Growth opportunities for Duty Free Sales

The Global duty free sales are forecast to reach US$73.6 billion by 2019, growing at a CAGR of 8.6%. Personal care and drinks will continue to be the categories with highest expenditure in the Duty Free market. Asia-Pacific region will fuel growth in the global market with sales reaching to US$37.6 billion in 2019. Growing low cost tourism, the expansion of space and the number of Duty Free stores in various airports, and wider brand availability will enhance channel sales.

Asia-Pacific is the largest and fastest growing region for travel retail ($24 billion, 13.8 percent compound growth between 2004 and 2014), with sales largely through airports, and downtown and border shops. Seven of the top eight downtown duty free locations are in Asia. Europe is the second-biggest region ($21 billion), but has the lowest growth (4.4 percent in 2004–14) and is focused on airports ($14.2 billion). The Americas region is worth about $11.5 ($6.3 billion in border shops, $4.6 billion in airports) and is growing by 7.1 percent a year. The Middle Easter and Africa market is about $6.7 billion, focused mainly on airports ($5 billion), with a compound annual growth rate of 12.4 percent for 2004–14.

As may be expected, the biggest country is Greater China (Mainland, Hong Kong, Macau, plus Taiwan), at about $10 billion, followed by South Korea ($8 billion). The third market is USA ($3.8 billion) followed by big western European countries (UK $3.7 billion, Germany $2.9 billion), the UAE ($2.7 billion) and Turkey ($2.2 billion).

Travellers account for 40 percent of global spending on personal luxury goods, with 12 to 13 percent captured through dedicated travel retail channels.

Airport malls account for almost 60 percent of the travel retail market, but the travel retail channel also includes ferries and cruises, border shops and downtown duty and tax-free shops.

Tax and duty free stores have a clear price advantage over the domestic market. They also face limited direct competition from other retailers, especially on core categories — airports with two or more operators for a single category are a minority. However, space growth is constrained by the need to win and retain concessions.

LVMH is the only luxury goods player with significant direct operations in travel retail, through its selective retail division. The division, comprising of duty free operator DFS and beauty products chain Sephora, booked sales of €9.5 billion (about $10.38 billion) and operating earnings of €882 million (almost $964 million) in 2014. Of this, DFS contributed an estimated 42 percent of sales and 38 percent of profits.

Salvatore Ferragamo is by far the most exposed brand to travel retail, with 138 duty free locations, more than twice as many as the number two, Hermès. It also operates nearly 27 percent of travel retail mono-brand points-of-sale (POS). Hermès and Bulgari follow with 60 and 51 travel retail locations respectively, each with about 19 percent of travel retail mono-brand POS. The list continues with Gucci, Swatch and Cartier.

The brand order is very different in terms of travel retail POS as a percentage of total POS: Shanghai Tang (30 percent), Givenchy (16 percent), Chloé (14 percent), Bottega Veneta (10 percent). But the picture could change as more and more travel retail POS are opened. In the past two years, Swatch has opened 26, Hermès and Givenchy have opened 13, Chloé 11, Bottega Veneta 10, Bulgari 10 and Cartier nine.

Hermès is the most exposed of the high-end brands, by a big margin, with 49 airport locations (Bottega Veneta 19, Chanel seven, Dior three).

Among the mega-brands, Louis Vuitton has the lowest exposure to travel retail, with only two airport locations (Gucci 31, Burberry 22, Prada nine). However, the brand operates 15 downtown locations, piggybacking on DFS Galleria (Gucci 15, Prada 15). This could give Louis Vuitton better marginal headroom for space growth, should it decide to expand more meaningfully into accessible categories — fashion jewellery, eyewear, fragrances and cosmetics, and silk scarves.

The overall market is growing fast, by an aggregate 8.4 percent a year in the past 10 years. This is several percentage points faster than the broader personal luxury goods market and nearly three times as fast as GDP. If we include spirits, cigarettes and electronics, the travel retail market has doubled in value during the period, to about $63 billion.

However, the travel retail market is by nature sensitive both to foreign exchange rates and to exogenous shocks; terrorism, health scares, financial crises and so on. Currency fluctuations have also been partly responsible for a nominal slowdown in market growth in the last three years.

The growing importance of emerging-market travellers is relevant as they are also the biggest spenders per passenger. Travel retail should therefore continue to grow faster than the personal luxury goods market.

Value for money remains a critical driver in the drinks sector and is key to increasing footfall, conversion and spend – according to the latest research from TFWA. The study, which was conducted by travel retail research specialist Counter Intelligence Retail, revealed that over half of passengers (53%) believe that there is a price advantage to be had by shopping at the airport. This is higher than any other travel retail category.

After price, however, a wide range of products was the next most compelling

reason to buy, with one in four of those surveyed stating that they would be

tempted to buy in the future if a broader selection was available.

Travel retail exclusives are also important to alcohol shoppers, and just under two thirds (61%) said that good value is the most important attraction while just under half (49%) like being able to buy products that aren’t available elsewhere.

A significant two thirds (62%) purchase for themselves, and on average buyers spend more on alcohol when buying for themselves than when buying a gift.

Commenting on the results TFWA President Erik Juul-Mortensen said; “Price is still clearly an important motivator to purchase alcohol at the airport, and retailers need to do all they can to ensure that the value proposition is fully understood by passengers. However driving sales in this sector will be about more than cost cutting. There is clearly substantial opportunity to encourage customers with initiatives such as engaging gift with purchase promotions as well as capitalising on the appeal of the travel retail exclusive. Developing gifting also represents an untapped opportunity, and there is room for growth here too.”

Making the most of the opportunities for incremental sales and flagging the appeal of travel retail exclusives are among the secrets to P&C success, according to new research conducted by TFWA.

Promotion of value for money, the convenience and exclusivity of these products will help to raise understanding and awareness, prompting shoppers to actively look for them.

“While three out of ten airport shoppers visit beauty, just 14% purchase, which means that under half (45%) are converted from browsers into buyers,” says TFWA President Erik Juul-Mortensen. “This is lower than for alcohol, confectionery or tobacco, demonstrating that there are plenty of opportunities to

drive sales in this important category.”

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