Feud Over Duty Free Stores Heats Up

Avi Ben-Hur, general manager of James Richardson, would rather be devoting his energies to the next big thing in cosmetics, or the next duty-free best seller. For the moment, however, the man who heads the company that controls close to 30 percent of the luxury cosmetics market in Israel is busy with legal wrangles over the tender to operate the cosmetics, tobacco and alcohol store at the new Ben Gurion 2000 terminal at the international airport that will open next June.

With annual revenues of $170-$200 million, the cosmetics store at Ben Gurion airport is a gold mine, so the tender to operate the future store at the new terminal has brought a mighty battle between James Richardson and the Sakal Group, which in the duty free section now runs the electronics store and - in conjunction with Mega Sport of the Fishman chain - the sportswear store.

The battle has already joined - in court - and Ben-Hur is furious at the publicly aired claims by Sakal that the Israel Airports Authority (IAA) favors James Richardson. Ben-Hur also angrily dismisses Sakal's claims of an infringement on the profitability of electronics sales at the duty free store.

"Sakal used the reputation of duty free stores to build its chain of stores in Israel," says Ben-Hur, "and the main reason for the drop in activity at the Sakal stores at Ben Gurion is that customers are shopping more at the stores in Israel."

Sakal recently petitioned the District Court to cancel the tender for the operation of the cosmetics store at the Ben Gurion 2000 terminal and to order the IAA to issue a combined tender for the operation of the existing store at the airport and the store that will operate in the new terminal, just as there is a combined tender for the operation of the electronics stores, a tender currently in progress.

The District Court rejected the petition. Sakal, however appealed and late last week the Supreme Court notified the IAA and James Richardson that they have 10 days to respond to Sakal's appeal of the District Court's decision.

Scent of victory

James Richardson is planning to submit a bid for the electronics store as well as the cosmetics store. The announcement of the winner of the tender for the cosmetics store will be published only after the submission of bids for the electronics stores so as to heighten the competition. James Richardson operated the electronics store at Ben Gurion from 1992-1997.

The franchise for the existing cosmetics store at Ben Gurion expired in November, 2002, after two extensions. James Richardson is currently operating the store by virtue of a decision by the IAA to maintain the status quo until the opening of the Ben Gurion 2000 terminal. To get a permit to operate the store in the interim, James Richardson had to agree to terms similar to those of the franchise period.

Sources at the IAA say Sakal was offered a similar option, but demanded easier terms due to losses incurred by the electronics store. Sakal sources deny that there were any negotiations on the issue and say the tender for the operation of the cosmetics store at the new terminal was "tailored" for James Richardson. Sakal also contends that James Richardson is operating the cosmetics store at the airport in contravention of the Tenders Law.

Ben-Hur, who was in the Israel Air Force and has been general manager of James Richardson for five years, is in no hurry to discuss James Richardson's sales and is angry at Sakal for revealing information about the store's operations in its petition to the court. Such information could help James Richardson's competitors in preparing their bids for the Ben Gurion 2000 tender.

The figures that Sakal included in its petition to the court indicate that in 2000, James Richardson's best year, the store had revenues of $200 million. In 2002 sales dropped to $170 million with the recession, the decline in tourism, the reduction in purchase tax, and increasing competition from retail stores and pharmacy chains in Israel.

Ben-Hur is especially angered by Sakal's claim that the 30-percent decline in incoming tourism led to losses in its duty free operations. "A tourist never bought a DVD here," says Ben-Hur, "Sakal's customers are Israelis and their numbers are steadily increasing."

Mismanaged maybe

According to past figures from November 1997, when Sakal won the franchise to operate the electronics store at Ben Gurion up to 2002, the number of Israelis traveling abroad increased 76 percent. In 1997, 1.75 million Israelis left the country and this grew to 2.79 million in 2002.

Ben-Hur also contends that Sakal's duty-free outlet is mismanaged. According to the figures published in 2002 prior the tender bid for the operation of the sportswear store at the airport, won jointly by Sakal and Mega Sport, Sakal's sales from its airport outlet totaled $40 million in 1999 and dropped to $20 million in 2001.

"These figures show that Sakal's sales fell by 50 percent, while outgoing tourism fell by 30 percent," says Ben-Hur. "How does Sakal explain this?"

"Sakal duty free has doubled its sales at the electronics store since James Richardson lost the tender in 1997," responded Kobi Sakal, vice president of marketing at Sakal. "Market conditions have changed completely, however. The tax regulations were altered, purchasing rights were restricted to $200 and purchase tax on a large share of the products was reduced. As to the slanderous remarks made by James Richardson, we have submitted our claims against them and the IAA to the court."

Ben-Hur does not deny the reduced purchasing power among Israelis due to the recession and admits that James Richardson has had to contend with a drop in sales and with stiffer competition from retail chains in Israel.

"I was waging a war," he says. "I too would have had a 50-percent drop in sales if I had not increased marketing activities. Even so, the average basket of purchases at the duty free store is not what it was in 1999."

Ben-Hur allocated millions of shekels to courting Israeli customers and notes that in 2003 James Richardson has spent NIS 10 million on advertising and NIS 25 million on marketing specials and sales promotion. There are plans to spend similar sums in 2004.

Unlike Sakal, which set up a retail chain of stores throughout Israel with the same product lines as its duty free stores, Ben-Hur says setting up a chain of stores in Israel would run contrary to James Richardson's strategy.

"Our competition is the local market," he explains. "A company cannot compete with itself, because one enterprise will flourish at the expense of another. One has to decide what one loves more - local or duty free operations."