Autogrill’s purchase of World Duty Free and Aldeasa was a landmark moment for the duty free industry last year, combining heavyweight players to create a super retailer. Acquisitions are, of course, an inevitable element of the duty free and travel-retail landscape as part of what was once described by one industry source as ‘Darwinism in the corporate world’. However, Autogrill has experienced more than its fair share of such deals of late, and the philosophy that size matters appears to be one in which the company has believed in since its days as a fledgling chain of Italian roadside restaurants several decades ago.
Established in 1977, the company has become the world’s largest food and beverage and duty free operator today through several key acquisitions, most recent of which was the €600 million purchase of World Duty Free (WDF) in March 2008.
After the purchase of Alpha Airports Group in 2007 and the outstanding 49.95% stake in Aldeasa and WDF last year, Autogrill generated combined annual sales of €5.8 billion for 2008. Travel-retail and duty free contributed €1.4 billion to this figure and the company manages operations at 73 airports in 22 countries.
The decision to pursue rapid external growth in the airport retail business was based on the size and value of an industry on the rise. The global travel-retail and duty free market was worth $34 billion in 2007 when Autogrill purchased Alpha and grew to produce sales of $37 billion in 2008, according to market research company, Generation.
Europe is the company’s principle market, with a strong presence in the UK and Spain, followed by the Middle East, the Americas and Asia. In the UK, travel-retail and duty free operations are operated by WDF, which also oversees Alpha’s domestic retail business. In Spain, other European countries, the Middle East, the Americas and Asia, stores are managed by Aldeasa, which also oversees Alpha’s international retail business.
Strategy to streamline
The company’s stated business strategy to date has been one of consolidation, and the concentration of the three companies’ operations in Europe will generate important synergies in purchasing and logistics to increase competitiveness in key markets.
The headquarters of Alpha and WDF were moved to a single building in the early part of this year and the global purchasing function for the three companies was slated to be finalised in the first quarter. And there was plenty of room to streamline here, given that over 80% of the suppliers used by the trio overlapped and 85% of product SKUs (stock-keeping units), with the top 27 suppliers accounting for more than 80% of sales. Fragrances and cosmetics are the most important category for the companies, while tobacco plays a big role for Aldeasa and liquor for WDF.
According to Autogrill’s integration plan, a leaner organisational structure, consolidation of non-stock suppliers in the UK and system integration as part of general and administrative operations will produce an estimated saving of €20 million by 2010.
Alongside these plans, reduced labour costs and the global purchasing strategy are forecasted to contribute overall synergies of €45 million ($61 million) by 2010.
Alberto De Vecchi, Autogrill’s chief financial officer, says: “The intensive programme of integration and re-organisation of our travel-retail business units is ongoing. The aim is to simplify the organisation and boost efficiency.
“The first phase of this process was completed in 2008, on time with the schedule, and the full benefits of it are just beginning to show. Efficiencies obtained have had an important role in coping effectively with the negative environment of 2009, both in the UK and particularly in Spain. Obviously, we are not going to stop there. The second phase, which is the convergence of processes to enhance profitability and define the organisational structure, is ongoing and on track to deliver the synergies we promised for 2010.”
Analysts indicate the company is on track to meet this target, although it is difficult to judge how much of this saving will be generated from cost cutting and how much will be produced from the optimisation of its supply chain.
The new ‘single’ retail company, scheduled for completion by December 2010, will be designed to have the flexibility to adapt to the preferences of airport partners and customers, feature a broad concept portfolio, use best practice in operations, such as planning and visual merchandising, and use synergies in promotional and pricing strategies.
Ultimately, it will be the synergies created as part of the integration process that really add value for its airport partners.
Oddo Securities financial analyst, Guillaume Rascoussier, explains: “Players like Autogrill can really add value by adjusting their supply offering and utilising their know-how of people management.
“When you have the right sub-contractor, with the right brand and the right location, you can improve sales. In Europe, when you combine their market share in Italy, Spain and the UK they are by far the number one player in terms of combined sales. This means that their bargaining and purchasing power with suppliers, such as the big liquor and beauty brands, is greater and therefore they are receiving better purchasing terms than their competitors.”
In a tough trading environment, still in the clutches of a global economic downturn with falling passenger numbers, currency fluctuations and a general lack of consumer confidence, the group has still demonstrated a propensity to ‘fine tune’ its supply offer.
Rascoussier says: “The group has demonstrated its capacity for long-term growth just by growing sales above traffic levels. In the UK we saw a traffic decline of 8% but Autogrill [WDF] was able to improve sales by 5% and it is really proof that their supply offering is right. Autogrill knows how to manage brands and how to react when traffic evolves. If they can still produce results when traffic levels are severely hit, it is the best proof that they are efficiently managed. When we strip all the currency effects we will really see the long-term benefits.”
Its investments, which in the first six months of the year totalled €13.9 million, have also gone some way to confirm that it is a concessionaire that is in the business for the long-term, unlike the get rich quick investors of a few years ago.
They have included the opening of eight duty free and retail outlets in Barcelona Airport’s new Terminal 1, the expansion of its store at Queen Alia International Airport in Jordan and the upgrade of its facilities at Manchester Airport in the UK.
Autogrill’s financial results for the first half of 2009 are also compelling credentials for those airports considering partnership. Consolidated revenue in the first half of year amounted to €2.6 billion, an increase of 4.5% compared with the €2.54 billion reported in the same period in 2008. This was driven by the increased contribution from Aldeasa and the acquisition of World Duty Free.
Rascoussier was positive about the results given the tough conditions. He says: “For the group as a whole the main surprise was that the cash generation was very good, particularly for travel-retail. The rise in margin was not anticipated but the fact that margins are under control is good news and above our expectations.
“There are several reasons for this, but I think the synergies of integrating WDF and Aldeasa certainly helped a lot. It has proved that in this business there is some flexibility on costs – they can decrease staff costs, they have very good control of their working capital and of their inventories.”
The company enjoyed a positive performance at UK airports, particularly at London Heathrow, where commercial initiatives and the weakness of sterling helped to offset a drop in passenger traffic, pushing sales up by 5.8% on a proforma basis.
But the company’s strength in the UK has levelled losses in Spain as Rascoussier comments: “The company has found a balance since the integration – what they lose in Spain and from negative currency effects they offset with a stronger position in the UK. It’s good confirmation that its business model is well-balanced.”
Its investment in the duty free channel and approach to joined-up thinking across the divisions indicate its commitment to offering value to the sector. But the real challenge will be its acceptance by airport partners when the company faces contract renewals such as its 14-airport deal with Spanish airport operator, AENA, which is set to expire on New Year’s Eve.
These are interesting times for airports and their business partners.