Duty Free International, Inc.

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Duty Free International, Inc.

63 Copps Hill Road
Ridgefield, Connecticut 06877
U.S.A.
(203) 431-6057
Fax: (203) 438-1356

Public Company
Incorporated: 1983
Employees: 2,100
Sales: $376.44 million
Stock Exchanges: New York
SICs: 5182 Wines and Distilled Alcoholic Beverages; 5194
Tobacco and Tobacco Products; 5122 Drugs, Drug
Proprietaries, and Druggist’s Sundries; 5145 Confectionery

Duty Free International, Inc. operates the largest chain of duty free stores in the world. Selling merchandise through 158 shops, located primarily near U.S. border crossings and in airports, the company is also the leading supplier of goods to foreign diplomats as well as ships engaged in international travel.

The duty free, or tax free, industry emerged following World War II. As international travel became increasingly popular during the late 1940s and 1950s, an international system was developed allowing travelers to purchase foreign goods free of all duties, sales taxes, and excise taxes. Under the system, customers were typically able to save between 20 and 60 percent on their purchases, making duty free goods extremely attractive. As a result of the duty free system, however, many countries began imposing additional fees or limits on the total value of merchandise travelers brought back to their home countries.

David Couri and John Bernstein, two duty free industry veterans, started Duty Free International in 1983. Couri had gained exposure to the business during his youth, as his father had founded a duty free company (the first, in fact, to offer goods other than liquor and cigarettes). As a teenager, Couri worked part-time in his family’s duty free shop in New York’s Kennedy Airport. In 1963, Couri graduated from Syracuse University with a degree in economics, and then served two years in the Army before taking a sales job. After several years in the floor covering business, Couri saw his chance to strike out on his own. On his way to Japan from Kennedy International Airport, he noticed that there was no duty free shop in the Northwest Airlines terminal. By 1972, Couri had obtained a permit to open a duty free concession in the terminal, thus launching DPI International, Inc.

Bernstein was also exposed to the duty free business as a youth. At Samuel Meisel & Co., a Maryland-based duty free wholesaler, Bernstein worked summers in one of the company’s two duty free shops in Washington, D.C., which catered to foreign diplomats. After receiving a B.A. in political science from Johns Hopkins in 1957, Bernstein went to work full-time on the sales staff at Meisel. Twenty-five years later, he was running the company. By this time, Couri’s venture had expanded into a six store chain at Kennedy International Airport.

In 1983, Couri and Bernstein joined forces to start Duty Free International. They were aware that duty free sales along the Canada/U.S. border had been growing at a rate of ten to 15 percent annually, but they felt that the existing shops were failing to capitalize on the full potential of the market. “We looked at these [Canadian border] stores,” Couri recalled in the August 19, 1991 issue of Forbes, “and many of them were dilapidated.” Couri and Bernstein used some of their own money and borrowed heavily from banks to finance the $4.7 million buyout of 19 border stores and one airport shop in Maine, New York, and Vermont. They then spent an additional $4 million to revitalize the lagging outlets. As a result, sales volume at the stores doubled almost immediately. Amazingly, the fledgling business paid off most of its acquisition debt after only two years of operation.

Encouraged by their early success, Couri and Bernstein quickly acquired 11 more shops in small towns along the Canadian border. After considerable renovation, these stores were generating healthy profits by the mid-1980s. The border stores offered Duty Free an excellent opportunity to break into the industry quickly. Although those establishments lacked the prestige of airport shops and did not have access to a steady stream of well-heeled business travelers and tourists, border shops proved easier to open, since obtaining a concession license in an airport usually involved an expensive and complicated bidding process.

In 1986, Couri and Bernstein expanded the scope of Duty Free by purchasing Bernstein’s old employer, Meisel. Meisel gave the company a dominant position in the niche market for merchandise sold to foreign diplomats. Indeed, embassies and consulates in Washington, D.C. and New York bought liquors and fine wines by the case from Meisel in order to avoid hefty taxes on those items. Duty Free also continued to buy border properties and to seek licenses for airport shops. By 1988, just five years after its inception, Duty Free International was racking up $69 million in annual sales and generating earnings of nearly $6 million. By 1989, the chain included several stores on the eastern U.S./Canadian border that operated under the name AMMEX Tax & Duty Free Shops and generated 46 percent of company sales. Several high-volume airport shops made up about 30 percent of revenues, and the Meisel division represented the remainder of receipts.

In the late 1980s, however, the company’s plans for further expansion were stalled by a lack of investment capital. To obtain more cash for growth, Couri and Bernstein tried to take their company public in 1987. Indeed, all of the details for a Duty Free public stock offering had been worked out by October of that year. However, the morning of the pricing meeting, during which traders and underwriters hammer out the per-share price of the stock, Couri turned on the radio and learned that stock prices were slipping precipitously. Less than a week later, on a day known as “Black Monday,” the market crashed, dashing any hopes of a successful offering for Duty Free.

Nevertheless, Couri (who became chief executive of Duty Free while Bernstein served as chairperson) rallied back to the market in 1989 with a stock sale that generated $22.6 million. Rather than have the money wired into the company’s account, Couri requested a check for the full amount. He placed a framed copy of the check on his office wall next to a letter of apology from the underwriter of the failed 1987 issue. The fresh injection of capital, combined with funds from successive offerings, bankrolled a period of rapid growth for Duty Free International, which continued into the early 1990s. The company’s earnings increased more than 100 percent in 1989, to about $10 million, as sales spiraled upward to $86 million. In anticipation of even faster growth, Couri and Bernstein moved Duty Free into a new, 100,000-square-foot, $5.5 million headquarters building.

The strategy behind Duty Free’s strong performance during the 1980s and early 1990s was relatively simple. It grew by acquiring underperforming duty free shops and improving their performance with sound management. The company also offered a more profitable product mix than many of its competitors, following the example set by Couri’s father; besides cigarettes and other highly taxed merchandise, Duty Free emphasized the sale of luxury items, such as leather goods, perfume, and cosmetics, all of which offered relatively high profit margins. Moreover, the company augmented border store acquisitions with lucrative airport shops. As the company swelled in size, economies of scale were achieved through bulk purchases and consolidated distribution and marketing operations.

In addition to solid management techniques that allowed Duty Free to gain on its industry peers, the company benefitted from favorable economic and demographic trends, particularly during the early 1990s. During that period, the value of the U.S. dollar dropped, making domestic goods a relative bargain for most foreigners. A $41 carton of cigarettes, for example, could be had at a Duty Free shop for just $15, and a bottle of American scotch whiskey that sold for $26 dollars in Canada cost less than half that when purchased duty free. As a result, the “capture rate,” or number of border crossers that would stop at a duty free shop, increased from two percent in 1983 to ten percent in 1989, and then to 13 percent in 1991. Furthermore, the average sale at Duty Free’s border stores climbed nearly 20 percent between 1989 and 1991, to $31.5 million. Similarly, airport store performance improved. Japanese travelers, for example, purchased an average of $125 worth of goods apiece when they visited the shops.

Duty Free’s sales reached $105 million during 1990, about $15 million of which was netted as income, and Duty Free’s stock price soared five-fold after its initial offering to about $29 by early 1991. During that year, moreover, Duty Free’s revenues rose dramatically to $187 million as a result of new acquisitions and higher sales at existing stores. In an effort to sustain the explosive growth rate, Couri and Bernstein began searching for ways to diversify Duty Free and extend its geographic presence. In 1992, Duty Free purchased UETA Inc., a chain of duty free shops along the U.S./Mexican border that had 1991 sales of $150 million. Duty Free also launched multimillion-dollar advertising campaigns in Canada and Mexico and added stores along the western U.S./Canada border. By the early 1990s, Duty Free was accounting for 90 percent of all duty free sales made along the U.S./Canada border.

Largely as a result of the pivotal UETA merger, Duty Free’s sales rose to $362 million in 1992, while net earnings surged to more than $30 million. The company continued to branch out along the Canadian and Mexican borders during 1992 and 1993, eventually amassing a force of 60 stores in the North and 28 shops in Texas, Arizona, and California. Duty Free also expanded its airport operations to include 85 retail and duty free shops in 14 international airports across the United States and Canada, and in Puerto Rico. Sales from its shops continued to be augmented by Duty Free’s Meisel division.

By 1993, Duty Free had organized its sprawling operations into three succinct divisions; airport, border, and diplomatic and wholesale. Under the name Fenton Hill American Limited, the airport division operated traditional duty free stores, as well as several specialty shops aimed at foreign buyers of perfume, cosmetics, sports clothing, and jewelry. Its America-To-Go stores, for example, emphasized uniquely American products, such as regional foods and house wares. Moreover, Fenton Hill oversaw the operations of several premium brand boutiques, such as Chanel, Elizabeth Arden, and Christian Dior.

Duty Free’s border division was separated into north and south operations. Stores in the North operated under the AMMEX Tax & Duty Free name and were located along the Canadian/U.S. border from Maine to the state of Washington. Several of those stores also offered gas stations, convenience stores, and currency exchanges. Shops in the South, located along the Mexican/U.S. border, all operated under the UETA name. They also offered a full line of luxury items in addition to popular tobacco and alcohol products.

Duty Free’s diplomatic and wholesale division operated through three subsidiaries: Samuel Meisel & Company, Inc.; Lipschutz Bros., Inc.; and Carisam International Corp. Besides handling Duty Free’s warehousing and distribution tasks, these subsidiaries provided upscale merchandise to diplomats primarily in the New York City and Washington, D.C. areas. The division also provided merchandise to cruise and merchant ships departing from Baltimore, Philadelphia, New York, Seattle, Los Angeles, and Miami.

Economic downturns and new government regulations in Canada caused sales from Duty Free’s important north border division to drop in 1992 and 1993, reflecting the sensitivity of the duty free industry to outside economic and political influences. Nevertheless, Duty Free’s diversification strategy paid off during this time, as gains in sales were realized in shops along the southern border. In fact, by 1993, UETA revenues had surpassed sales in the once dominant AMMEX stores near Canada. As a result, Duty Free was turning its attention toward greater expansion near Mexico. Sluggish sales in the north were also offset by steady gains in the diplomatic and wholesale division, and particularly in the lucrative airport division—those two segments made up about 40 percent of company revenues in 1993.

Despite an overall sales slowdown from its border operations, Duty Free revenues increased four percent in 1993, reaching $376 million. Net income slipped to a still healthy $27 million. During this time, Couri continued to penetrate new marketing channels and to diversify regionally. In 1993, for example, Duty Free entered into an agreement with McDonald’s Corporation to form Chicago Aviation Partners, a joint venture designed to develop concessions at Chicago’s O’Hare International Airport.

Early in 1994, Duty Free purchased Inflight Sales Group Limited, a New York-based concessionaire that sold merchandise on over 20 airlines. Inflight would provide more than $100 million in additional annual revenues to the Duty Free organization, and the buyout ensured Duty Free’s status as the largest provider of duty free merchandise in the world. With operational efficiency, a light debt load, and dominance in its core market segments, Duty Free expected continued success throughout the 1990s.