Business commentary andanalysis of key developments inthe global duty free and travelretail industry for readers of The Moodie Report.

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ISSUE 27 JUNE 2007

The Moodie Report PLUS© ispublished by Moodie International.

Please direct any comments toMartin Moodie by e-mail:Martin@TheMoodieReport.com

Back issues can be found atwww.TheMoodieReport.com

i ns ide th i s i s sue

From triumph to turmoil..................................1

The bombshell is dropped ...............................2

Serenity in crisis ...............................................3

“A legitimate tender”.......................................3

“Like a small house in a hurricane” ..............4

Full steam ahead downtown ..........................7

Support from Thai society..............................7

Ready for battle –King Power

speaks outEditor’s introduction: King Power Group Deputy Chairman ChulchitBunyaketu has faced many challenges during a long and outstanding careerin Thai business, including a period as Managing Director of the country’slargest oil refinery, Thai Oil. But he can never have experienced anything likethe turmoil in the country since the military coup that toppled the govern-ment of Prime Minister Thaksin Shinawatra on 19 September last year.

That dramatic event, which took place just nine days before Bangkok’snew Suvarnabhumi Airport opened for business, set in motion a series ofcommercial aftershocks that threatened to sour an extraordinary doubleachievement by King Power between early August and late September –and which culminated in the company this month filing two lawsuits and aUS$2.1 billion compensation claim against Airports of Thailand.

On 18 August 2006 the company opened its sprawling, ambitious down-town Duty Free Shopping Complex in Bangkok – the first stage of a retail,cultural, commercial and entertainment development on a scale unprece-dented in the travel retail industry.

Just six weeks later, amid political upheaval, King Power opened some10,000sq m of duty free and tax free space at Suvarnabhumi and, togeth-er with sub-concessionaires, a further 27,500sq m of general commercialspace including food & beverage, entertainment and services facilities.

Despite well-documented teething difficulties after opening, Suvarnabhumirepresented a dramatic qualitative contrast with its oft-criticised prede-cessor, the overcrowded Don Muang International. Where the commercialoffer was good it was very good – and the few shortcomings, promisedChairman Vichai Raksriaksorn, would be addressed quickly.

When The Moodie Report asked him in late September if he was satisfiedwith what he had achieved at Suvarnabhumi and downtown, Vichai replied:“Not yet. Everything will take time to settle down and we will address anyweaknesses. We will streamline all aspects of the operation. Ask me thesame question in two years time. Then you’ll have your answer.”

Then, quietly at first but soon to an ominously rising drumbeat, the rum-blings started. The alleged corruption of former Prime Minister Thaksinhad spurred the coup that replaced him, and it wasn’t long before accusa-tory charges were levelled at the contracts put in place at Suvarnabhumi –including King Power’s duty free and tax free concession and the company’smaster commercial contract.

Over a period of weeks a series of hostile articles appeared in the Thaipress, leaked by members of the new government and suggesting that thecontracts were at risk. The main thrust of the criticism was that each wasworth more than THB1 billion, and therefore should have been approvedunder the Public-Private Joint Venture Act – which they had not been.

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King Power heard nothing directly; butat a fateful meeting with the Airportsof Thailand (AoT) board on 22 March abombshell was dropped. AoT informed thecompany that it planned to terminate bothcontracts, citing non-compliance with thePublic-Private Joint Venture Act as thebasis for the termination. “The meetingunanimously agreed on the termination ofthe duty free contract and commercialcontract,” said Board Chairman GeneralSaprang Kalayanamitra afterwards.

Pertinently, the Board which voted onthat occasion was depleted by five mem-bers. At the time of voting the five Boardmembers – all executives of AoT, whowould have worked under previous AOTBoards – were asked to leave the room.

Nevertheless, AoT Board SpokesmanChermsak Pinthong confirmed that theretailer could continue to trade while theboard’s decision was sent to the Attor-ney General to consider further action.

Nearly two months went by and, despite aflurry of media headlines, little happened;and King Power continued to trade. On 9April the company gathered its key sup-pliers together in Bangkok to assure themthat it was as close to business as normalas was possible in such circumstances.

But pressure was mounting. Both nationalnewspapers, The Nation and The BangkokPost, claimed on 20 April that AoTplanned to call bids for duty free shopoperations at Suvarnabhumi to allow “atleast two to three operators”. The claimallegedly followed an AoT board recom-mendation the day before. Again, noth-ing was communicated to King Power.

Then, on 8 May, the silence was broken.King Power received a terse two-para-graph letter (dated 3 May) from AoT.The first paragraph related to requestsfor some 30 modifications to shops andother commercial areas at Suvarnabhu-mi, citing safety and security complianceunder the terms of the contract. Mosthad in fact already been completed.

The second, crucial, paragraph referredto the contracts themselves. It madethe extraordinary claim that as a conse-quence of legislation relating to ThePublic-Private Joint Venture Act of1993 “no contracts ever legally existed”.

Because of what it called – withadmirable understatement – the ambi-guity of the letter King Power asked itslawyers to review the wording in orderto ascertain AoT’s intentions. But itshowed its feelings publicly for the firsttime in a statement on 11 May, in whichit noted: “There is no reference in theletter to any change in the existing busi-ness circumstances, or cessation of anyof the existing businesses, or any futuresteps that need, or will, be taken by Air-ports of Thailand PLC.”

It added: “King Power InternationalGroup would also like to highlight thatthere has never been an occa-sion historically where the Gov-ernment of Thailand has rescind-ed, or not honoured, contractswith third parties executed by aprevious government.”

In an open letter to the industry(published in The Moodie Reportdays later) it concluded passion-ately: “It is very much businessas usual with our airport opera-tions. We have almost 6,000very loyal and dedicated staffemployed directly by us, betweenour various businesses. Theyare working professionally anddeterminedly, in clearly difficultcircumstances.

“On the supplier side, again theresponse has been overwhelm-ingly supportive. Our supplypartners remember the past

times of crisis, and that there has neverbeen an occasion when King PowerInternational Group has defaulted on anyof its commitments, whether they wereof a financial nature, or of any otheragreed commercial or moral principle.”

On 4 June King Power stepped up itsresponse as its wholly owned companiesKing Power Duty Free Co Ltd and KingPower Suvarnabhumi Co Ltd filed two law-suits in the Civil Court against AoT anda THB70 billion (US$2.1 billion) com-pensation claim. It claimed the contractterminations involved “unlawful use oflaw” and that the compensation was inrespect of the nullification, loss of futureearnings, the companies’ investments todate in the projects, recruitment of spe-cialised contractors, interest and taxcharges, and products purchased.

These are testing times for King Power,but the group is now underlining itsresilience. In a compelling interviewover breakfast with Martin Moodie atthe TFWA Asia Pacific show in Singa-pore last month, Chulchit Bunyaketuspoke out for the first time about howthe company is responding to the pres-sures of recent months and the uncer-tainty over its future at Suvarnabhumi.

[Note: This interview was updated bytelephone in the wake of last week’sdevelopments.]

Vichai Raksriaksorn: Verycalm and very focused

Serenity in crisisChulchit Bunyaketu is calmness per-sonified as we talk about the contrac-tual furore in which King Power findsitself in Thailand. When I ask if the crisis has caused him many sleeplessnights, he responds with his trademarkchuckle: “I always sleep like a baby atnight. I do my best during the day, so I can do no better.”

That serenity flows down from Chair-man Vichai Raksriaksorn, who insiststhat the company is blameless in thewhole affair – and is adamant that KingPower will prevail through the most try-ing of circumstances.

“One thing I like about my Chairmanvery much, and it’s something we havein Buddhism, is that he can focus sowell,” notes Chulchit. “Once the politicalproblems began and started to affectthis business, any human would beginto worry what will happen. But once heset out all his strategies he becamevery calm.”

Chulchit adds with a laugh: “He’s young– just 49 – and my Chairman is just ascalm as me. So all the preparation forthe battle is there. We don’t like to havea battle, but we are ready for it.”

Arguing that the whole crisis is aboutpolitics not contractual shortcomings,he insists on underlining the scale ofthe company’s achievements in recenttimes to put the matter in its rightfulcontext.

“The growth of King Power over thepast three years has been tremendous,”he says. “Both the [former] governmentand the AoT board recognised that wehad been very efficient in running dutyfree at Don Muang. For Suvarnabhumithey looked at both international andThai operators. The fact is that in thiscase the Thai company had proveditself and, as in many countries, thegovernment therefore preferred a localcompany.

“And they looked at our track record. Wehave always produced more income thanthey anticipated. There was a minimumguarantee and our sales at the end ofthe year have always exceeded it – thatis the only benchmark that counts.”

But, he insists, the company still had tocontest – and win – a tender that passedthe strictest and most rigorous stan-dards. “It was one of the most difficulttender documents you could ever see,”Chulchit recalls. “Our offer proved thatwe were a really professional company.

“More importantly, when we got thejob our vision meant that we saw dutyfree as part of the wider tourism indus-try. It was not just the normal travelretail experience – to us it was allabout supporting the country. Ourvision was to interconnect allour tourist activities, both atthe airport and elsewhere. Weleased Crown Property land[for the Downtown Complex] –really big space – and we com-mitted heavily to investmentthrough one of the largestbanks in Thailand.

“At the end of this year we willhave a grand openingdowntown. We have the hotel,the entertainment centre, theduty free; it will all be connect-ed. And right across the roadyou will have the express trainto the airport. That’s the ideawe conceived three or fouryears ago.

“That was really supporting theThai tourism industry. We feltthat with the combination of

downtown and Suvarnabhumi we weredoing something for the country. Peoplesaid ‘Wow!’ After all, three years agoKing Power was just another operatorat Don Muang; but we became veryhigh profile. And, I think, people becamejealous.”

Chulchit says King Power should not beheld accountable for any damage to theformer government’s reputation.“Remember, we didn’t select the govern-ment when we started the project. Wewere always very, very careful in all thesteps we took – in bidding, in documen-tation and in contracts.

“We always consulted our legal expertsover all the contracts, and we evenquestioned during the bidding confer-ence whether it was worth over THB1billion in investment. That joint invest-ment law is only applicable to govern-ment procedures – it does not apply toprivate parties.”

Commenting on the AoT list of com-plaints in its letter of 3 May, Chulchitpoints out that the company – like allparties at Suvarnabhumi – had beenforced into opening on time underincredible pressure. “We were not happythat we had been rushed to open,” herecalls. “We were working 24 hours andhad contractors all over the place. Itwould have been easier for us if we had

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Chulchit Bunyaketu: “We don’t like to have a battle, butwe are ready for it”

been able to defer a month or so, butthe government decided to open.”

Citing his experience with major infra-structure developments during his timewith Thai Oil, he says: “In any majorproject, even if you have a first-classcontractor, you will get some defects.You have to allow time for some adjust-ment. And when the government rushedto open on 28 September they shouldhave allowed the contractors to correctany defects over three or six months. Inany normal project you would have asoft opening and a test run. But in thiscase domestic planes were already land-ing and passengers walking through –we had to accommodate those passen-gers as well as continuing the building.You can’t do that.”

Nevertheless, under the gravest of timepressures, the company opened on time.Then, suddenly and chillingly, theclimate changed. “Yes, it was a heavystorm,” admits Chulchit. “We were like asmall house in a hurricane.

“They thought we were part of it [theirregularities] because we were involved

at Suvarnabhumi – even though thebidding process had been open, theprice has been checked and over aperiod of ten years we were THB2.2billion (US$81 million) higher than thesecond bidder as well as being the besttechnically. But people didn’tlisten to the truth; they likedsensationalism.”

In recent weeks, however, thatsensationalism has begun towear off, says Chulchit. “After awhile things began to change.The press began to realise wewere professional, that we hadbeen recognised throughout theworld by the industry. And afterinspection they could not findanything wrong with our proj-ect, except to question why wehad used more space than stip-ulated in the original contract.”

Chulchit has a ready answer tothat. The 5,000sq m in the con-tract was a minimum. KingPower had the right to extendthe space to 9,000sq m as itdid, he insists, but had to pay for

the privilege. And everything had to beapproved. “Every single layout and everysquare inch of each shop was subject totheir approval. We got every single draw-ing and plan approved by the Presidentof AoT, with official documentation.

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A typically sweeping retail panoroma at Suvarnabhumi Airport – a complete qualitative transformationfrom the shopping offer at the old Don Muang International Airport Picture: Martin Moodie

“On top of that, every month we had ameeting chaired by the Prime Minister ofThailand – effectively the CEO of thecountry – and every time he would ask usif we would be able to complete in time.And of course we would say ‘Yes, Sir’.

“He would say ‘Don’t disappoint us,make it as beautiful as the layout andanimation you presented. You must haveall the brand names and be able to com-pete with the likes of Singapore andHong Kong.’

“We were running around trying to getthe boutiques. Getting a top brand toopen a boutique is not easy. We workedwith Chanel for a year – a whole year –until they were happy with it.”

But that was then, this is now. I askChulchit the hardest question – the oneon everyone’s lips: “Can you hang on toyour business?”

“There are two aspects to this” hereplies. “Firstly, the country’s top rev-enue earner is tourism, and King Poweris part of the tourist industry. So I thinkthe government will have to seriouslylook at all areas and try to work out anamicable solution.

“Secondly, and legally speaking, if the[former] government was supposed tocomply with certain procedures andthey did not, that does not make ourcontracts void. The AoT could easily goback to the cabinet and redo the whole

thing while keeping King Power intactfor the operation.

“After the news broke three or fourmonths ago we finally received a letterdated 3 May saying we did not have acontractual relationship so please co-operate. They did not even give usnotice.”

Chulchit warms to his theme. “If anydecision AoT takes becomes a boardresolution issuing notice to us, then theboard will have to take full responsibili-ty in terms of the eventual damage toour company. So that’s whythey are being very careful.”

So is there any hope of a cor-dial resolution? Chulchitoutlines a ‘what if ’ scenario.“What if they asked us to redothe plan by cutting a huge area– let’s say 1,000sq m or2,000sq m? Do we have tocomply? Legally we don’t haveto, but if we were faced withdoing that we would be losingout on our investment and wewouldn’t reach our targets.

“Secondly, what are they goingdo with all that space? Are theygoing to keep it empty or giveit away to a second operator?In our two contracts it saidclearly that we are the singleoperator. Of course there areplenty of people looking around

for opportunities – we know all themovements of our competitors.”

Chulchit offers no criticism of rivalretailers seeking to take advantage ofthe opportunity – “after all that’s theirnormal business” – but he has somecautionary words. “I would warn themto be careful. We have been there for 18years with signed and sealed contracts.I would suggest they don’t play aroundwith the politics at this time.”

Now I ask a ‘what if ’ question myself,and a highly sensitive one. “What if AoT

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King Power’s two disputed contracts at the new Suvarnabhumi Airport cover duty free and generalretail as well as the master commercial concession, including all food & beverage operations

did take away some of your space, andeither issued a tender or appointedanother concessionaire?” The reply isimmediate. “Then we would sue them.They are not allowed to do that.”

But AoT is arguing that the contractsdo not exist, I point out. “That willinvolve litigation over whether the con-tracts exists,” replies Chulchit. “There’s aprocess involved and it will take verymany years, with the court processes,until the conclusion is reached.”

“Everything by the book”Asked last week by telephone about thelawsuits and compensation claim filedon 4 June, Chulchit says: “We are simplyfighting for justice. We have done noth-ing wrong and everything by the bookand by the law of our land.

“We cannot stand by and allow ourbusiness, our vision and our reputationto be damaged – and we will not.”

King Power has paid big money inadvance to the airport authority – a

voluntary two-year up-front concessionfee. So what has the crisis meant interms of the funding that was in placeto underwrite the vast investmentinvolved at Suvarnabhumi?

Chulchit answers a difficultquestion candidly. “Some of theoverseas banks do not under-stand the situation, and theywant to call in early,” he says.“They have the right to do so,even though it is unfair. Theydon’t want to get caught by allthe business in Thailand and Iunderstand that.

“We have re-financed alreadyas necessary. But all the Thaibanks are familiar with thepolitical situation and haveissued a statement publicly, viathe media, that they will contin-ue to support us.”

How much pressure has thatput on cash flow? “We have towork harder on our cash flow,”

Chulchit admits. “When the airport firstopened sales did not go as planned, andthe situation was not helped by the con-stant regional press controversy overthe condition of the runways in Suvarn-abhumi. Now we are back on scheduleand our performance for the first quar-ter year is over target. Let’s say we areup by almost +30% [over the old DonMuang].”

As the interview nears its conclusion, Iask the soft-spoken Chulchit what mes-sage he and Vichai have for the indus-try. He smiles. “I am sure we will win atthe end of the day. In fact the battlehas not yet started. There are going tobe battles and more battles, and at theend of the day, with the support of theindustry, we will win the war thanks toour professional competence. We havemany letters of support from the indus-try, from suppliers, saying they are onour side

“Last night we were nominated for four[Raven Fox Asia Pacific] awards and wewon them all – partly because theindustry believes we deserve them, andpartly because they want to support us.

“I’m very positive about the operationat the airport. None of the overseascompanies can do it the way we do it.We have 6,000 staff to handle the com-plex – all of them very professional. You

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First-quarter duty free sales at Suvarnabhumi were nearly +30% up on revenues at Don Muang International

check with any official of the AoT, notat board or government level, and youwill find they are happy with us. Theyhave known us for 18 years. They don’twant to work with anyone else, becausethey know we are sensible and flexible.”

Chulchit admits that going forwardeverything will have to be resolvedwithin a legal framework, especiallygiven this month’s developments. But hepoints out a fundamental contradictionin AoT’s position as outlined in its corre-spondence of 3 May.

“In their letter to us they said at onepoint we did not have a contractualrelationship. But in the first part of theletter they said ‘according to our con-tract’ and pointed out 30 things thatwe had to correct in order to meetsafety standards.”

In reality most of those had alreadybeen resolved, he points out. And it wasKing Power, under no orders to do so,which itself ordered the removal of itsMuseum Shop just behind the centre-piece ‘Churning of the Milk Ocean’sculpture in the central entrance tocreate more space.

“We were not asked to do that, but wedid. It created more space and made itnicer for people. That proved that wedidn’t just care about the business butalso about the convenience of the trav-elling public.”

I ask about King Power’s long silencebefore finally breaking cover in lastmonth’s open letter to the industry.“Western culture and Thai culture aredifferent,” he explains. “Whoever is act-ing as a government here either comesfrom revolution or an election.

“In Thai culture we have to show ourrespect for who they are – after all,they are the head of the country, forgood or for bad. But in the Thai way, ifwe choose to fight back we have tomake sure we do it harder. We don’ttake the course of fighting openly; butby not making a big noise we gain moresympathy. My strategy is to get peopleto understand the facts – but I don’t doit through the press. I show the facts tomy partners and my suppliers, and theyshow their support for us.”

In the meantime, it’s full steam aheadfor the full opening of the King PowerDowntown Complex, a 41,500sq mextravaganza sited on a 12-acre siteleased from the Crown PropertyBureau for 30 years with two ten-yearrenewal options. Total investment costsare estimated at THB5 billion (US$134million).

The existing retail and office facilitieswill be complemented by the 380-roomNovotel, a 600-seat 1,200sq m

Ramayana Restaurant, and a theatre onthe 4th floor featuring the authenticJoe Louis Puppet show, produced byfamed national artist SakornYungkhieosod.

Underlining confidence in the operation,Chulchit reveals that he signed aground-breaking deal with ultra-premi-um watch company Rolex the daybefore to open a boutique in the Down-town Complex. “It will be a first in theworld for them to have a stand-aloneduty free boutique with us,” he saysproudly.

Breakfast comes to a close. I try to putmyself in Chulchit’s shoes, leading acompany facing a completelyunforeseen threat to its operation andwhich is operating under circumstancesthat are bizarre by any standards. Howdifficult is it, I ask, for him to continueto motivate his fellow managers andemployees?

“I had a meeting recently with my6,000 staff and I comforted them,” hereplies. “I told them that hard timeswere ahead, but that in a few monthsthere would be a new government. Isaid we shouldn’t lose our spirit – weare professional, and professionals mustface problems. That’s why the Chairmanasked me to work here. Because I amup to whatever situation arises, locallyor internationally, politically or legally.

“Morale is still high at King Power. Infact I would say it’s actually even higherthan before. One of the reasons is thatwe are starting to get support from theThai people. Everywhere when I walkinto a business function people ask if Iam OK and tell me they will back us up;they say you have done the right thing,don’t surrender, don’t give up the fight.

“That is also happening in the press.People who used to get jealous about usbegin to feel that it’s reaching the limitsof unfairness. I don’t think the publicwill tolerate that. So we’re not fightingalone now. We are fighting with our6,000 staff and with Thai societybehind us. So anyone coming into thisarea will have to think twice.” n

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Full steam ahead for the King Power Downtown entertainment,leisure and retail extravaganza Picture: Martin Moodie

“In the Thai way, if we choose to

fight back we haveto make sure we

do it harder”