Airport Retail Flying High

Once a profitable but rarely discussed sideline business, airside retail is now a highly lucrative, core component of a successful luxury strategy and airport operators are innovating to take sales even higher. BoF investigates.

Dior concession at London Heathrow Airport | Source: Heathrow Airport

LONDON, United Kingdom — Christian Dior’s dove grey carpets and boudoir mirrors vie for the eyes of customers with Prada’s harlequin tiles. The polished hardware of Dolce and Gabbana handbags glint, not far from lustrous exotic-skinned accessories by Gucci.

No, this is not the Avenue des Champs-Élysées or Bond Street, but the departure lounge of Heathrow Airport’s Terminal 5, where passengers buy over $450 million per year of perfumes, clothing, scarves, sunglasses, jewellery, watches, bags and small leather goods from brands including Alexander McQueen, Burberry and Chanel, the airport’s top performer.

A similar scene plays out each day at a plethora of major international airports across the world, from Singapore’s Changhi and South Korea’s Incheon to Dubai International and Charles de Gaulle in Paris. But this wasn’t always the case. Indeed, in the last 20 years, airside retail has undergone a radical transformation.

From Sideline to Strategic Priority

“What you used to have at Heathrow and Gatwick, for example, was big old airport terminals, with a WH Smith and maybe a Knickerbox and a big greasy spoon café,” Brian Collie, former group retail director of the British Airport Authority (BAA) from 1997 to 2005, told BoF.

But things began to change in the mid-1990s. “What we did was bring quality retail developers and architects to the airports,” said Collie. “And we were beginning to get demand from brands who had never really traded at the airport: big players like Chanel and Dior, who had always sold cosmetics through the duty-free operators, but had never had stand-alone stores.”

The passengers who make up the majority of retail foot traffic at airports constitute something of a captive audience, passing what executives often refer to as “the magic hour,” the time between passengers clearing security and boarding their planes. Many are bored and looking for diversion. Others are buoyed by the start of a leisure trip.

“For many, airport shopping marks the start of their holidays,” said Richard Perks, director of retail research at Mintel. “Today, over one in ten European travellers look forward to shopping at airport shops.”

But perhaps the biggest draw for brands is the premium customer profile of international passengers. “At an airport you have the best customers. Ten, fifteen, twenty million customers going past your door every year and they are 60 percent AB’s,” said Collie, using socio-economic classifications developed by the NRS (National Readership Survey) in which A’s are upper middle class and B’s are middle class. “[Luxury brands] had been buying posters at airports around the world for years, buying the back covers of in-flight magazines stuck in a seat in front of somebody and now they had the opportunity to put their product and staff in front of them.”

Today, marketing remains a key reason to invest in airport real estate, but “the volumes were so good that it became, not just part of the marketing mix, but part of the retail operation,” Collie continued. “Airports are a fantastic piece of real estate. The sales density can be significantly higher than the best locations downtown,” he added, referring to a critical metric for retail performance, typically measured in sales per square metre.

While declining to reveal precise figures, Muriel Zingraff–Shariff, retail concessions director of London Heathrow, concurred: “For some of the luxury brands, I can tell you that their store [in London Heathrow Terminal 5] is second only to their Bond Street or New Bond Street stores in terms of productivity — and, for some, it’s the most successful in terms of productivity per square metre.”

Duty-free and travel retail sales of perfumes, cosmetics and luxury goods jumped 28 percent between 2008 and 2011, and are expected to grow by another 25 percent in the next two years, according to Generation Research, a Stockholm-based consultancy, which predicts that, by 2020, the travel retail and duty-free market will be worth $120 billion per year.

“Before, travel retail was seen as a kind of nice-to-do thing, but you didn’t really talk about it and it was a side part of the business. Now, travel retail is integrated into the main strategies of very big brands such as Burberry,” said Zingraff–Shariff. “With Smythson, as another example, they had a very strategic approach to travel retail. They describe travel retail in their overall strategy and they see Heathrow as an international platform to launch their brand to the world.”

A New World Takes Flight

In January of this year, the UN World Tourism Organisation announced that, in 2012, the number of unique international tourist arrivals passed a record one billion for the first time in history. And indeed, driven by continuing globalisation and the rise of emerging economies, half a billion more international tourists, defined as those staying over one night in a non-native country, travel today than they did in 1995.

Along with growth from China, Russia and Brazil — at 31 percent, 22 percent and 15 percent, respectively — Central and Eastern Europe grew by 10 percent, South East Asia by 12 percent and the Middle East by 13 percent, which all spells increasing sales for luxury retailers with airport concessions.

“Thirty years ago, it was the Japanese. Twenty years ago it was the Koreans. The past few years it has been the Chinese. And between all of those you have had a lot of the Middle Eastern markets and South American markets,” said Collie. “Once you have an emerging market with a burgeoning middle class with the propensity to travel, who don’t have access to a lot of the brands in the local markets, or if they do have access it’s at a very high price because of import tariffs, what you have is the opportunity to sell huge quantities of your best products.”

“Last year, there was an 18 percent increase in the average spend per passenger from the BRIC (Brazil, Russia, India, China) countries,” added Zingraff-Shariff. “[At Heathrow], Chinese passengers currently represent 0.7 percent of overall passenger volume, but are responsible for 25 percent of the total spend on luxury goods.”

Big Data and Digital Merchandising

Airports offer unique advantages for another reason as well: data. As passengers move from check-in to gate, airports capture an enormous amount of information on them — including who they are, where they are going, on what airline, at what time, in what class — a trove which could prove a gold mine for savvy retailers, if effectively structured and shared. But according to Zingraff -Shariff, this hasn’t traditionally been the case.

“Before I joined, the one thing I did was phone a number of CEOs who I knew and they all came back saying ‘Great environment, the problem is we don’t understand it that well.’ That’s because information was not shared in a way in which the brands could understand it,” she said. “It was not analysed in a way that made the data a tool; it was just loads of information.”

Zingraff-Shariff has plans to change this. “The first step is that we are going to be able to have our daily sales fed to us directly, so that we can analyse them in conjunction with flights and passenger numbers; we can analyse all of this and give it back to the brands so they can make good use of it,” she said

“For example if you have got the Singaporean flight going out and you are a luxury accessories brand, you may want to make sure you put your smaller size bags in front and not your big size bags, because we know that the Far Eastern customer doesn’t like big bags; they buy small.”

“The next level is what we call big data, which is basically creating a platform where the brands, our partners, can access that information directly,” she continued. “It will be merged with parking information and basically any other data that we otherwise have, and analysed in such a way that it will enable people to understand the total journey of a passenger.”

This type of data is already used to alert certain luxury companies when particular individuals are passing through the airport. “Our objective with a lot of luxury brands is to significantly increase the average transaction value by being able to offer [special things] when we know certain passengers are going through.”

But by digitising product displays, using high quality screens, retailers may soon be able to more rapidly and efficiently adjust their merchandising strategies, in real-time, to reflect the profiles of much larger numbers of customers currently passing through the airport.

“Basically, [when you have digital screens] all you need is to plug in various contents of each brand at a lot less cost and with more flexibility. It enables you to change quickly, so if you have got the English going through in the morning and they like their Johnny Walker Black you will put it on [the screen]. And then at 15.30, because you have got another nationality going through in droves, you are going to put on the latest Chinese liquor. In essence, you could end up having a pop-up that doesn’t have any product and actually you would just be sending people through to one of the stores, but it would become a real experience, similar to when Burberry did a fashion show that was all holographic.”

“The technology is here, but there is still a big step to commercial realisation. We will make that journey, but it will take some time.”