ONE OF THE WORLD S GREAT WINES. inniskillin.com

ONE OF THE WORLD’S GREAT WINES inniskillin.com May/June 2005 LUNCH WITH… Baker Salleh Lunch with… Baker Salleh The date: March 15, 2005 The cuis...
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ONE OF THE WORLD’S GREAT WINES inniskillin.com

May/June 2005

LUNCH WITH… Baker Salleh

Lunch with…

Baker Salleh The date: March 15, 2005

The cuisine: Japanese

The restaurant: Senzuru, Harbour Plaza Metropolis, Hong Kong

The wine: Cloudy Bay Sauvignon Blanc 2004, Marlborough, New Zealand

The Moodie Report is pleased to launch a new regular feature, ‘Lunch with…’, in which we learn about some of the industry’s most respected figures in a less formal setting than the traditional interview environment. We begin with Baker Salleh, one of the great characters of Asian duty free. He has spent 35 years in the business – nearly 30 of them with DFS Group – and the past five with Hong Kong International Airport liquor & tobacco concessionaire Sky Connection. His has been a remarkable career that has embraced multi-locations with DFS and the glory years in that retailer’s history as well as the very different – and hugely demanding – challenge of leading Sky Connection out of troubled times and into the bright new future that now beckons. Over some fine Sauvignon Blanc and sashimi he talked frankly with Martin Moodie.

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hen Baker Salleh joined Sky Connection in October 2000 after nearly 30 years at DFS Group, he recalls vividly someone (“who shall remain nameless”) saying to him “What the hell are you going to do with this sunset industry?” The subsequent four and a half years have embraced Sky Connection’s successful fight to restore profitability and credibility to its operation, a hotly-contested tender to retain the liquor and tobacco contract at Hong Kong International Airport, 9/11, and SARS. “Oh boy, I’ve seen everything,” he laughs. “It’s been a real rollercoaster. The year 2000 when I joined was a good year, although we were always struggling to make money because of the concession fee. It was just so high there was

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no way we, or anyone else, could make any money. Thankfully we didn’t have too much left of the old contract to run.” Sky Connection’s original offer resides, unquestionably, in the ‘overbid’ category of famous industry tenders; but Salleh defends his company stoutly for the way they responded to the economic realities. “One thing you have to say about our owners is that, although they lost money, they made a commitment and stuck with it. They weren’t about to turn tail and run. It was just a matter of minimising the losses. “So when the time came for the new contract they could say, ‘Hey, Baker we seem to have had a handle on this in the latter part of the contract,’ so we went for a new

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LUNCH WITH… Baker Salleh contract on a profitable basis. And we were successful. That made everyone happy.” Today things are looking brighter than ever for Sky Connection. Notes the affable and ebullient CEO, “I’m having fun, and I’ve had some luck.” There’s no question about the former – he is doing a job he loves (retailing), embracing a personal passion (wine) and benefiting from four decades of experience in the business. But luck? People and businesses tend to make their own luck. And Sky Connection’s latter-day success owes much to the vision and tenacity of its CEO. Our lunch meeting begins with my handing over two bottles of the super-premium Cloudy Bay Sauvignon Blanc from my home country of New Zealand (won by Salleh in a competition on The Moodie Report.com). With typical generosity, within minutes a bottle has found its way into an ice-bucket at our table. As he takes his first sip, I ask him: “Was 9/11 your first shock as CEO?” “Actually no,” he laughs loudly. “The first shock was when I saw the P&L – and that was in a good year!”

May/June 2005 “If I focus on just 10% of the nationalities trudging through Hong Kong International Airport and not do enough for the other 90%, I should be shot,” he thought. “The situation forced us to do a complete rethink of our strengths and weaknesses. It quickly became apparent that we were missing the boat – a lot of American and European travellers – and Chinese and believe it or not Hong Kong travellers – were not buying. The Hong Kong market is huge – it’s a third of the passengers at the airport.” The old offer was mainly Cognac and high-end Scotch, still significant business for Sky Connection but today only part of a highly-varied and constantly-changing mix. The deluxe and super-premium brown spirits were very profitable, but given the poor penetration rates they were simply insufficient to sustain the operation. So in came a new emphasis on white spirits (particularly vodka) and, arguably Sky Connection’s signature statement, wine. Salleh decided to dedicate significant space to this nascent category, one long dismissed by duty free retailers as lacking viable margin returns.

“Let’s turn the store around, let’s put wine right smack in front of the shop. And let’s try to sell to the Hong Kong population – 30% of our passengers”

He recalls that the only way out of the precarious financial dilemma he encountered was to re-examine the whole operation, particularly the cost structure. “I had to ask how we could get through the rest of the contract and still be in a reasonable position for the next bid. That dictated what I had to do,” he recalls. “Whether my margin was 50% or 60%, the concession fee was eating it anyway. So every extra dollar I got in was going straight to the bottom line.”

“That was a huge gamble. If you think back to 1999 and 2000, there was still a significant north Asian business, Taiwanese, South Koreans and Japanese, to whom we were selling Cognacs and premium Scotches. The margins on those premium products are very good.

The problem was that he had few places to turn. In those days (it has since added some other Hong Kong duty free operations, such as the Hong Kong–Macau and Hong Kong–China City ferry terminal concessions) Sky Connection was a one-location retailer. If it was going to sort out its problems there was only one place to look – and nowhere to hide.

“Now all of a sudden I was saying ‘Let’s turn the store around, let’s put wine right smack in front of the shop. And let’s try to sell to the Hong Kong population – 30% of our passengers.’ You can’t imagine the reaction I got. People looked at me… and these are professional, experienced people… and said ‘You must be mad… what kind of margin are you getting on wine?’ So I said ‘Not much’ but I also said that my passengers are not buying in the store and only a handful are buying the premium Scotches. We were letting the others walk away with just a carton of cigarettes.”

Salleh believed that the company was doing an adequate job of servicing the high-spending north Asian clientele, particularly the Japanese, but not enough for the others.

It was a classic interpretation of the old adage that you don’t run a business on margin – you run it on cash. Simultaneously Salleh ‘cleaned house’, scaling back the

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independent

Glenfiddich is a registered trademark of William Grant & Sons Ltd.

The

spirit.

www.glenfiddich.com

LUNCH WITH… Baker Salleh

May/June 2005

Baker Salleh packs his trunk There’s no disguising Baker Salleh’s satisfaction with the successful turnaround at Sky Connection, or how much he is enjoying the job. “I’m having fun, Martin. Let’s face it, I’ve been in this industry for around 35 years. DFS was my first and only job till I left. I joined them in 1970 here in Hong Kong. So I’m like an elephant that returns to where it was born to die.” He recalls those DFS days fondly. “After I joined DFS, Hawaii was my first assignment out of Hong Kong. From Hawaii I was transferred to Singapore where I was charged with opening it up. We had nothing there and I got on a plane and started it. Singapore was interesting. At DFS we had the very first candy and chocolate shop. It was at the old airport back in 1982.” They must have been very interesting days with DFS, I surmise. “It was a very good business model actually,” Salleh replies. “The owners were entrepreneurs. They were the business development guys and they went after business in terms of acquiring locations. Then they had professional managers for each of the divisions, and those guys were charged with making money for their locations. “They were on the spot, they knew the market, they knew the customers and they ran the business and contributed to the group; so there was a lot of individuality in those days. Each one was a mini business on its own – Hong Kong, Hawaii, Guam and Singapore – they all contributed to the group. It was a very decentralised approach and it was hugely successful. “You were local and on the spot. You made your own decision and if it didn’t work it was on your arse,” he recalls with a smile. “But if it worked you got a nice bonus. That was exciting.” warehouse and back-room force and using technology to reduce the manpower requirement. It worked. 2000 and 2001 were good years, and more people began entering the shops (much smaller then than they are today under the new contract), and spending. Then Salleh had another brainwave. “You see, Martin, I am a retailer,” he says. “I remember saying ‘What the hell can I do with liquor and tobacco that’s going to make tourists want to buy it as a memento of their visits?’ They can buy their bottle of Johnnie Walker or Marlboro anywhere, but what’s going to show that

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Salleh has learned much from those role models. “I was in the first generation at DFS when I joined in 1970. Bob Miller and Chuck Feeney started it all. If you look back, what was the story of their success? They were able to satisfy the needs of the huge number of travelling Japanese. What are we doing at Sky Connection now? We’re trying to satisfy the needs of the customers that are visiting the airport.” Salleh believes a successful retail operation must combine discipline with flair. “It’s big investment in terms of dollars,” he says. “You need the accountants to keep you on the straight and narrow. You need to watch your inventory and to ensure you are investing in the right places. You have to have all those disciplines. But, at the end of the day, it’s also about how to excite your customers. So there’s got to be some sort of balance – if you over-control it you stifle all the creativity. And if you under-control it your costs go to hell. “It all boils down to having a team that can understand retail – you have your disciplinarians to keep your stock losses under control, the stock counts correct, the cash till reports correct – and then you need the merchants who bring in the products and have the flair.” they’ve been to Hong Kong? So we started moving into Chinese wine. “Not too many other locations can sell Chinese wine, so I felt it was justified. We developed our own ‘souvenir’ kind of liquor. We increased the number of Chinese wine references from less than ten to 60 or 70. We fleshed it out and made it really, really Chinese. For the average tourist – it doesn’t matter if they’re from Europe or Malaysia or Thailand or Australia – if they see a pagoda with a reasonable Chinese wine in it, they can enjoy the wine and have a souvenir of their visit as well.” The Moodie Report

Visit us on Stand H28 For further information contact: Lewis Johnstone. Alize International, New Bank House, 1 Brokenhurst Road, Ascot, Berkshire SL5 9DJ T: +44 1344 871860 F: +44 1344 871861 E: [email protected]

LUNCH WITH… Baker Salleh So the range wasn’t targeted at the Chinese traveller? “No. Chinese wine is mainly for non-mainlanders. The mainland and Hong Kong guys don’t buy, but the other 60% or 70% of visitors to Hong Kong will show some interest.” White spirits. Wine. And Chinese wine. There was one more sector to play with: single malt Scotch whisky. But not just any single malts – Sky Connection has become famous locally and internationally for offering some of the oldest and most expensive lines on the planet. Today, for example, a Glenfiddich Rare Collection 1937 (the oldest single malt ever bottled, at 64 years of age in 2001) occupies pride of place just outside the main store. Its retail price? Around £25,000 [HK$380,000/ US$49,000]. Salleh isn’t too worried about whether it will sell or not [though one bottle did just before we went to press]. “It’s not selling it that excites me,” he says. “It’s more about having that £25,000 bottle bringing in the people that say ‘Gee, I didn’t know a bottle of single malt could be so expensive.’ “Now it makes them buy the 50yo at £4,500 (US$8,800) which is a helluva bargain,” he laughs. Such offers are crucial to tapping the airport location’s prime status, Salleh believes. “Hong Kong International

May/June 2005 is unique. We are the crossroads of people going in and coming out from mainland China – and let’s face it, mainland China is the place now. “So we try to have the best products, and bring them to the attention of the mainland Chinese consumers. We have the crème de la crème coming through the airport. Our offer creates awareness. They will go back to Beijing or Shanghai or wherever and say that in Hong Kong there is a HK$380,000 bottle of whisky and there are only six in the world. That’s going to bring their mates around when they come here – and if nothing else they will remember Sky Connection. “It’s creating a story about your shop. When did liquor and tobacco stores do that? We’re probably the biggest seller of vintage and aged malts among any retailer. In the past year we have sold dozens of The Macallan 1946, which is HK$18,800 (US$2,400) a bottle. “Bob Downing [Duty Free Director] at William Grant & Sons saw what we could do with the very high end single malts and trusted us to market and retail the last six bottles of the single malt that he has. We have not disappointed Bob. We have set it up nicely in both shops – the 1937 is in a museum case with a certificate and a promoter.” Having the last six bottles available was important to Salleh. “I don’t want to buy one bottle and then have the next guy claiming to have it as well,” he explains. “Otherwise we’re just another retailer – whereas now we have a story to tell. My owners are with me 110%. It’s something that is creating a stir at the shop level, and I’m not just talking about customers who come in and say ‘Is there a zero too many on the price tag?’ I’m also talking about our own staff and sales team. Our staff get this sense of pride that they work in a company that has merchandise that ordinary duty free shops don’t have. It adds to the whole sense of confidence.” That confidence is also mirrored in the supply community. The retailer suffered from a mixed reputation to say the least in the late 1990s, leading to first Rémy Martin and later Diageo refusing to supply. Both positions are now fully resolved and sound relationships are in place.

Creating a story: Baker Salleh’s pride and joy is the world’s oldest single malt, Glenfiddich Rare Collection 1937, on sale at US$49,000 a bottle

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“Rémy stopped supplying in 2000. I got it back in 2001. So for me it was a whole year without any Rémy products, and that was tough. There was resistance to us from the major suppliers, and we had problems with them. Now there’s a sense of confidence amongst the suppliers, amongst our own staff, amongst our customers and amongst the airport people.” The Moodie Report

LUNCH WITH… Baker Salleh New tender, new times And so to the new tender in 2002, the successful retention, and the resultant new-look stores. In what was a highly competitive bid, against offers from Nuance-Watson and King Power, Sky Connection was seeking “a really new way of looking at liquor and tobacco”, Salleh recalls. He had never forgotten the ‘sunset’ allusion and was determined to learn from it in the new tender. “We reassessed the whole market and how the dynamics had changed. Looking at the new bid, we learned some lessons from our malt initiative, we learned something from our Chinese wine initiative, and we looked closely at the space. The airport did a very good job in that they had pre-marked the liquor & tobacco, perfumes & cosmetics and general merchandise areas so we all knew exactly where the shops would be before we bid. “So when we saw where the shops would be [tucked back from the escalators leading to the gates, i.e. against the traffic flow – Ed], the challenge was how to draw customers into the shops. We had to have something on offer that would attract strongly. We had many a brainstorming session.” One of the solutions was to create the bar that lights up the area in front of the main store and draws the passengers back in. “It’s such a prime area that any supplier would have paid big bucks to have their brand in that particular spot – and believe me it was big bucks,” Salleh recalls. “But from my point of view, what is going to make us more profitable – to have one brand in that spot to pay us x million a year, or to do something creative with that space that would draw in x million people who would spend $100 or $200 each? “We can always go back to having one brand in there, but we owed it to ourselves to try something new and create a talking point – to have the customers at least pause a little bit and say, ‘Hey, that’s interesting, I wonder what they’ve got?’ Was it the right decision? “It was, and still is, the right decision. But I’m thinking of modifying it now,” Salleh answers. “I would rather not sell it to one vendor for any period of time. I prefer to invite our suppliers and say: ‘Here is the space – let’s work together. I’m not going to charge you an excessive amount of money for it. But I am going to charge you to come up with something exciting and creative so we can both have pride of ownership.’

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May/June 2005 When The Moodie Report visited, the reworking of the area had already begun. Taking pride of place is the Glenfiddich 1937 featuring the Glenfiddich story on a plasma screen and strong promotional supporting material which majors on the line’s cost and its exclusivity to Sky Connection. “It gives Glenfiddich a huge name recognition among Chinese,” says Salleh. “My promoters had been telling me that the Chinese didn’t really know this brand. They know it now.”

Examining outside opportunities With Hong Kong International Airport ticking over nicely, Salleh says the company’s ambitions are now stirring elsewhere. “There are good opportunities all around,” he notes. “We are obviously looking at concession availabilities anywhere in Asia. China is a very interesting market. Although it’s still very controlled there is some indication this may be relaxed to some extent. DFS is in Hainan, Sunrise is in Pudong and Beijing looks like it may break away [from CDF Group buying]. “With the mainland it depends on if, when and where the opportunities arise. New World [Sky Connection’s parent company] is a very, very big player on the mainland with a lot of businesses and it dovetails right into what they are doing. New World is actually the biggest retailer on the mainland – it owns a lot of department stores there.” How about the Singapore Changi liquor & tobacco concession, currently held by DFS Group and up for tender in late 2005? “We would definitely take a look at it and if it makes sense, and we can stretch ourselves to cover Singapore, then why not?” Salleh replies. “Fortunately we’re talking about two well-established categories with a lot of obvious big icons like Philip Morris, Rémy and Hennessy. So it’s not like trying to get your hands around too many items. We believe we have a very good rapport and working relationship with major suppliers. It’s a question of logistics. If we can get the logistics right and we have the right people I don’t think that should be too much of a problem.” So it makes logistical and strategic sense. But Salleh has a more fundamental concern – profitability. “It’s more a question of can we or anyone else interested in Singapore mount a reasonable bid that, at the end of the day, will make money?” he asks. “It doesn’t make any sense to overbid or bid for the sake of bidding and win the concession for the sake of being The Moodie Report

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LUNCH WITH… Baker Salleh

May/June 2005 there. I look at it first from an outsider’s point of view. If I want to get into Singapore and I can’t make money out of it, why the hell should I bother? Equally, if I were the incumbent I would say: ‘If I bid for it, win it and lose money, why bother? Why should I take money from my downtown operation to subsidise the airport? Can I improve my downtown operation without the airport?’ Those are the questions I would ask myself.”

The trauma of SARS Hong Kong International Airport was not too badly hit by the impact of 9/11, but it felt the full brunt of SARS, the 2003 health crisis that sparked a devastating downturn in travel to, from and within Asia. “Oh man, the airport traffic was decimated, absolutely decimated,” recalls Baker Salleh with a grimace. “It was down to a third of the passenger flow. It was very much an Asian problem. “But we came through, with a lot of help from a lot of people. The airport stepped in and said they recognised the problem – there was some rent relief – and many of our suppliers understood the problem and were very helpful in rescheduling their deliveries and being tolerant with us with payment terms.” Throughout the Sky Connection organisation, too, people took the hit, going on unpaid leave and working fewer hours to reduce the payroll. “It was painful all round, but it also had a silver lining. Everybody realised we were truly in it together. We all tightened our belts together. It served us well because out of that there grew a closer sense of unity. The airport is now more aware of the operators’ problems.” Salleh says he now has a very well balanced team that is working together with a common goal. “I think the track record over the past few years has been good, and each of us has got more confidence in one another. And we’re relying on that teamwork to carry us through.”

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Salleh says the times are over when landing an additional concession could in turn be leveraged into more margin points across a retailer’s operation. “For the supplier community like Diageo and Hennessy and Maxxium and Philip Morris, these guys are so big that they are going to say ‘This is my price, it’s a reasonable price and it is competitive with what you are getting elsewhere. Just because you have one extra concession that doesn’t mean I am going to give you lower prices.’ They are strong enough to do that. The days are gone when an operator with multiple concessions could go to a vendor and demand a better margin.” Salleh says the company will consider other opportunities outside liquor & tobacco. The company put in a ‘tentative bid’ in the perfumes & cosmetics tender at HKIA (won by Nuance-Watson HK) but may bid more seriously in future, both in its home airport and elsewhere. Explains Salleh: “Obviously we’ve found a formula that seems to work for us in liquor & tobacco. But to me it’s more about making the shops exciting, making the customers relate to the shops… if I can make it work for two sunset categories, hopefully I can make it work for others…” He applauds the liquor industry for the way it has revitalised itself. “Absolut has come out with all those flavoured vodkas, and the whole Scotch industry has given us a surge in single malts – down the line there could be a whole variety of brandies, not just Cognacs. “Five years ago you would have laughed at someone selling vodka at US$40 a bottle. Now how many references have you got retailing at that price, and retailing well? You’ve got the Grey Gooses, the Belvederes and so on, all expensive vodkas. A few years ago you would have said: ‘Icewine? What the hell is that? What chance does that have?’ Today we sell a lot of it, including our own exclusive. It’s called First Frost – the first French ice wine. It started off at a dinner after Cannes with a friend of mine… he poured me some liquid from a nondescript bottle and I said ‘Gee. this is good.’ He said it was their late harvest wine, produced when the frosts come down from the Pyrenees. The Moodie Report

May/June 2005 “I said ‘Let’s try it.’ We came up with a bottle, a label and a name. Everybody has bought their share of Canadian Icewine but nobody had heard of a French ice wine. We bought it all up and it’s been hugely successful, retailing at HK$350 (US$45). That’s slightly less than Inniskillin, which is still a very, very strong item for us. They have done a fabulous job and I have to credit DFS for being first on the bandwagon: they set the trend. There’s a lesson to be learned. The lesson is that you go with your instincts, with what brought you there, you go with all the knowledge that you’ve gathered in the marketplace. Then if you see a product and you think that it has a reasonable chance then you go for it – so what if you screw up? They were the only guys who believed in it, they went after it and now we’ve got a whole category.”

LUNCH WITH… Baker Salleh

Salleh’s secret: “I’m not interested in the stagnation game. I’m interested in being responsive to and alive to the marketplace. At the end of the day, if you’re having fun doing what you’re doing and you’re making money, what a fantastic experience”

Following the 1937 Glenfiddich promotion, Sky Connection will revamp the whole bar area. It also plans to rework its second anchor shop in the west hall. “We think we have been overly concerned with having transparencies in the front of the shop to make people see it from a distance. I think the shop itself is highly visible, so we can do away with some of the transparencies and turn it into a more exciting, more dynamic tasting area.

bottle six. Are you going to sell your last one to me?”

“That’s how I look at retailing – it’s constantly changing,” Salleh enthuses. “That shop has been open less than two years, but now it’s time to move on. The bar has been with us for less than two years: now it’s got to be something else. The Glenfiddich 1937 promotion is the first attempt to do something different.”

“I’m not interested in the stagnation game. I’m interested in being responsive to and alive to the marketplace. At the end of the day, if you’re having fun doing what you’re doing and you’re making money, what a fantastic experience. To me that’s important. I don’t know about old dogs learning new tricks – but I think there’s always a new trick out there!”

The retailer is also preparing to launch another new concept by the last quarter of 2005: an exclusive membersonly VIP lounge, accessible only to holders of Sky Connection VIP cards or by special invitation.

“I’ll sell it!” replies Salleh without blinking. “There’s always another hill to climb. It’s always a case of what is the market looking for now – what can we introduce now? What can we do that our competitors are not currently doing? How can we stay a step ahead? The minute we stop doing that is the minute we are going to stagnate.

The lunch and our talk draw to a close. “I didn’t know an interview could be fun… maybe that Cloudy Bay did it,” muses Salleh.

“In there we will sell nothing but service,” says Salleh. “We will have a person like a hotel concierge who hopefully can help the customer and answer their questions about destinations, on what there is to see in Hong Kong and so on. It will be a personal service so that they can relax, sample some wine and can take a look at our premium products presented tastefully in the lounge so they can make a purchase or not if they choose to. We’ll have magazines, coffee and so on. We will have a very small selection of exclusive high-value products, for example a bottle of the 1937 will be in there, so will the vintage The Macallans and the 50yo Glenfiddich.”

So what does he make of the acclaimed New Zealand Sauvignon Blanc? “For lunch with sashimi, this is great. It’s got flavour. It’s still a little bit young. It’s very fresh with a good nose. It could use maturing. But it’s good!”

So the big question. “You’ve sold five bottles of the 1937, you’re sitting on the sixth, I come into the shop having had a great year on The Moodie Report and I want to buy

Salleh has plenty of friends. And little wonder. Not many individuals can ensure that sunset is indefinitely postponed. �

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And what is his favourite wine? “Gosh, that’s a tough one,” he says. “I’m a red man and I like some of the older French wines from nice vintages. The 1989 Haut-Brion has got to be among the top but I don’t drink it day in and day out – I can’t afford to. Then there’s Margaret River Shiraz… it’s great value for money and great for when you’re just kicking back with friends.”

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