Tapping Travel Retail Amidst Terror

LONDON, United Kingdom — The day after the tragic terrorist attack that took place in Nice on July 14, French Prime Minister Manuel Valls told France it "must learn to live with terrorism." Although Valls was heavily criticised for his frankness, his statement follows the consensus of many international and national security chiefs.

In 2016, Europe was the only region of the world to receive fewer international bookings than 2015, with a decline of 2.1 percent from last summer, according to ForwardKeys, a data provider that compiles flight-ticket information. International bookings to France and Belgium declined by 11 percent and 23 percent respectively. Similarly, following an attack on Istanbul's Atatürk airport, ForwardKeys identified a 31 percent decline in international bookings to Turkey.

Tracking the travel corridors along which consumers holiday or travel for business is more important than one might think. Luxury shopping at airports — where the spending grew 18 percent in real terms in 2015 — now accounts for 6 percent of the total luxury market, up from just 4 percent in 2015, according to Bain & Company. Travel retail — which includes airport malls, ferries and cruises, border shops and downtown duty and tax-free shops — is growing at an 8.4 percent compound annual growth rate, according to Exane BNP Paribas’s report “The Anatomy of Travel Retail,” — significantly above the 6 percent average growth rate of the broader personal luxury goods market over the past 10 years.

Luxury brands need a global footprint, integrated costs and flexibility in their business, so that they can serve the travellers wherever they are.

The Cost of Terror

In 2015, terror attacks cost the travel retail industry $8.2 billion dollars, according to Marketwatch. Terrorism’s negative impact on travel retail is likely to worsen this year. In the two weeks following the July 14 truck attack that killed 84 people in Nice, five passengers were attacked by a teenager armed with an axe on a train in Bavaria, Germany, 12 people were injured when a man detonated a bomb outside a music festival in the southern German town of Ansbach, nine were killed in Munich after a terrorist opened fire in a shopping centre and two terrorists attacked a Catholic church in Rouen, France, killing a priest. Unsurprisingly, international travellers are becoming warier of visiting Europe.

“The big question here is whether terrorist attacks in Europe need to be seen as 'one offs' like 9/11 — or as a sign that Europe will look more and more unstable. In case of the former, tourist flows would go back to normal in due course. In case of the latter, tourist flows could change structurally,” Luca Solca, head of luxury goods at Exane BNP Paribas, tells BoF.

“I believe everybody in the industry is hoping for the authorities to be more effective in guaranteeing security in Europe. So far, the trend is not promising — especially in France, but increasingly so in Germany,” Solca continues.

While the popularity of Europe wanes, this summer, international bookings for destinations in the Asia-Pacific region, which includes China and Australia, rose 7.8 percent from a year earlier, according to ForwardKeys. Indeed, overall trends regarding air travel traffic numbers remain extremely supportive to airport retail. The number of travellers flying each year has grown dramatically since 2009, jumping from 2.225 billion to 3.44 billion. Global tourism measured by its contribution to global economic output is expected to grow to 3.5 percent in 2016, up from 3.1 percent in 2015, according to the World Travel & Tourism Council. “[Tourists] change destinations, but they do not tend to stop travelling as a whole,” says David Scowsill, president of World Travel & Tourism Council.

But can brands respond quick enough to tap changing consumer travel patterns?

Chasing Shifting Corridors?

“I am not sure travel retail companies can do a lot,” says Solca. “Luxury is highly exposed to specific cities. The world’s top 10 fashion capitals account for about one fifth of all luxury points-of-sale,” he continues. What’s more, the vast majority of duty-free travel retail, situated “airside” and only accessible having cleared security, is leased on a concession basis, typically for a number of years — preventing rapid location shifts, tracking consumer travel trends.

“[Lease-length] depends a lot on the type of airport, Dufry [a specialist duty-free retailer] just renewed their contract with Zurich Airport until 2028, so they are quite tied in. In other airports, such as Changi [airport] in Singapore, they tend to do contracts that are three-year contracts for a lot of the locations, so the turnaround is a lot quicker so that gives an opportunity to the brands or the operators to react a lot faster,” says Muriel Zingraff-Shariff, the former head of retail at Heathrow, who oversaw the launch of Terminal 5.

The number of terror attacks taking place all around the world also prevents forward planning. “You can expect, with a number of long (airside retail) leases that your business may be effected by such things in some parts of the world at some point. But the market it is entering a period of volatility that it is becoming increasingly impossible to predict where consumers will travel and by what route they will get there,” says Mario Ortelli, senior analyst at Bernstein. “For luxury brands it is important to have a global footprint, but one where you have integrated costs and flexibility in your business so that you can serve the travellers wherever they are,” he continues.

However, sales that take place airside, in the airport, are crucial to the channel. “Travel retail is mainly concentrated in the airport channel ($36.4 billion, almost 60 percent of total), with the biggest and fastest growing [airports] reaching a 10 percent compound annual growth rate over the last 10 years,” states Exane BNP Paribas in its report “The Anatomy of Travel Retail.” The rest of sales come mainly from downtown and border shops, accounting for $21 billion — or 33 percent of total travel retail sales.

For specialist travel retailers like Dufry and DFS which rely upon making most of their sales in airport, and operate with much smaller margins, the threat posed by diminishing tourist flow through key locations or routes is more acute. “[Specialist] travel retail is really a volume business, it’s based on the large number of people travelling who spend ‘X’ amount per head at the end of the day. As soon as that volume starts shrinking, even if it is a small percentage, it has a huge impact on the return and on the revenues for the operators and for the airports also,” says Zingraff-Shariff.

“I think if you start seeing volumes of passengers dropping in certain locations or airports, for the operator such as Dufry or DFS, there are two types of action: the first is to try and develop retail formats that really try and capture more of the passengers. If there’s less of them, to try and increase the number of passengers actually buying so that you can mitigate and balance the decreasing number of passengers,” she continues.

You may not know where travellers are going, but you know where they are flying from.

“When I was at Heathrow, we had about 70 million passengers going through the airport. If you had a drop of 2 percent, that’s already a huge number of people. In 2015, the latest net retail income per passenger that was published by Heathrow was £6.66. You multiply that by a few hundred thousand passengers and very quickly you’re losing money. You can try and do more promotions, you can try and be more aggressive on pricing, there’s a number of things you can do in the field right in the stores, but it’ll never make up for the difference,” says Zingraff-Shariff.

However, unpredictable consumer travel trends should prompt retailers to switch their focus to outbound passengers. As Ortelli says, “You may not know where travellers are going, but you know where they are flying from.” For many, that place is China.

Targeting China’s Outbound Customers

“China will definitely be a big focus of all the operators,” says Zingraff-Shariff. Indeed, the Chinese emerging middle class are taking to the skies in greater numbers than ever before, supported by government investment in numerous airports, serving China’s 15 mega-cities, each with a population of over 10 million.

“The Chinese government is encouraging more and more of its population to shop within the country. There’s going to be new airports and infrastructure built, new retail opportunities. They continue to develop tourist destinations within the country,” says Zingraff-Shariff. With luxury retail sales contracting by more than 10 percent in 2015 in traditional destinations of Macau and Hong Kong, national Chinese tourists are emerging as a critical revenue driver for the luxury industry.

“Overall spending [by Chinese consumers] is growing in double digits in real terms,” says Bain’s Claudia D’Arpizio. “While there’s very bad performance in Hong Kong and Macau, there are nice tourist flows to Taiwan from the Mainland. Japan is the most important destination for Chinese shoppers right now,” she adds.

The opportunity in China’s interior is a bright spot on an otherwise bleak horizon, believes Zingraff-Shariff. “Travel retail is suffering, not just from terrorism, but due to the erosion of its competitive advantage due to online technology. The free wifi in airports, now expected by passengers, is stealing shopping time while people are in the terminals, there’s a lot of other threats that they’ve already had to contend with which is why I think, interestingly enough, it’s really encouraging the operators in travel retail to become better retailers, better at converting passengers into buyers.”

Investing in consumer experience and building a compelling brand offering is key to enticing travellers to spend their time shopping “At exceptional airports like Heathrow Terminal 5, you see outbound customers shopping because the experience is so good. It has a good selection of brands and one of the only Louis Vuitton stores in an airport,” says Ortelli.

But, if negative trends continue, the risk of falling revenues could hit the bottom lines of both brands and airport operators. “If the passenger numbers really drop dramatically then they would probably need to sit around the same table and really look at their contracts and say that is not sustainable for us, we need to review these terms,” says Zingraff-Shariff.

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The Anatomy of Travel Retail
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