DFS Hawaii began taking steps Thursday to reduce a quarter of its workforce in one of the biggest layoffs to hit the state as it experiences an economic softening in the tourism industry.

Layoffs for about 165 of the company’s 660 employees are expected across three DFS Hawaii locations: T Galleria by DFS, Hawaii; Daniel K. Inouye International Airport; and Ellison Onizuka Kona International Airport at Keahole. They include employees from management, sales, operations, clerical and virtually all DFS Hawaii departments.

Jay Frame, vice president of corporate communications for Hong Kong-headquartered DFS Group, said the steep decline in visitor spending and diminishing travel demand from key international markets, coupled with the cost of doing business in Hawaii, led to the layoffs. Another major factor was the significant spread of the retail sector statewide, which has increased the competitive environment for retailers, Frame said.

Workers will receive severance packages based on their years of service to the company, which has strong ties to Hawaii going back decades to when operations began here in 1962.

DFS Hawaii’s concession at the former Honolulu International Airport was the company’s first duty-free shop in the United States. Its flagship store in Waikiki, now named T Galleria by DFS Hawaii, first opened in 1975 and is now the chain’s sixth-largest Galleria store in the world.

Tim DeLessio, president of global store operations for DFS Group, was in town Thursday to assist DFS Hawaii with breaking the news to local employees. He said while the layoffs were still somewhat fluid, the bulk of them would take place Thursday and be effective immediately. DFS is making on-site counselors available to employees to begin assisting them with the transition, he said.

DeLessio said the layoffs were a “last resort” following approximately 18 months of attempts to drive higher gross sales and implement cost-saving measures such as implementing a hiring freeze, reducing store shifts and encouraging employees to take voluntary leave.

DeLessio said DFS also has been in discussions with the state “alerting them to our situation within the last 18 to 24 months.” He said DFS’ contracts with the state for its four airport locations and the T-Galleria expire in 2027.

DFS declined to answer questions about its discussions with the state, and so did state Department of Transportation spokesman Tim Sakahara, who would not tell the Honolulu Star- Advertiser whether the company is in arrears with the state.

“Your questions pertain to the financial impact of a private company and are best responded to by DFS,” Sakahara said.

State Rep. Richard Onishi (D, Hilo-Keaau-Kurtistown- Volcano) said he might entertain discussions about reductions in lease rents for DFS, but would have been more inclined to listen if the reduction would have saved jobs. These newest layoffs come at a time when Hawaii island is beginning to recover from last year’s volcano-related downturn, he said.

“Also, are they willing to agree, if tourism picks up, to go back to their original lease rents? When they are doing good, they aren’t necessarily sharing their revenues,” said Onishi, chairman of the House Committee on Tourism and International Affairs.

DFS previously had some high-profile contract and rental disputes with the state and previous layoffs. In October 2008, DFS gave notice to 130 workers as part of the fallout from the recession. In October 2001, DFS Hawaii laid off 70 workers in its first round of cuts following 9/11. In April 1998 after the Japan bubble economy burst, DFS began laying off 300 of what was then a staff of 1,660.

Frame said what DFS Hawaii is experiencing now is a more “systemic” pattern versus an “acute” event like 9/11, SARS or last year’s eruption at Kilauea Volcano.

“What we are seeing now is an emerging trend of increasing visitor numbers and lower spending. We just don’t see any adjustment in-site — that’s probably what’s so unique about this,” she said. “Everything that we are doing now is to sustain the business there and to maintain our presence in Hawaii. We are definitely going to be a leaner business, but there will be no change to our service levels.”

Thursday’s DFS Hawaii layoffs came the same day that the Hawaii Tourism Authority reported year-to-date drops through August in international visitor arrivals and spending. In August, Japan, DFS Hawaii’s top customer source market, posted a greater than 4% spending reduction and a 1% drop in arrivals. All other international markets, which include foreign visitors outside of Japan and Canada, suffered a nearly 13% drop in spending and a more than 5% decrease in arrivals.

While net leisure and hospitality jobs have grown statewide every month since May, slowing in Hawaii’s economy is deepening.

Tourism is still generating impressive overall visitor numbers, but DFS said that there has been a sharp pullback in international markets. To be sure, the University of Hawaii Economic Research Organization’s updated state forecast published Friday said inflation-adjusted international visitor spending is down more than 9% this year. UHERO also forecast that the state economy was expected to slow to a near “standstill” for the next three years.

Megan Escamilla, DFS Hawaii managing director, said the company has seen overall sales at its key locations drop by 30% since 2o14, with sales from its largest source market, Japan, declining by 19% during the same period.

Likewise, Escamilla said sales to visitors from the state’s highest-spending China market have dropped 27% this year and are anticipated to drop by 60% for the rest of the year. Sales from Korea, another important market to DFS, were down, too, she said.

DFS said the China decline, which hurts DFS more than other retailers, has been caused by the ongoing U.S.- Chinese trade war, the continued difficulty of Chinese travelers in obtaining visas to the U.S. and the devaluation of Chinese currency.

The cancellation of Hawaiian Airlines’ three-times-weekly service between Beijing and Honolulu last year and Air China’s cancellation of its Beijing-Honolulu service this month also have suppressed arrivals of high-spending Chinese visitors, DFS said.

Chris Tatum, Hawaii Tourism Authority president and CEO, said the agency is working to address challenges in international markets. HTA is working with Hawaii’s congressional delegation to improve the visa process in China and supports a pre-clearance program that would allow visitors from Japan to clear immigration before boarding planes to Hawaii.

State Sen. Glenn Wakai (D, Kalihi-Mapunapuna-Airport- Salt Lake-Aliamanu-Foster Village-Hickam-Pearl Harbor) said easing access to Hawaii for travelers from China and Japan would help shore up those markets, but he doesn’t expect that to happen anytime soon.

“Both of those changes have to happen on a federal level, and I just don’t see it happening under this president,” said Wakai, who chairs the state Senate Committee on Energy, Economic Development and Tourism. “A lot of things are beyond our control, and Trump’s antagonistic attitude toward China isn’t helping.”

Wakai said Tokyo’s hosting of the 2020 Summer Olympics also could dampen Japanese travel to Hawaii next year.

“I think many Japanese visitors will choose to stay home in 2020 to support the Olympics,” he said.

Still, HTA isn’t giving up. Tatum said HTA is increasing its marketing budget for Japan by $1 million to $10 million and that it’s doubling Southeast Asia’s marketing contract to $500,000 and adding another $100,000 to bring the budget for outreach to China to $2 million.

Tatum, who attended the U.S. China Tourism Leadership Summit this month in Seattle, said he plans to bring the summit’s organizer, Brand USA, to Honolulu later this year to provide Hawaii’s visitor industry with access to new data and insight about Chinese travelers.

“The Chinese really aren’t basing their decisions not to come to the U.S. on trade wars or visas. Their perception is that the U.S. really hasn’t engaged or welcomed Chinese travelers. We have to be more China-friendly,” Tatum said.

Tatum said DFS Hawaii is “clearly China-friendly,” but the overall Hawaii market needs to embrace Chinese travelers more.

“It’s one of the biggest outbound markets in the world — there’s 20 million people there available to travel. We have to find a way to get a bigger share,” he said.