TRAVEL RETAIL / AIRPORTS: The sky’s the limit

02 October 2006 By db staff writer

“standfirst”>Passenger numbers are expected to double in 15 years and retail is increasingly regarded as critical to the commercial viability of airports. Travel retail is set for sustained and substantial growth.

The global travel retail industry has quite startlingly strong survival instincts. But that’s rather fortunate, because it also has remarkably bad luck. The past seven years have seen an unfeasible chronicle of crises ravage the channel, and this summer has been no exception. Yet somehow, as it lurches precariously from disaster to disaster, the trade manages not just to survive, but to positively prosper. For once, the rollercoaster analogy is not mere journalistic hyperbole; operating in the travel-retail sector truly is a white knuckle business, and it’s certainly not for the faint-hearted.

From the abolition of intra-EU duty-free sales in 1999 to the latest conflict in Lebanon – via 9/11, SARS, Iraq and avian flu – these have been truly torrid times for the aviation business and, consequently, the travel retail trade. The spectre of terror continues to loom large, as evidenced by August’s liquid explosive plot. In fact, while this latest drama unfolded without loss of life, it could yet have the most severe ramifications for travel retailers.

All of the scares that have rocked the trade since 1999 have affected first and foremost the aviation sector, grounding aircraft or scaring off passengers, with a resultant knock-on effect on travel retail; fewer passengers, unsurprisingly, results in fewer sales. But, as we discuss in News Analysis on page 8, the implications of this latest plot may point squarely at the heart of travel retail.

Upward curve
As the industry gathers for its annual jamboree in Cannes for the Tax Free World Association this month, the liquid explosive plot will undoubtedly be the subject on everybody’s lips. However travel retail, airports and airlines are three of the hardiest industries out there and, in spite of this latest hazard, all three are forging forwards with gusto. No battened down hatches here; the global aviation sector is investing at a furious rate and looks set to continue on its staggering upward curve.

Paul Behnke, a director of Airports Council International (ACI), explains: “There are no certainties in aviation, but it looks like a very bright future. We’ve had a very tough five years but are still seeing airports and carriers doing very well.” There are a record number of aircraft currently on order, particularly to Middle Eastern and Asian airlines, and a plethora of big budget projects are currently underway to develop major new airports and terminals globally.

Growing middle class
“Disposable income is on the rise everywhere and there is a growing middle class in the developing world,” Behnke explains. The evidence clearly indicates that as personal finances increase, the result is an insatiable appetite for travel. ACI registered 3.9 billion passenger movements in 2004, but by 2020 it anticipates this number will shoot up to 7.4 billion. Travel retailers – and suppliers whose brands line the shelves – should be rubbing their hands together in anticipation.

But the good news for the industry is not just that the pool of potential consumers is set to double in a decade and a half; equally encouraging is the greater priority given to high-quality retail within the airports. Fuel price rises and increased competition have put a serious squeeze on the airlines, resulting in ever-tighter pressure on landing fees. Airports, as a result, have had to look at how best to drive up non-aeronautical revenues – and retail has been identified as the most effective solution. Shops used to be an “added extra” at the airport, but they are now crucial to their financial viability.

Swiss ease
Zurich is a case in point. Retail used to be considered a low priority, so units were scattered throughout the airport, squeezed into the dingiest, darkest corners, wherever there was space. Even if you managed to find the shops, they were poorly lit, badly presented and utterly unengaging; not exactly the kind of environment that inspired flyers to become buyers. Then came the new Airside Centre, opened in 2004. Peter Eriksson, retail director of airport operator Unique, explains, “Travel retail is not about fulfilling demand: it’s about creating demand, by creating a great experience in an attractive environment. Nobody is using the airport with the main purpose of shopping. You need to seduce them to buy.”

Prime position
It is thus imperative to create an alluring and attractive offer and, crucially, it must be located in a prime position. “In the early days the retail units were located in free spaces to avoid any interruption of the passenger flow. In the Airside Centre we decided to give the best locations, in or close to the major passenger flows,” says Eriksson. Unique also recognised the importance of getting retailers involved in the planning process as early as possible. Swiss giant The Nuance Group, the second largest operator in the business, was invited to participate in 1999, ensuring that the building was constructed with appropriate space and facilities for an engaging, efficient and unavoidable retail offer. It was a sensible step; footfall in Nuance’s Zurich stores now stands at an impressive 60%. The global figure is a meagre 30%.

Eastern promise
While the mature European and North American markets continue to post modest growth figures, in the Middle East and Asia the aviation sector is expanding at a phenomenal rate. ACI projections indicate that traffic through the Middle East will grow at an annual rate of 8.7%, fuelled by the region’s internal development and prime location as a long-haul stopover. Rapid expansion is underway at the major hub airports of Abu Dhabi, Dubai and Doha in a frantic effort to keep up with demand.

Abu Dhabi International Airport currently has capacity for some six million passengers, but is groaning under the pressure. As an interim solution, terminal expansion is currently underway which will double this figure by 2009 – but this is only a short-term fix. In order to meet demand an entirely new airport is being planned for the site. The first phase is due to open in 2011 and serve 20m passengers; on completion it will be able to carry a staggering 50m.

As a result, resident retailer Abu Dhabi Duty Free will not only have more potential customers to target, but it will also be setting out its stall in far more favourable locations. “It is very important for us that the traffic flow and positioning of the retail outlets is well-planned to maximise penetration to the shops. A location that does not follow the natural flow of movement is an uphill struggle from day one,” says managing director, Mohamed Mounib. The first meetings to begin planning the layout of the new airport were held last month and a member of the retail team was part of this process from day one.

Dubai expansion
A similarly spectacular growth rate is projected at Dubai International, and the resident retailer Dubai Duty Free (DDF) is eagerly anticipating enlarged facilities. “Last year we handled 24.6m passengers and expect to handle 28m [in 2006],” explains managing director, Colm McLoughlin. When the new T3 and Concourses 2 and 3 open in 2007/08, however, the total capacity will be 70m. And that’s not mentioning the newly announced Dubai World Central, which is being planned to accommodate 120m

Presumably many drinks execs may have read the last paragraph thinking: “The aviation sector in a Muslim region is booming, what does that mean to me?” Well, to the astute suppliers, it means an enormous sales opportunity. DDF manager of purchasing and research, Sharon Beecham, reports that liquor notched up over $75m last year, almost 13% of the total sales.

Regional flavour
While the big international brands will always be the mainstay, regionality is becoming an increasingly important factor. Local favourites play an important role not just in generating sales, but also ensuring that the retail offer reflects a sense of place, rather than the standard, increasingly homogenous offer. In The Nuance Group’s stores at Toronto Pearson, for example, Canadian whiskies dominate the category, while Champagne (rather unsurprisingly) is a big hit in Aelia’s stores in Paris.

Another notable trend that is picking up pace is arrivals shopping. In the Middle East in particular, where local markets aren’t necessarily the easiest place to purchase liquor, arrivals stores are performing exceptionally well; DDF reports that 90% of beer and 85% of wine sales are to arriving passengers. It doesn’t take a genius to work out the role that decent shelf
presence in the airport can play in educating these consumers. 

As a global, multi-category industry, there is clearly much cause for optimism in the travel retail sector. But in a business increasingly focused on luxury goods, is liquor still a relevant part of the category mix? The answer, in a word, is an emphatic “yes”, though the numbers indicate that the category’s growth rate is not quite as dynamic as others.

The emergence of “travel retail” as a concept followed the abolition of duty free in Europe in 1999. As the tax-free advantage was lost on European journeys, luxury goods began to steal share from the “core” (highly taxed) categories. The likes of fashion, jewellery and electronics have become staples at the airport, generating a valuable slice of the total business and commanding substantial floorspace. However, every one of the retailers who the drinks business spoke to is adamant that liquor continues to be a mainstay of the business.

A steely nerve is required for any organisation hoping to prosper in travel retail. Total dependence on the health of the aviation sector makes the channel alarmingly susceptible to short-term catastrophes. But the underlying, long-term trading conditions are tantalising; greater personal wealth will result in more travellers passing through better airports with more engaging and unavoidable shops. It seems safe to assume that every year the industry will be hampered by a new “disaster” of some description. But with such favourable trading conditions, if the travel-retail sector fails to post continued growth it will only have itself to blame. 

United we stand

Talking to the drinks business as the final preparations were being made for the Tax Free World Association (TFWA) World Exhibition in Cannes this month, association president, Erik Juul-Mortensen, was in a cautiously optimistic mood. But facing up to yet another testing crisis, he stressed the importance of industry-wide unity; the industry will only prosper if it works together to promote a single agenda.

A look back at the recent history of the sector provides precedents that justify Juul-Mortensen’s positive outlook. Since the abolition of intra-EU duty free in 1999 the trade has been beset by crises, yet it has demonstrated an uncanny, cartoon-esque ability to bounce back from each disaster. “In the last two decades [we] have experienced setbacks as a result of world events with alarming regularity. Typically, however, the industry has shown its remarkable resilience every time. I am hopeful that this will happen again this time, although it will take a lot of hard work,” said Juul-Mortensen.

Set against a backdrop of political vulnerability, economic insecurity and the threat of aggressive legislation, a united front is of paramount importance. Perhaps the most devastating of the recent blows to the trade was not the result of external factors, but a lack of internal unity. Following the abolition of European tax-free business in 1999 the industry response was fragmented, contradictory and divisive; seven years on many travellers are still unsure what they can buy, so they don’t.

Poor communication and a lack of unity cost the industry dear, but the newly formed Duty Free World Council, working in close cahoots with TFWA and a number of regional and national representative groups, is now working hard to ensure that a single, unified voice represents the industry’s interests.

Equally encouraging is the growing tendency towards cooperation at all levels of the business. “A defining occurrence has been the development of a real partnership within the industry. I sincerely believe we have made major strides forward here,” Juul-Mortensen explains. Forging closer alliances between brand, retailer and landlord has dominated industry conferences and the trade press to such an extent in recent years that the fabled “trinity” has become a mainstay of the travel-retail lexicon. There is still much work to be done before all airports finally realise the futility of cripplingly high rental rates, but the industry is undoubtedly moving in the right direction.

But what future does liquor have within the increasingly diverse travel-retail category mix? Juul-Mortensen has no doubt that the future is bright, and that’s not just because he serves as president of Maxxium Global Travel Retail when not on TFWA duty. “There is a great deal of competition from other categories, but the liquor sector is determined to remain dynamic and innovative,” he explains, “I sincerely believe the future of liquor in travel retail remains sound.”

© db October 2006