March 2019 Newsletter – The Importance of Travel Retail

After working for a Japanese bank in New York for more than five years, I was sent to Miami to focus on the Travel Retail industry, more commonly known as duty free shops. The Travel Retail or Duty Free Retail industry sells goods to international travelers. Travel retail sales are exempt from taxes when the goods are immediately taken out of the country of purchase.

Vital revenues for the aviation, travel, tourism and maritime industries are generated by travel retail. At airports all over the world, travel retail is the largest contributor to non-aeronautical income. Shopping is a key element of the travel experience for many passengers, and the provision of duty-free retail goods is a service as well as an important revenue generator. More than 1 billion international travelers pass through airports each year, and that number is expected to grow 5% annually, according to industry projections.

Cornerstone of Airport Growth

Travel retail is the cornerstone of airport growth and development with modern airport terminal design recognizing the critical economic role it plays and ensuring new airports come with spacious and vibrant retail spaces.

The top three product categories in global travel retail are fragrances and cosmetics (30%), wines and spirits (17%) and accessories (15%). In 2018, travel retail revenues reached $82.42 billion and are expected to reach $125 billion by 2023.

Travel Retail Keeps Growing

  • Increase in travelers – Annually more than 1 billion people travel internationally, approximately 15% of the global population, a figure expected to increase as emerging economies improve.
  • The propensity to shop while traveling – travelers have more time to browse in airports designed as inviting shopping spaces.
  • Travel retailers use data insights such as advance knowledge of where the customer is coming from and heading, to cater to specific needs. Staff and product displays are organized based on arrival passenger language and cultural sensitivities to ensure that the right products are clearly visible to targeted customers.
  • Retailers have a tremendous opportunity to create visibility of their products, increase customer loyalty, recruitment and diversity.
  • Aligning luxury with everyday products – travel retail is traditionally a market for luxury and high-end products. So travelers shop for everyday and luxury products in the same location and at significant discounts. High-end luxury product retailers use “minis” and “travel sets” to introduce their products at a discount.

Business Opportunities in Travel Retail

The sector affords SMEs the opportunity to present their products to international travelers at nominal advertising and marketing costs. Large manufacturers see the channel as a cost-effective route to market for new products requiring an international environment.

However, although the channel is lucrative, it is also full of challenges. Air travel requirements – security, passport control, gate closure, etc. – all take time away from browsing and shopping. Another big issue is space. Most travel retail stores, counters and pop-ups operate in a restrictive space, making it difficult to balance merchandizing and positive experience. Baggage allowances and product restrictions also affect the traveler’s propensity to buy.

Taking Advantage of Travel Retail

First is negotiation with airport operators. Travel retail operations are granted via concessions. Concession owners then negotiate with retailers on the appropriate margin based on expected sales volume. Retailers have to negotiate with the operator at each airport if they want to be in that airport and cater to those passengers. Operators look for the retailers that will generate the most sales that translate into more revenue and profit.

According to Moodie Davitt, the largest provider of business intelligence for the travel retail industry, the top five travel retail operators based on sales in 2017 were:

  1. Dufry – €7.166 billion/USD 8.098 billion (Switzerland)
  2. Lotte Duty Free – €4.842 billion/USD 5.471 billion (South Korea)
  3. Lagardere Travel Retail – €3.917 billion/USD 4.426 billion (France)
  4. DFS Group – €3.670 billion/USD 4.147 billion, Hong Kong based, owned by LVMH (France)
  5. The Shilla Duty Free – €3.412 billion/3.856 billion (South Korea), owned by Samsung Group

Duty Free Americas, the Miami International Airport concessionaire, ranks #11 with €1.499 billion/USD 1.694 billion in revenue in 2017 and is owned by a Miami-based group.

In Conclusion

If your business or a client can benefit from our experience and knowledge, please contact us:

Carmen Diaz 305.725.1922 cdiaz@npcfo.com

Gary Colbert 941.323.9555 gcolbert@npcfo.com

Russell Slappey 407.448.1781 rslappey@npcfo.com

Alma Kadragic 954.651.8044 akadragic@npcfo.com