World Duty Free Americas, Inc.

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World Duty Free Americas, Inc.

63 Copps Hill Road
Ridgefield, Connecticut 06877
U.S.A.
(203) 431-6057
Fax: (203) 438-1356
Web site: http://www.dutyfreeint.com

Wholly Owned Subsidiary of BAA PLC
Incorporated: 1983
Employees: 2,000
Sales: $563.6 million (1998)
NAIC: 45399 All Other Miscellaneous Store Retailers

World Duty Free Americas, Inc. operates one of the largest chains of duty free stores in the world. The company sells merchandise through approximately 200 shops, located primarily near U.S. border crossings and in airports. Its most popular products are perfumes, tobacco, and liquor, for the most part of premium brands. Customers save substantially buying goods free of excise taxes. The company is also the leading supplier of goods to foreign diplomats, and it supplies ships engaged in international travel. Formerly known as Duty Free International, the company became a subsidiary of the British airport operator BAA in 1997.

Beginning of the Chain in the 1980s

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 typically were 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 the 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 also was exposed to the duty free business as a youth. At Samuel Meisel & Company, Inc., 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. He was running the company 25 years later. 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 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.

As a Public Company in the 1990s

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. But 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; aside from 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 benefited 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 fivefold 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.

In large part 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 housewares. 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. Aside from 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 also were offset by steady gains in the diplomatic and wholesale division, 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 more than 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 at that time. With operational efficiency, a light debt load, and dominance in its core market segments, Duty Free expected continued success throughout the 1990s.

Changes in the Mid-1990s

Yet by the third quarter of 1994, the company was experiencing difficulty. Duty Free took a $53.7 million charge against its third quarter earnings to restructure. The company’s costs had gotten beyond it, and Duty Free shut 23 of its stores and slashed its work force from 2,000 to 1,800 at the end of 1994. Sales for the year were more than $376 million, with earnings of $27.4 million, but administrative and other expenses were rising, eating into profits. By the middle of the next year, Duty Free had suffered a severe decline in earnings due to the devaluation of the Mexican peso and poor sales along the Canadian border. Its Mexican border operations accounted for almost a third of total sales, and an even larger percentage of profits, so problems with its southern operations affected the company greatly. Moody’s Investor Service had to downgrade Duty Free’s debt, though Moody’s at the same time affirmed that other aspects of the company, particularly its Inflight Services subsidiary, still showed strong earnings potential.

By the close of 1996, Duty Free had better news to report. Earnings at the third quarter mark were up more than 34 percent from the previous year. Total sales rose more than eight percent, and sales at its airport stores gained almost 20 percent. The numbers at this point looked good, yet it was not long before Duty Free succumbed to a merger, and let itself be bought by Britain’s BAA PLC for $674 million. BAA, formerly the British Airport Authority, was a private company built out of a former British government agency. It operated seven airports in the United Kingdom, as well as the Pittsburgh and Indianapolis International Airports in the United States. With sales of more than $2 billion in the mid-1990s, BAA was a smart retailer. It conducted extensive market research to determine what international travelers were most likely to buy. It tailored its airport displays to feature, for example, the whiskey the Taiwanese preferred before Taiwan-bound flights, and it switched to Wedgewood china to snag travelers returning to Japan. When BAA took over management of the Pittsburgh International Airport, it also showed its shrewd marketing skills. The company ordered airport merchants to charge the same amount for goods and food inside the airport as outside. Travelers had frequently felt cheated by prices for coffee and soft drinks that were typically twice as much at the terminal as at a restaurant in the city. Under BAA’s management, prices were made to match what consumers were used to paying and, as a result, sales volume increased dramatically. BAA had been eyeing a U.S. expansion for several years and also wanted to keep pace with some of its competitors in the duty free industry, who were consolidating in the late 1990s. The cash-rich company made the offer for Duty Free in July 1997, and the deal was completed only a month later. BAA folded Duty Free into its airport operations and renamed the now private company World Duty Free Americas, Inc. The new parent company did not publish separate financial information about its subsidiary, but BAA itself seemed to flourish after the acquisition. Airport traffic increased in the late 1990s, rising almost eight percent for 1998. BAA’s marketing worked well to snare customers, so more traffic translated to rising sales. World Duty Free International continued to operate its in-flight sales division, its Canadian border and Mexican border subsidiaries, its nearly 200 airport stores, and its diplomatic and wholesale division.