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RETAIL/F&B Last modified on January 23, 2012

Shopping showdown

The duty free business is arguably more competitive than ever before with airport retailers cranking up their efforts to boost sales, writes Kevin Rozario.

With airport shops expected to generate close to $25 billion in duty free sales this year, there is simply no denying that the retail business is a lucrative one for all concerned.

Indeed, non-aeronautical (or commercial) sales have been growing faster than aeronautical income over the past two decades and they have become the biggest revenue stream at some locations.

According to ACI World, in 1990 only about 30% of airport turnover came from commercial operations. But by the mid-2000s this share had crept up to almost 50% on average, "with a number of large airports deriving over 60% of gross revenues from non-aeronautical sources".

These include retail concessions, car parking, rental car concessions and the leasing of airport land.

Non-aeronautical revenues help airports to hold down charges to airlines, a point ACI is keen to stress. For example, between 1978 and 2005, airport charges as a percentage of airline operating costs have fluctuated within a tight band (3.7% to 4.4%), "not something other airline suppliers can claim" notes ACI.

By 2008 the figure had remained "no more than 4% of the total worldwide operating cost of scheduled airlines".

Holding down airlines charges by increasing retail sales is increasingly a necessity, as aeronautical charges are often government capped. Furthermore, eagle-eyed rating agencies seem to like retail. Last November, Fitch noted: "Commercial revenue growth that meets or exceeds passenger movements will be viewed more positively."

So how has the industry performed in this regard, if comparing duty free retail sales with passenger numbers over time? The global expert in the analysis of the duty free business is Sweden's Generation Research. Its data shows that between 2001 and 2010, duty free sales at airport shops rose steadily from $8.9 billion to $23.3 billion – a 162% increase – with a blip in 2009 when the global financial crisis hit.

By comparison, passenger traffic in this period rose from 3.48 billion to 5.04 billion, a far less spectacular jump of 44.8%.

It means, however, that airports have been prizing more cash from the wallets of travellers.



Using these top line figures, spend per head on a global basis has gone up from $2.56 per head to $4.62 during the decade – almost double.

Given the rating agencies' view, improving spend per passenger is a priority for most airports, but because they generally lack internal retail expertise – except at certain big hubs like London Heathrow, Seoul Incheon or Paris CDG where large retail departments exist – duty free shopping is operated by concessionaires.

Whereas they were once primarily national or regional players, mergers and acquisitions as well as stock market listings have created global companies, which are continuing to grow and snap up smaller rivals.

Yngve Bia, president of Generation Research, says: "Ten years ago, the world's top 50 duty free retailers made up 49.2% of global sales, but by 2010 this share had risen to no less than 80.6%.

"Purchasing power is the name of the game and so is logistics. So, while consolidation will continue among the world's leading airport operators, we may not see too many straight mergers or acquisitions, but definitely more cross-continent alliances such as between traders in Europe and Asia."

Looking specifically at airports, the main players with worldwide reach are Dublin Airport Authority subsidiary, Aer Rianta International; Italy's Autogrill; US-based DFS Group, which is majority-owned by French luxury conglomerate LVMH; Dufry in Switzerland; family-owned Gebr Heinemann in Germany; LS Travel Retail, a division of Lagardère Services, which in turn is part of France's Lagardère Group; and Zurich-based The Nuance Group, which has joint ownership.

Each of them is developing its own strategies for airport expansion but, as Bia points out, creating global footprints seems to be the name of the game.

Dufry, for example, has been pursuing a strategy of profitable growth with a focus on tourist destinations in emerging markets such as Brazil and, just this year, Argentina, while more Europe-centric Gebr Heinemann and LS Travel Retail have both taken decisions to actively grow in Asia-Pacific either by expanding existing teams and operations, or establishing new ones.

Within the past three years, DFS Group has also stepped beyond its comfort zone of downtown duty free shopping in Asia-Pacific by entering new regions such as the Middle East and India, both via airport operations (see fact file for details of all the above companies).

What is noticeable is a rush in two directions: towards Asia and Latin America, where passenger growth is expected to be fastest.

In the first eight months of 2010, the UN World Tourism Organization (UNWTO) says growth in international tourism arrivals to South America rose 13% and in South and South East Asia by 12% - 13% against a global average of 4.5%.

UNWTO's latest forecast puts international tourist arrivals at 1.8 billion by 2030, an annual growth rate of 3.3%.

However, in emerging economies, growth is expected to double that of advanced ones (4.4% versus 2.2%).

Looking ahead, Bia says: "Over the next five years, airports' share of the global duty free trade will stabilise at around 60%. Shopping facilities at many airports in the world have reached maturity; sales growth will mainly come from increases in passenger numbers."

Bia believes that while duty free sales onboard aircraft and ferries are not expected to keep up with average market growth, downtown shops – such as those in Asia-Pacific including Hawaii – fuelled by rapid growth in Asian overseas travel especially from the Chinese and the Koreans – will be the winning channel in growth terms.

It seems that although airports have been the fastest growing duty free channel in the past decade, their share of this market has finally reached a plateau.

Airport retailers will therefore have to fight harder on price and service to keep spending in their shops from going to downtown malls and offshore/island duty free locations that are springing up in Asia, such as Macau and Hainan.



Autogrill
The Italian company owns WDF in the UK (with limited airport retail operations in Europe), and Aldeasa in Spain, which has substantial airport concessions in the Americas (including Canada, Mexico, Peru and Chile) and Jordan.

A recent consolidation of management and other operations
at the two groups has led to their joint renaming as World Duty
Free Group.

Last year, Aldeasa had its Spanish concessions extended until 2012 (with the exception of Madrid). Meanwhile, WDF got an extension to 2021 of contracts at Birmingham and Manchester airports.

Autogrill's travel retail and duty free sales in 2010 were €1.67 billion, up 9%. Almost all (97.3%) of these sales came from airport operations. EBITDA was €193.6 million – up 23.4%.

 

Aer Rianta International (ARI)
ARI is the international division of Dublin Airport Authority and has a travel retailing history dating back to the establishment of the world’s first airport duty free facility at Shannon Airport over 60 years ago. It was also a pioneer duty free operator in the former Soviet Union.

Today, ARI manages airport retail operations in North America, the Caribbean, Eastern Europe, Russia, Ukraine, Cyprus, India and the Middle East where the company extended a number of contracts during 2010, including Bahrain, Muscat, Oman and Qatar. The company also owns a 20% stake in Düsseldorf Airport in Germany.

In 2010, ARI produced a 40% increase in after tax profits rising from €13.4 million, pre-exceptional items, to €18.8 million, on sales of €954m, up nearly 18%. A highlight last year was the company’s first move into India through a joint venture operation in Terminal 3 at Delhi’s Indira Gandhi International Airport under a 15-year contract.

 

DFS Group
The retailer, majority owned by LVMH, is primarily a downtown duty free retailer with less than half of its revenues coming from airport locations, which include Los Angeles, San Francisco, Hawaii and Hong Kong airports.

Recently, the company has expanded into the Middle East at Abu Dhabi’s Terminal 3 and Mumbai–Chhatrapati Shivaji International Airport in India. DFS has a stated aim of “moving toward high-end products”, which means that its airport activities are likely to be limited to large hubs. Last year the company celebrated its 50th anniversary.

LVMH does not break out DFS sales, which fall within its Selective Retailing division. In 2010 the division had sales of €5.3 billion, up +19% and profits of €536 million, up +38%.

Industry estimates of DFS sales vary between $2.8 billion and
$3.5 billion. Actual duty free sales at two airport locations where DFS operates, SFO and LAX, were $78.8 million and $117.5 million (fiscal 10/11) respectively.

 

Dufry
Dufry operates more than 1,160 shops globally at airports, seaports on cruise liners and other tourist locations. The company has been very acquisitive since its IPO in 2005.

It bought the very profitable Brazilian airport retailer Brasif, floated it and finally merged it with the main company last year. The year before it acquired airport retailer Hudson Group with 550 shops in 69 airports in the US and Canada, and this year the company bought Interbaires, the top airport retailer in Argentina, plus smaller players in four other countries.

Based in Basel, Switzerland, Dufry had consolidated sales in 2010 of €2.12 billion, up +9.7% and an EBITDA of €278.6 million (+13.9%). And it continues to perform well this year, recently reporting “organic growth” of 8.4% for the first nine months of 2011, although fluctuating exchange rates meant that its turnover for the period was actually down 4.4%.

Talking about the business acquisitions this year, Dufry CEO, Julián Diaz, says: “The acquisitions will have a significant impact on Dufry’s profile going forward. They further strengthen our position as a leading travel retailer and increase our presence in emerging markets.”

 

Gebr Heinemann
Germany’s family-owned Gebr Heinemann operates over 230 Travel Value/duty free shops at 48 international airports in 19 countries, with a strong geographical focus on Europe, Eastern Europe in particular, and Turkey.

It also has operations in South Africa and, this year, is expanding its presence in Asia having opened an office in Singapore. The company often works in joint venture with local partners.

Three years ago it revamped its image and decided to use the name ‘Heinemann’ on new airport storefronts to communicate a stronger identity to passengers. Much of the company’s duty free business is in distribution and logistics.

In 2008, Gebr Heinemann had a stated turnover of €1.9 billion. Industry estimates put 2010 sales at €1.95 billion to €2 billion.

 

LS travel retail

This division of Lagardère Services, part of France's giant Lagardère Group, is focused on airports in Europe and Asia.

LS travel retail includes Aelia, an airport retailer primarily operating at French airports as well as locations in the Czech Republic, Poland and the UK. The company has expanded fast in Asia with the addition of 14 new outlets this year bringing the number of stores there to 67.

Among the new locations are a large fashion emporium and a specialist confectionery unit both at Singapore Changi. LS travel retail has a strong presence at Sydney Airport plus stores at Melbourne and the four main airports in New Zealand.

LS travel retail sales were €2.3 billion in 2010 from a network
of 2,000 sales outlets (almost 200 are duty free stores) in over
120 airports and 700 rail and metro stations across more than
20 countries.

Much of the revenue comes from the Relay brand's 1,200 press
and convenience shops.

 

The Nuance Group

Based in Zurich, The Nuance Group operates over 370 outlets across 56 airports in 17 countries and territories. In February 2011, private equity firm PAI acquired a 50% stake in the company, the other half is owned by existing shareholder, Gecos, an Italian food retailer.

PAI says Nuance is the number two travel retailer in the airport channel, strong in Europe but with a presence outside: the top airport player in Asia-Pacific, and active in several airports in Canada and the US.

In 2010, Nuance has consolidated sales of €1,511 million (+18.3%), an EBITDA of €79 million (+73.3%) and an EBIT of €49.6 million (130.6%).

Roberto Graziani, CEO of Nuance, says: “With global air travel predicted to exceed over six billion passengers by 2014, and the travel retail industry expected to double in the next 10 years, we can certainly look forward to a brighter future.

“Our industry will continue to be tested by global events, such as the recent earthquake and tsunami in Japan and the evolving situation in North Africa and parts of the Middle East and therefore we cannot assume the course ahead will be smooth. Whilst it may take some markets a few years to regain full strength, these potential uncertainties will be offset by the more dynamic growth in other parts of the world.”

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