Deluxe: How Luxury Lost Its Luster (9 page)

Vogel rang Chanel executives in New York to inform them of his idea.

“Hawaii?” they responded incredulously. “Are you crazy?”

He wasn’t. In
1984
, Vogel opened Chanel’s first freestanding store in the United States—before New York, before Beverly Hills—in the Royal Hawaiian Shopping Center, a mall at the entrance of the famed hotel’s drive. The store carried accessories as well as a small selection of ready-to-wear by Chanel’s new designer Karl Lagerfeld. The Japanese flocked to it, snatching up quilted leather purses, gold chain belts, and two-toned shoes like crazy. Throughout the
1990
s, the Waikiki boutique was the number one Chanel store in the world, with $
60
million a year in sales.

The success of Chanel drew other brands to open on Kalakaua Avenue. All the usual suspects arrived, each building a large, lush boutique with Japanese-speaking staff. It was a wise business move: within five years of its
1992
opening, the Louis Vuitton store on Kalakaua Avenue was doing nearly $
100
million in sales annually. Several brands reported that their Waikiki stores were among the most successful in the world, enticing more brands to open there and those who were there to upgrade their locations. In
2002
, Chanel moved out of its Royal Hawaiian digs down Kalakaua Avenue into a twelve-thousand-square-foot flagship; Cartier moved into the old space.

The new Chanel store is a luxury shopping palace with expansive salons, high ceilings, plush carpeting, and gobs of handbags, sunglasses, shoes, suits—and security video cameras that are viewed at headquarters in New York. Of the seven hundred to eight hundred customers who enter the Chanel boutique on Kalakaua every day, most are Japanese and most buy accessories. Sometimes a Japanese customer will take a picture of an item in the store with her cell phone and zap the image to a friend in Japan with a note asking, “What do you think?” If the friend says yes, then the customer will make the purchase. If the desired luxury brand product is not available in the Waikiki store, the brand’s salesclerk can find it in one of the mainland U.S. boutiques and have it overnighted to Hawaii before the customer heads back to Japan. Joyce Okano, regional vice president for Chanel in Hawaii, tells me that “more than half the sales of Chanel in Hawaii are to Japanese.”

T
HERE WAS ANOTHER
great attraction that drew the Japanese to Hawaii: buying luxury goods duty-free. Duty-free shopping allows shoppers holding boarding passes to buy tax-free goods that have never entered the local stream of commerce, thus providing a discount of
10
to
30
percent off full retail price. Hermès products in Japan, for example, cost
30
percent more than in France and
15
to
20
percent more than in duty-free stores. In
2005
, about
10
percent of all Hermès sales were duty-free.

Today, according to the Tax Free World Association, annual duty-free sales are about $
25
billion—$
9.1
billion of which are luxury goods. There are several duty-free companies in the world today, but the largest by far is Duty Free Shoppers (DFS), which operates primarily in Asia and the Pacific, and is majority-owned by LVMH. In
2006
, DFS did about $
2.2
billion (€
1.7
billion) in sales—
30
percent more than its nearest competitor.

The notion of selling items duty-free dates back as far as commerce itself. In Britain during the
1500
s, seamen were offered liquor duty-free—or tax-free—for consumption on board ships in international waters. In the nineteenth century, liquor, cigarettes, and perfume were supplied duty-free to crew members and travelers on ships for voyages that took weeks or months. The modern version of duty-free retailing began with the International Civil Aviation Organization at the Chicago Convention of
1944
, which allowed the selling of articles duty-free on ships in international waters and on aircraft on international flights, and created “customs-free” zones in airports. Soon after, Brendan O’Regan, the head of the Shannon Airport Catering Service in Ireland, opened a kiosk at the airport to sell gifts and souvenirs tax-free to departing passengers on transatlantic flights that stopped to refuel. Business started slowly—on a good day, it would do £
5
in sales. But as international travel grew in the
1950
s, so did O’Regan’s business: in
1953
, it did £
120
,
000
in sales.

In
1960
, two Americans college buddies named Robert Miller and Chuck Feeney, both graduates of Cornell University’s hotel management school, were drinking in a bar in Barcelona and dreamed up a business to sell liquor tax-free to GIs ending their tours in Europe. They called their business Duty Free Shoppers and opened shops in Hong Kong and at the Honolulu airport in Hawaii to target Asian tourists. Business went so well that they eventually hired a British accountant named Alan M. Parker and an American tax lawyer named Anthony Pilaro to help optimize the profitability of the company and gave them each a small stake. Between
1977
and
1995
, DFS generated some $
3
billion in dividends,
90
percent of which the four partners received in cash or funneled into their tax-driven trusts or foundations; both DFS and Feeney’s foundations were then based in Bermuda, an offshore tax haven. “This was not just a nice cash cow they milked,” said lawyer who knew the company. “The size is more on the magnitude of Godzilla and King Kong.”

Feeney, the more conservative of the pair, set up a foundation called the Atlantic Philanthropies and donated generously to Cornell, underprivileged youth programs, and Sinn Féin, the political wing of the Irish Republican Army. He gave anonymously, and most recipients never knew who their benefactor was. “I simply decided I had enough money,” he explained. “It doesn’t drive my life. I’m a what-you-see-is-what-you-get kind of guy.” Miller, by contrast, lived large, with stately homes reportedly in New York, Gstaad, Paris, Hong Kong, and Yorkshire, England, and a taste for the extravagant: he once threw a three-day party for which his Ecuadorian wife, Chantal, dressed as a South American princess, arrived in a hot air balloon. For his daughter Marie-Chantel’s marriage to Crown Prince Pavlos of Greece, Miller hosted a wedding for fourteen hundred guests that reportedly cost $
1
.
5
million and included a reception at the posh Claridge’s Hotel in London officially hosted by Queen Elizabeth II.

In
1994
, Feeney decided to sell his stake to LVMH, DFS’s largest supplier. Miller was dead-set against it. “Despite his promises, Bernard Arnault has a pattern of exploiting the assets of partially acquired companies for the benefit of LVMH with no concern for the best interests of the minority shareholders,” Miller charged in court. Feeney and Parker sold their majority stake of the company to Arnault for $
2.47
billion. Eventually Pilaro sold his
2.5
percent to Arnault, too. Arnault abruptly stopped negotiations for Miller’s
38.75
percent—said to be worth $
1.6
billion at the time—and Miller remained a minority shareholder of the company. Arnault told financial analysts it was “not necessary at this stage to invest an additional
9
million francs [$
1.58
billion] to take advantage of the synergies that already exist between [LVMH and DFS].” In other words, the world’s leading producer of luxury goods controlled the world’s leading purveyor of luxury goods.

A
S WITH LUXURY
,
Bernard Arnault changed the way duty-free business was done. Traditionally, duty-free stores had been in airports or at ports, on airborne planes, or on ships at sea—places where it was guaranteed that the goods would not be entering the local stream of commerce. Arnault had another idea: targeting tourists in town. You still need a boarding pass, and your purchases will be delivered to you as you board the plane. But you are shopping in town, just across the street from your hotel.

In Waikiki in
2001
, Arnault opened on the site of the old Woolworth’s a $
65
million, three-floor, gleaming white shopping-mall-like store on Kalakaua Avenue called the DFS Galleria to sell luxury goods at both duty-pay and duty-free prices. Compared to the usual stark, stock-laden duty-free stores in airports, the DFS Galleria was a veritable palace. To enter, you can either walk through a sixty-five-thousand-gallon aquarium filled with black tip reef sharks, spotted eagle rays, parrot fish, and other colorful Hawaiian reef fish or drift in through the sidewalk openings into an atrium loaded with Hawaiian floral perfumes, macadamia nut candies, and other Polynesian kitsch. The second floor is a regular duty-pay section that features hip fashion; logo-covered accessories from a few luxury brands, as well as more reasonably priced labels like Le Sport Sac; and the largest cosmetics section in the state. DFS doesn’t charge the state’s
4
percent sales tax in the duty-pay sections of the Galleria—the company pays it—to make their prices more competitive than those of the other retailers on Kalakaua Avenue. The third floor is exclusively duty-free—there you’ll find luxury brands as well as perfume, liquor, and cigarettes. Since you must possess a boarding pass to a foreign destination to shop in the duty-free section, there are very few Americans. And a great many Japanese.

DFS has always used crafty tactics to get the Japanese into its stores—way back when, Chuck Feeney learned Japanese to negotiate deals with Japanese tour operators so that they would steer their customers into the stores. But DFS under Bernard Arnault’s guidance has taken Feeney’s stratagems to another level altogether. Flights arrive from Japan early in the morning, long before the hotels are ready for check-in. If the Japanese come on a package tour—and
85
percent do—they already have their return boarding pass and a DFS shopping card, which allows them to enter the duty-free zone of the store. If they are traveling with a tour company that receives commissions from DFS, they are bused straight from the airport to the Galleria, where they are ushered into a conference room for a briefing on Hawaii and DFS. Following the discussion, they are guided to the duty-free floor, which is set up like Ikea: there is only one way out and you have to pass through every section of the store—luxury goods, jewelry, perfume, liquor, and tobacco—to get there.

Most of the top luxury brands are represented: Prada, Hermès, Dior, Céline, Fendi, Ferragamo, Bulgari, Burberry, Cartier, and Van Cleef & Arpels. On the duty-free floor, all the major luxury brands have miniature versions of their regular boutiques and primarily sell accessories such as handbags, wallets, jewelry, watches, and shoes or small fashion items like T-shirts and bathing suits—things that can be carried on an airplane. Many of the shops, as well as the tobacco and liquor sections, have signs announcing reduced prices written only in Japanese. Some brands have boutiques on both the duty-pay and duty-free floors but are careful not to carry identical items. The boutiques on the duty-free floor rarely carry shoes larger than size
7
¹
/
₂
for women, or clothes larger than size
8
, because Japanese women are small. What they primarily sell, though, is leather goods. In
2003
,
42
percent of Japanese travelers around the world purchased a high-end or branded handbag or leather good.

Generally, the Japanese only look during their maiden visit to the Galleria. They prefer to return in the evening, after dinner, to do their serious shopping. Because of this, the Galleria—and most luxury stores on Kalakaua Avenue—stay open until
11
:
00
p.m. DFS provides a free Trolley Express that cruises up and down Kalakaua Avenue, making stops at Louis Vuitton, Gucci, Cartier, Chanel, and the DFS Galleria. DFS will reimburse taxi fare for those who buy in the duty-free section. And the charter bus depot is directly behind the Galleria, giving Japanese tourists yet another chance to pass by the store. The goal of DFS is to get the Japanese into the store as much as possible.

Though the secret to duty-free sales success is moving product in volume, there are some exclusive items. In
2000
, for example, Céline—an LVMH brand—created a line of handbags just for DFS, which is also an LVMH company. And on occasion Hermès gets one of its coveted Kelly or Birkin bags to sell—normally they are made to order and there’s a several-months-long waiting list. Not surprisingly, they sell almost immediately. In February
2005
, Hermès received a small black crocodile Birkin with a diamond clasp and a price tag of $
82,100
. A Japanese customer bought it within a matter of days. Galleria Hawaii is DFS’s biggest retail outlet, and the Japanese are by far its—and DFS’s—biggest-spending clientele.

Today, of Hawaii’s
7
million visitors each year,
1
.
5
million are Japanese. They stay for four or five days or long weekends, and most come to shop; tourism is secondary. “The Japanese know what they are going to do from the time they land until they leave,” says Okano of Chanel. “They come with an agenda and know what they are going to buy in each store.”

The Japanese obsession with luxury goods—and the luxury companies’ obsession to satisfy it—has dramatically changed Waikiki’s landscape. When I went there in the mid-
1980
s—not long after Chanel arrived—Kalakaua Avenue was a party scene, with teenagers cruising in shiny low-riding Japanese pickups, a few working girls available for lonely conventioneers, five-and-dimes like Woolworth’s, local bars with cover bands playing Hawaiian-twanged pop, and a couple of old movie theaters. I went to catch Clint Eastwood’s
Heartbreak Ridge
at one.