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Marketing Strategy of DFS Group Ltd.

Marketing Strategy of DFS Group Ltd.

Discuss Marketing Strategy of DFS Group Ltd. within the Marketing Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; Statistics: Wholly Owned Subsidiary of LVMH Mot Hennessy Louis Vuitton SA Founded: 1960 Employees: 350 Sales: $127 million (2003 est.) ...

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Marketing Strategy of DFS Group Ltd.
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Anjali Khurana
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anjalicutek
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Marketing Strategy of DFS Group Ltd. - December 16th, 2010

Statistics:
Wholly Owned Subsidiary of LVMH Mot Hennessy Louis Vuitton SA
Founded: 1960
Employees: 350
Sales: $127 million (2003 est.)
NAIC: 453220 Gift, Novelty and Souvenir Stores


Company Perspectives:
From its inception DFS has focused on a specific customer--the international traveler.


Key Dates:
1960: The company is founded by Charles Feeney and Robert Miller.
1966: Alan M. Parker and Anthony M. Pilaro are brought in as partners.
1995: The company's first Galleria store opens in Guam.
1996: Feeney, Parker, and Pilaro sell interests to LVMH.
2004: The company's headquarters are moved to Hong Kong.


Company History:

Hong Kong-based DFS Group Ltd. is the world's largest retailer of duty-free merchandise, specializing in luxury brands and primarily catering to Japanese tourists. DFS operates approximately 150 stores, mostly located in airports, where the company pays a hefty concession fee. The traveling public can purchase merchandise at these shops and avoid the duties--taxes and other charges levied by the local government--as long as the buyer does not use or consume the items while at the location. Historically, tobacco, alcohol, and perfumes have been the mainstays of duty-free retailers. In recent years, DFS has opened "Galleria" stores in downtown locations, offering luxury boutique merchandise, contemporary fashion, and local destination products. To purchase items at duty-free prices, customers must show an airline ticket out of the country. Their purchases are then shipped to the airport for pickup at the departure gate on the trip home. DFS is majority owned by the French conglomerate of luxury brands LVMH Mot Hennessy Louis Vuitton SA. Cofounder Robert W. Miller retains a 38 percent interest.

Origins in the 1950s

DFS was founded by Miller and Charles Feeney, both raised in working class communities. Miller grew up in the small town of Quincy, Massachusetts, located in the shadow of Boston. Feeney came from Elizabeth, New Jersey, the son of a nurse and insurance underwriter. During the postwar years following World War II, Feeney joined the army at age 17 and served in Japan and Korea. After being discharged, he used the scholarship the military provided to attend Cornell University, where he studied hotel administration. Because his stipend paid for little more than his tuition, Feeney supplemented his income and honed his entrepreneurial instincts by selling sandwiches door-to-door to fraternities. In Cornell's hotel administration program, Feeney became friends with Miller, a year ahead in school but nearly two years younger. Miller graduated in 1955, and Feeney followed in 1956. Because he still had four months of scholarship money, Feeney attended college in France. He stayed to run a camp for the children of the U.S. Navy fleet stationed in southern France and later met up with Miller in Barcelona. There, in a bar, he told Miller that he thought they could make some money selling merchandise to the fleet. In 1958, they went into business together and began to sell such items as perfume, tape recorders, and transistor radios to navy personnel in Europe. Their emphasis soon switched to selling duty-free liquor and foreign-made cars to U.S. servicemen and tourists on their way home to the United States through a pair of companies: Tourist Internationale Ltd. and Cars International Ltd.

In 1960, Feeney and Miller changed their focus from Europe to Asia, wisely anticipating the potential of selling to the rising class of international businessmen from the region. They launched Duty Free Shoppers, later abbreviated to DFS, and opened duty-free shops at the international airports in Hong Kong and Honolulu. The Duty Free industry actually began aboard international cruise ships in the 1930s. The concept was transferred to international airports in 1947 when Brendan O'Reagan opened a duty-free shop in Shannon, Ireland, which was a major refueling stop for transatlantic flights. The government supported the idea as a way to promote Irish whisky and woolens, and other governments would also soon recognize the potential of promoting tourism and local products by permitting duty-free shopping at their international airports.

DFS continued to concentrate on the military market in the early 1960s. Miller and Feeney passed out literature on navy vessels before they left the United States, outlining DFS car and liquor programs that could be found in Asia. Later they would hire ex-military men to run offices located at U.S. Air Force and Navy bases in Asia. Business was thriving, leading the partners to expand too aggressively. Soon they found themselves overextended when the U.S. government undercut their business by changing the rules on duty-free liquor and allowing U.S. automakers to sell on military bases. As a result, DFS was forced to shutter its store and was essentially bankrupt by 1965. At this point, the partners turned to outside help. In 1966, they gave 10 percent stakes in the business to British accountant Alan M. Parker and American lawyer Anthony M. Pilaro to help restructure the company. It was Pilaro who brokered a deal with Butlers Bank of Nassau that provided the money DFS needed to exit the car import business. Henceforth, the fortunes of DFS would depend on the tourist trade, in particular Japanese tourists.

Focus on Japanese Travelers in the 1960s

Feeney was the one credited with targeting the Japanese. Twenty years after its defeat in World War II, Japan was emerging as an economic powerhouse. When travel restrictions were lifted in 1966, Feeney correctly surmised that the Japanese possessed a great deal of pent-up desire to travel as well as a demand for western luxury items. He visited the country, learned the language, and became familiar with the Japanese travel customs, which featured lavish gift giving. Travelers would be given a gift of money, Senbetsu, and when they returned they were expected to bear gifts, souvenirs of their trip called omiyage. Japanese couples on their honeymoons would also reciprocate wedding gifts. In addition to the importance of advertising in Japanese travel magazines and tourist guidebooks, Feeney recognized that the vast majority of Japanese tourists, some 80 percent, traveled in package or group tours. Thus, DFS established ties with Japanese travel agencies and began paying tour operators a flat fee for every tourist they brought to a DFS store, as well as commissions as high as 15 percent. Even tour guides and bus drivers were given an incentive to deliver Japanese tourists to DFS stores. Furthermore, DFS took care that it had concessions at the international airports in the countries that the Japanese liked to visit. In addition to Hong Kong and Hawaii, DFS over the next 20 years opened duty-free stores in such locales as Guam, Saipan, Singapore, Anchorage, Los Angeles, and San Francisco. DFS hired Japanese-speaking clerks and made sure that any defective merchandise could be replaced or repaired in Japan.

Retailing in the Asian market proved highly lucrative for DFS, due in large part to Western luxury items commanding a much higher markup than in the United States or Europe. The partners often split 90 percent of the profits the company earned each year, an estimated $3 billion from 1977 to 1995, making Feeney and Miller fabulously wealthy. In the early 1970s, they turned over management of DFS to others. They were both successful in solo business ventures, adding further to their immense wealth, but in many respects they now pursued opposite paths in life. Miller resided with his wife and three daughters in Hong Kong and became famous for a jet-set lifestyle and throwing extravagant parties that rivaled the excesses of America's Gilded Age of the late 1800s. Also reminiscent of that period of ostentatious wealth were the high profile marriages of his daughters, complete with dowries that reportedly ranged from $100 to $200 million. The eldest, Pia, married Christopher Getty, grandson of oil tycoon John Paul Getty; the middle daughter, Marie-Chantal, married Crown Prince Pavlos, the eldest son of the former King Constantine of Greece; and the youngest, Alexandra, married Alexander von Furstenberg, son of Austrian-born Prince Egon von Furstenberg. Equally as wealthy, Feeney, with his wife and five children, lived almost like a recluse--and a pauper. He flew coach, wore a watch worth less than $10, never owned a house or a car, and preferred wearing crumpled old suits. One employee recalled that the first time he met Feeney, his pants were held up by a safety pin. However, Feeney was anything but a miser. In secret, he was giving away most of the millions he had earned from DFS and his other successful ventures. He created a charitable foundation, Atlantic Philanthropies, and in 1984 turned over his share of DFS to it. Then, by the use of off-shore cutout corporations, he gained anonymity to pursue his philanthropic goals. To further protect his identity, he did not even take a tax deduction for his charitable contributions.

DFS faced a challenge early in the 1980s when Host International opened airport and downtown duty-free stores in Honolulu, but DFS's ties to Japanese tour operators proved too formidable an obstacle, and after just nine months Host defaulted on its Honolulu concession. Another rival emerged in 1987 in Hong Kong, when Kiu Fat Investments Corp., backed by the People's Republic of China, won the airport liquor and tobacco concessions. DFS responded by pricing its duty-paid liquor below Kiu Fat's duty-free prices and pressured European design houses not to supply merchandise to Kiu Fat's downtown stores. DFS also launched a service to have the purchased liquor delivered to the airport and checked through to Tokyo or Osaka. In little more than a year, Kiu Fat folded and DFS regained the airport concession. Also during this period, DFS was able to use its contacts with Japanese travel agencies to learn that the honeymoon market was about to shift from Hawaii to Australia and New Zealand. As a result, DFS was able to establish stores in these countries to take advantage of the trade.

The 1980s also saw the interests of the DFS partners begin to significantly diverge. In 1986, the United States overhauled the tax code, which according to the New York Times, "increased [the partners'] isolation by prompting them to restructure the company in a way that put more distance among them. Instead of owners, they became 'shareholder representatives' of tax shelters and charitable foundations they created." Isolation turned into conflict later in the decade when Feenery launched retail stores in Hawaii that his partners felt were in competition with DFS. Because he refused to sell the business, the others ousted him from the board of DFS and some subsidiaries. As a way to settle any future conflicts, the four agreed in 1991 to submit differences to a seasoned arbitrator, Ira. M. Millstein, a senior partner in the New York law firm of Weil, Gotshal & Manges. Several years later, Millstein's services would be needed.

In 1994, Feeney decided that the tourist trade was often uncertain and that he preferred a more predictable and conservative investment to fund his charitable foundation. Wanting to sell his stake in DFS, he turned to the most likely buyer, long-time supplier LVMH. His partners vehemently opposed the idea, but after two years Feeney was able to win over Park. Together they owned 58.75 percent of DFS and could sell majority control to LVMH, which in June 1996 presented a $4 billion bid for the company. Millar and Pilaro insisted that the partners bring the matter to Millstein. According to the New York Times, "The central issues quickly boiled down to whether the 1991 agreement required the selling partners to obtain the approval of the nonsellers, and if not, whether a sale would damage the holdings of Mr. Miller and Mr. Pilaro." In the end, Millstein ruled in favor of Fenney and Parker, but he also worked out an agreement with LVMH that would protect the interests of the nonsellers, so that profits would not be inappropriately diverted to the parent company. That same day, Fenney and Parker sold their share in DFS to LCMH for $2.47 billion. (During the course of the sale of DFS to LVMH, Fenney decided it was time to reveal his involvement with Atlantic Philanthropies.)

Miller and Pilaro continued to fight the acquisition, going to court in January 1997, but only days later Pilaro dropped out and agreed to sell his 2.5 percent stake for $105 million. Miller now began to negotiate the sale of his interest, but after several weeks LVMH decided to break off the talks, dissatisfied with his demands, and announced it would run DFS as majority owner with Miller as a shareholder.

Challenges Following 1996 Sale

As had been the case throughout his business career, Feeney displayed an excellent sense of timing, selling his interest in DFS at the peak of its value. Because of an economic crisis in Asia that led to declining tourism, DFS saw its sales drop from $3 billion to $1.5 billion in little more than 18 months from 1995 to 1997, albeit part of that decrease was due to a strategy to close some of the company's airport concessions. In 1995, DFS opened its first Galleria store, in Guam, representing a new direction the company hoped to take. Nevertheless, the Asian crisis precipitated a major restructuring of DFS. It launched a $120 million program to improve its systems and to open more Galleria stores as well as proposed Sephora perfumeries. Nevertheless, matters became so difficult that in March 1998, just a year after LVMH acquired control, DFS had to ask vendors for more time to pay its bills. A few days later, the company announced that it was eliminating 300 jobs and closing five of its 150 stores--two in Hong Kong and the others located in Honolulu; Vancouver, British Columbia; and Queenstown, New Zealand. Management insisted that it was not about to exit the airport business but was eager to lessen its exposure and reposition DFS as an operator of high-quality, specialty stores. The emphasis would no longer be on tobacco, liquor, and perfumes but shift toward fashion.

In September 1998, DFS hired a new president and CEO, Brian E. Kendrick, a turnaround specialist who had been the number two executive at Saks Holdings Inc. Over the course of the next year, DFS rebounded somewhat, due to a revival in the consumption of luxury goods by Japanese tourists. Having guided the company through the Asian economic crisis, Kendrick then left to take a job elsewhere and was replaced by Edward J. Brennan, who had 16 years of experience at R.H. Macy & Co. and Federated Department Stores, and had joined DFS in May 1997. Under Brennan, DFS continued its efforts at diversification, made necessary by the relaxing of trade barriers and other changes affecting the duty-free industry. Sales also improved somewhat, and the company reportedly returned to profitability. Brennan was rewarded in January 2001 by being named chairman in addition to his other titles. However, DFS continued to struggle. A retail flagship store in San Francisco that had opened with much fanfare in late 2000 closed after little more than a year, unable to attract domestic customers. Headcount was reduced, and the company announced that to further cut costs it was reorganizing the business into two major groups: the Asia Group--with divisions in Hong Kong, Taiwan, Korea, and Macau--and the Pacific Group, with operations in Hawaii, Guam, Saipan, and Palau. In addition, a separate North American Division would be located in the company's San Francisco corporate offices.

World events combined to hinder DFS's plans for recovery. The effect of a SARS outbreak as well as the U.S. invasion of Iraq hurt tourism and cut into sales. Matters improved when the company was able to renegotiate airport contracts in Hawaii and Los Angeles. To rebuild the business, DFS returned its focus to the Asian market. In keeping with this initiative, the corporate headquarters was moved from San Francisco to Hong Kong. The company again returned to profitability in the fourth quarter of 2003, but the ongoing viability of the business would likely hinge on a new market, the Chinese traveler and the Chinese mainland.

Principal Competitors: BAA plc; KP Company Ltd.; Compagnie Financire Richemont SA.
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Last edited by anjalicutek; December 16th, 2010 at 03:02 PM..
   
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