars and bags are ready by the time they near the end of the store. For the next hour or so, these Japanese travellers enter a world of brands unlike anything they will have seen before. From the registration area they cross a glass walkway beneath the glass, water runs gently over beautiful black stones. It s very Japanese and there s a nice feeling of crossing a bridge into an exciting new world within. 3 From the gracefulness of the reception area the customer passes progressively through a series of retail sections. Each is set off from a portal area that allows transition from one retail world into another. It s time to go shopping

4 Okinawa s fast-changing consumer profile The profile of the typical Okinawa Galleria customer varies tremendously month by month. At certain times of the year the passenger base is a little older; other times there is a strong student business and in summer months a lot of families arrive on the island. Of all our markets this is the most seasonal, notes Merchandising President Michael Schriver. Hawaii is a relatively flat line in comparison. Here we have the most significant changes in pax profile so our mix in cosmetics, for example, can move two or three points month by month, just because the profile changes. It s been a learning curve, but fortunately we ve been in the airport for two years so we have a pretty good read on what kind of pax flow we re getting month by month. But on an aggregated basis the customer profile isn t significantly different to Hawaii or Guam which makes the success of top-end lines in Okinawa a little surprising to DFS. And there, Schriver believes, lies an important lesson. The only real differentiator I can attribute that to is the environment for this is truly a very different environment. Beauty and frangances Bringing brands alive Cosmetics is a core strength of DFS and a core attraction for Japanese shoppers. During our second walk of the store in the afternoon ten tour buses have pulled in, and the beauty area is humming with shoppers. There s a big crowd gathered in the popular Lauder-owned MAC brand area, and Chanel is buzzing with activity. The traditional La Mer fish tank and raised makeover areas create a sense of theatre while the 18 brands present enjoy an impressive mount of space, allowing a wide range of skus a factor that comes into play throughout the store. We see this as a great new venue for beauty brands, says Schriver. Brands include Christian Dior, Lancôme, Helena Rubinstein, Chanel, Estée Lauder, Clinique, Shu Uemura, Anna Sui, Stila, Bobbi Brown, Guerlain, Biotherm, De La Mer, Clarins, Givenchy, Yves Saint Laurent, Origins and MAC. You ll notice since I walked into the store that I have talked a lot about branding, branding, branding, Schriver tells me. I think we did a really good job here on cosmetics getting the brands projected [with the right space] is everything. Cosmetics has been very successful and will continue to improve as we inject events and other elements and our beauty advisers get more skilled. Remember we hired the entire staff here their first day in retail was December 15, so they re all still learning. From cosmetics shoppers move effortlessly into fragrances. It s an open oval-shaped room, another first for DFS. 4 It s a neatly self-contained approach, fondly nicknamed Linda s Galleria by DFS Vice President, Global MM, Cosmetics and Fragrances Linda Allario. A flat-screen video brings the brand messages to life, helping drive sales which, Schriver says, are doing very well. The packed room tells its own story.

5 Luxury boutiques A palatial experience Nobody has walked into here and not been totally mesmerised, says Michael Schriver of the consumer s next experience and DFS Galleria s defining offer the luxury boutique area. Here, 13 of the world s leading luxury names enjoy dedicated boutique space customised to their own exacting requirements. After exiting fragrances and transiting through a short portal, shoppers enter a beautiful long curved room with boutiques set off to either side. An open piano bar with table seating fills the centre area allowing customers to sip Champagne in between shopping. Brands on offer are Tiffany, Montblanc, Cartier, Christian Dior, Prada, Bvlgari, Chopard, Burberry, JP Tod s, Celine, Fendi, Ferragamo and, from the day of our visit, Louis Vuitton. The Italian marble is complemented by Okinawan materials including wood trim, limestone and sandstone, and the architecture of the room draws heavily on local inspiration. Each boutique environment is dictated by the demands of the brand, the range of its offer and by likely customer volumes (the jewellery boutiques are typically smaller than the fashion-led ones, for example). Notes Schriver: The Cartier assortment here would be consistent with any Cartier assortment you ll find anywhere in the world, with high jewellery, gold and diamond watches and jewellery watches. This is a whole new format for us so you really have to have qualified sales associates here who will work with the customers, sit them down and sell the products but it s been very successful. Interestingly the luxury end of the business at DFS Galleria Okinawa is even stronger than in the retailer s international business both in offer and sales. In each case a full range is on offer, a distinguishing feature of the whole Galleria. We re really trying to represent the brands the way they would represent themselves, says Schriver. It s exactly how they want to communicate they give us the design for it, this is their store. The boutiques also reflect changes in the way that DFS now buys. Under our old structure we would have someone buying handbags, notes Schriver. If we wanted jewellery we would have another person doing it, someone else buying scarves and someone else buying ready-to-wear. Now, however, for any brand you see in the store in any given space there s only one product merchant who selects the range. We ve got a much better look, and the brands are much happier because one person is in market with them. This has been very effective. 5 The gentle curve of the room allows the shopper to see all the brands from any angle. "It really catches your eye," says Michael Schriver. So how different is this Galleria to the others? I guess the closest we have is Guam [Tumon Bay], but that is six years old, so you can t compare it. This is an entirely different level of retail, Schriver enthuses. [For a pictorial view of the Galleria s luxury boutiques, see Features at

6 Watches and jewellery Moving upscale As the customer exits the boutique world through another portal the classical notes of Ravel on the piano give way to funky music over the sound system in the watches and jewellery section. This area begins with the fine watches range including the proud new addition, Blancpain ( a first for us ). Brands such as Omega, Piaget, Chopard, Bvlgari, Baccarat, Hermès, and TAG Heuer benefit from soft lighting on the case lines and the watches, ensuring the products are always shown to their best advantage. We ve always had a very good watches business, Schriver notes. It softened up on us two years ago as the Yen softened to the 130 to 140 mark [against the US Dollar]. The watches are probably impacted more than any other business by the Yen. But as it has strengthened [just under 105 at press-time Ed] we have really become very serious about the category. Nearby, the fine jewellery selection is another example of how DFS has pursued the branded route. The entire offer is branded to top-class names such as Piaget, Chopard, Bvlgari, Baccarat and (with very significant space) Folli Follie. It s a strategy that is paying off. Customers are responding to brands, notes Schriver, whereas historically we had tried to build a fine jewellery offer that was that non-branded. And that, for the Japanese at least, was not a very successful strategy. The Okinawa offer is already the most well-penetrated fine jewellery business of any of the Gallerias, says Schriver, despite a smaller footprint and a lot less product just brands. So we think it s the right formula the model is right on. The Galleria also houses a strong fashion and designer watch section, with entry price-points provided by the likes of Anne Klein and Swatch [though DFS is likely to reduce the space given to lower-priced lines and give it instead to higher price point items]. Homing in on the range From watches and jewellery the customer enters what DFS would have historically called a general area. But generals are out this year and brands are in. From the sizable Coach boutique follow a series of premium fashion names in a branded section that will be improved further when the revamped Tumon Bay Galleria opens next year. Fashion The brands in the larger spaces are improving their productivity because we can represent them in a much better way with a much better selection, notes Schriver. Dunhill, for example, is not just leathergoods; we have jewellery, neckwear and a lot of different product categories. The range is an intriguing mix, from the long-established Hunting World ( still very strong 6

7 with the Japanese ) to the colourful Kate Spade, a relatively new brand for the retailer and a prime example of the full range emphasis. In the past this would have just been handbags now the merchants are buying the full range to round out the space, notes Schriver. The fashion jewellery collection also sees changes from the past, offering a smaller but rounded-out selection. For Swarovski, which has historically been a crystal business for us, here we have the same merchants buying gifts, says Schriver. Jewellery is a very important part of the business for the Japanese but gifts (sets of Swarovski crystal pendants, for example) are now injected into the mix as well. They have partnered with us to do fixtures that would sell fashion jewellery well not an area of strength in the past compared with their high-end jewellery and crystal. The spring collections add colour throughout the store, notably in the spacious Polo Ralph Lauren store, which goes beyond the traditional ready-towear confines and offers everything from handbags to belts to socks. Polo Kids is also doing well, reflecting the ageing of the Japanese population, which across DFS locations is translating into a growing business in children s items, particularly clothing. The store closes with the Destination selection and spirits and wines. During our visit the former, like the fashion area, is packed, the liquor zone quiet a decade ago the latter would have dominated the whole store. The destination area is a cacophony of colour and a riot of flavours, from pineapple wine to local Ryuku glass and is packed with shoppers. There s also a strong international presence in confectionery, led by a customised Godiva offer and supported by Goldkenn and Ferrero. Notes Schriver: In every one of our markets we have a local-market Godiva package. The Japanese really like the brands and something that signifies where they have been. Schriver admits that the spirits and wine area has begun slowly so DFS has already made a number of changes. Stronger branding is being introduced on the back wall and the range is being refocused around XO and above Cognacs (including Rémy Martin Louis XIII) and ultra-premium Scotch, such as the popular Ballantine s aged range. 7 The wine selection, also disappointing apart from perennial Japanese favourite Inniskillin Icewine ( a great gift-giving item, well packaged ), is also being taken upscale, and will in future be based on first growth Bordeaux, complete with regular tastings. It will create a lot of buzz and activity, Schriver smiles. You may want to be around I do. In fact I don t want to leave, the mark of a great retail experience. From the moment the shopper enters the refinement of the DFS Galleria Okinawa reception lobby to when they exit through the spectacle of the destination section, they are certain to be entranced. There is no other travel retail store like it on the planet.