DFS Group L.P., which has operated duty-free stores in Hawai'i since the early 1960s will run them for another five years.

DFS yesterday was the sole bidder seeking to operate the duty-free concession in the state. The company, which operates duty-free shops at the Honolulu International Airport, in Waikiki and on the Big Island, also sells goods at retail stores and has more than 1,000 employees in Hawai'i.

Under DFS' bid, which is under review by the state Department of Transportation, the company will pay the state at least $38 million a year for five years — the minimum set by the state. The contract also requires DFS to make at least $1.75 million in improvements at the airport. The five-year contract leaves the door open for a possible five-year extension, said Sharon Weiner, DFS Group vice president of business development.

Weiner said DFS will now proceed on a roughly $40 million renovation of its Waikiki Galleria that will "introduce new luxury brands and continue our commitment to support the state's tourism strategy to attract more high-spending customers to Waikiki." DFS recently completed renovating the duty-free floor in the Galleria, she said.

"DFS is very pleased to have this assurance that we can move forward with our duty free business," Weiner said. "Most importantly, our employees can be assured of at least five, possibly 10 years, of continuing operations in duty free."

The Hawai'i concession agreement is DFS' largest single concession, Weiner said.

Business this year has been challenging for DFS in Hawai'i, which has seen an 8.9 percent drop in Japanese visitors through November, in part because of higher airline fuel surcharges, more expensive and limited hotel rooms and tougher competition from other destinations. Japanese tourists account for about 90 percent of DFS' duty-free sales.

Weiner said Japanese visitors also appear to be more conservative in their spending, a change that DFS officials are analyzing. One reason could be an increase in brand boutiques in Tokyo. A report this summer by the Japan Tourism Marketing Co. said more Japanese overseas travelers are now buying luxury brand goods domestically and thus purchasing less abroad.

"While Japanese arrivals and spending are not where we hoped that they would be right now, we believe that there will be a substantial improvement in the near future," Weiner said. "In addition, we have been told that the U.S. might consider a visa waiver program for the Republic of Korea in the next couple of years. And, we are seeing an increasing number of high spending customers from (China) and Taiwan."

The $38 million annual minimum payment is roughly about what DFS has been paying in recent years but considerably less than in the mid-90s to 2000, when DFS' duty-free concession — thanks to higher Japanese arrivals and spending — paid the state more than $100 million per year.

DFS was the sole bidder for the duty-free concession in 1996, 2001 and 2003, when the company was allowed to rebid the last 32 months of a five-year contract. The contract has since been extended a year to May 2007. The rebid of the duty-free contract in 2003 was part of a settlement between the state and DFS Group to resolve a dispute over $49 million in back rent for Hawai'i duty-free shops.

Reach Lynda Arakawa at larakawa@honoluluadvertiser.com.