Press Release

Travel Retailer International, March 2002

Break For The Border

Latin America is looking to be the new El Dorado of hard-pushed American travel retailers. Joe Bates finds out why Fairn & Swanson, now opening its fourth and largest border store at San Ysidro’s giant shopping centre, is so confident of finding gold.

Don’t make the mistake of calling Fairn & Swanson a ship chandler if you want to get along with Ned Trippe. The director business development is a little tired of telling people how far the 53-year-old Oakland-based firm has come from its ship-fitting roots. In just over a decade Fairn & Swanson’s retail division Baja Duty Free has grown to three stores on the US/Mexico border and a fourth, its largest yet, will open this May. This spacious 10,000sq ft (930sq m) outlet will be located in a new, upmarket $260m shopping centre and hotel complex at San Ysidro—the world’s busiest border crossing.

But despite this rapid retail growth, industry perceptions of the company—still the largest duty-free distributor on the US West Coast—are hard to shake off. “I do take exception when people say Fairn & Swanson are ship chandlers,” Trippe tells TRI. “Although we supply ship chandlers, we haven’t been ship chandlers ourselves in over a decade. It’s not even a remotely appropriate label for us. It is duty-free retailing that it is an increasingly strong focus for our company…it will probably generate 40–50% of our turnover this year.”

Latin lessons

Baja Duty Free will be rubbing shoulders with Tommy Hilfiger, the world’s biggest Nike store, The Gap and Liz Claiborne. All 75 tenants are eager to attract not only US tourists but also Tijuana’s rising middle class and rich ex-pats working in Mexico’s maquiladora zone—an area south of the border where foreign companies have taken advantage of cheap labour costs to set up factories. Mexicans from Tijuana are fast becoming a valuable source of income for San Diego’s retailers. They have high brand loyalty, pay in cash because of the country’s backward credit system and will travel long distances to shop in the US. Annual sales at Las Americas are expected to top $200m.

Trippe is understandably happy about both the volume and the quality of the customer base that the Las Americas shopping centre will attract. San Ysidro is the busiest border in the world with more than 86m crossings a year. Another plus is the longer dwell times expected, which means more store space can be devoted to promotional areas for new and existing products. “We will have all the benefits and none of the drawbacks of an airport store,” says Trippe. “We won’t be restricted by space and our customers won’t be restricted by time.”

Unlike at Baja Duty Free’s existing commuter-oriented stores where the traditional duty-free trio of liquor, tobacco and fragrance dominate, the higher percentage of Hispanic customers at Las Americas will call for a broader product assortment. The extended offer will encompass fashion, accessories, confectionery, toys and electronics. Well-known European brands with international appeal will augment a range of products popular with Mexicans such as tequilas and South American wines.

San Ysidro, the dividing line between San Diego in California and Tijuana in Mexico, is an unusual choice of location for a shopping and entertainment centre of the size and scale of Las Americas. Often called the “back door” to the US, San Ysidro is better known for drug smuggling, and 3% of people crossing the border do so illegally.

But Sam Marrasco, President and CEO of Real Estate Developer Land Grant Development, believes the Las Americas project can transform the image of San Ysidro. He wants the development to become a bold statement of cross-border cultural and economic co-operation between the two countries. The retail mall, which opened in November last year, is only the first phase of a project that will eventually boast themed restaurants, open-air entertainment, hotels, offices and a conference centre across a 66-acre (27ha) site.

Bridge over troubled waters

The proposed centrepiece of Las Americas is a soaring 150ft pedestrian bridge linking the US and Mexico, creating a new port of entry through which visitors from both sides would clear customs and immigration on foot. The completion of this phase is at least two to three years away but Baja Duty Free has the option to open a 3,000-5,000sq ft (280-465sq m) duty-free store on the US side, and possibly a second outlet of the same size on the Mexican side. With an estimated 16m people expected to use the bridge every year, it is unlikely that the company will want to pass up the retail opportunity.

Surprisingly, Baja Duty Free did not have to compete for the lucrative Las Americas concession. When retail tenancies at the centre were being decided early last year, the company’s erstwhile competitor on the US/Mexico border, World Duty Free Americas (WDFA), had other things on its mind. It was busy putting the final touches to its own multi-million dollar duty-free store (also located at San Ysidro) and was ultimately preparing to pull out of the Americas entirely.

Now Baja Duty Free has new competition at San Ysidro. The Falic brothers’ purchase of WDFA last November for the knock-down price of $6m (plus the assumption of liability for a $115m bond) caught everybody in the industry unawares, including Trippe. “It was a surprise to us, as it was to everyone. My reaction now is: ‘Welcome to the party’. They are a young, dynamic group coming in with an ambitious agenda and I wish them all the luck in the world. We think that anything that promotes the duty-free industry and raises awareness of it with the traveling public in North America is a good thing. Their entry is welcome; we like competition, so let’s see what happens.”

But despite this apparent warmth, business is business. The lawsuit which Fairn & Swanson took out against BAA for allegedly breaking a no-compete clause after it had sold Seattle-based cruise ship supply firm Export Inc to Fairn & Swanson in 1996 has now passed to the Falic brothers’ new company Duty Free Americas (DFA). Trippe confirms that the legal case is ongoing but will reveal no more details on the subject.

Fairn & Swanson may not have had the financial muscle of WDFA but it is the smaller, private company that continues to do business on the border today. Trippe is in no doubt as to why. “We believe that the success of our company competing against a large outfit like WDFA with all its resources was due to our focus on, and knowledge of, our customer base. That made the difference and allowed us to enjoy the success we have.”

And Baja Duty Free is likely to give new kids on the block DFA a good run for their money at San Ysidro. The new store in the Las Americas shopping centre will give retailer a second location at the crossing and Trippe reveals there are “firm plans” to open more stores on the US/Mexico border in the near future. Despite the new competition, it is clear that Fairn & Swanson’s growing retail business—safe from the devastating drops in passenger traffic seen by US airport retailers in recent months—has a bright future.

Fairn and Swanson’s ship comes in

In the 53 years that Fairn & Swanson has been supplying duty-free goods to cruise ships the business hasn’t got any easier. As business development director Ned Trippe explains, cruise ship operators remain tough customers, margins are tight and there is fierce competition from other ship suppliers. And, like other areas of the duty-free industry, the business is easily affected by external events. Trippe confirms that many of the cruise operators based on the US west coast were hit by the events of September 11 and Fairn & Swanson’s supply business has also suffered as a result.

Through acquisition and expansion Fairn & Swanson has grown into the largest duty-free distributor and ship supplier on the west coast. And the company remains committed to this area of its business. Last year it relocated to a larger 105,000sq ft (9,760sq m) facility on the edge of Oakland Harbor, complete with modern office space, as well as bonded and tax-paid warehouses. The move from three separate Northern Californian locations to the new high-tech facility allowed Fairn & Swanson to cut costs, speed up efficiency and improve intra-company distribution.

Trippe explains that liquor, and specifically the onboard pouring trade, accounts for a large proportion of the company’s cruise ship supply business. In recent years Fairn & Swanson’s closeness to the Napa Valley wine growing area has proved particularly useful in this area of its business.

Fairn & Swanson also supplies duty-free goods to land-based customers, including foreign military personnel, foreign consulates, and US embassies and consulates overseas. The company also has a supply of mainly domestic goods to customers all over the Pacific.

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