LONDON, United Kingdom — In recent years, booming international travel — originating especially from China, Russia, Indonesia and Thailand — has propelled travel retail from a relatively small sideline business to a highly lucrative and critical component of a successful luxury strategy. “Travel retail has been growing at about 12 percent in the past few years. A similar growth is expected in the next two to three years, putting it at double the growth rate for the luxury goods market,” said Luca Solca, head of luxury goods research at financial services firm Exane BNP Paribas. “Travel retail is significant for the broader luxury market. We calculate that travel retail is worth about 15 percent of the broader personal luxury goods market,” he continued.
Changing Faces, Changing Lanes
As the market has grown, the demographics of travel retail have changed dramatically. “In the old world, before 2005 or 2006, the Americans and the Japanese were the leading super nations. Now, the Japanese have been decreasing pretty sharply for two years. They went from number three to number seven. But what has really changed the deal is China and Russia. They completely exploded. These two nations grew the market three or four times bigger, even though the United States, Japanese, Arabs, Swiss and Hong Kongese stayed pretty small,” said Manelik Sfez, vice president of corporate marketing at Global Blue.
Indeed, the significance of Chinese and Russian travellers dwarfs other groups. “China accounts for 27 percent of the total market and Russia for 15 percent. Number three is Indonesia with 4 percent. It’s really linked to GDP per capita. As soon as GDP per capita starts to rise and people have more disposable income, they want to travel, and when they travel, they want to shop. For 82 percent of Chinese travellers, shopping is their number one priority, dropping to 56 percent and 48 percent respectively for Middle Eastern and Russian consumers. The Chinese consider shopping a fundamental part of their travel experience. They are the sixth continent for the retail industry,” Sfez explained.
“In China, travel is very much linked with urbanisation. When cities become bigger and they become richer, you have an explosive growth of the number of people from these cities that want to discover the outside world,” said Philippe Schaus, chairman and chief executive of DFS, an LVMH-controlled premium duty-free retailer that operates 420 stores around the world in traditional travel corridors like airports as well as in downtown locations. “For DFS, it is very important to understand which cities are coming up. We have offices in a growing number of cities in China and internationally, which help us to be in direct contact with the travel industry,” Schaus continued.
“It is all about understanding where people come from and what the travel trends are,” he added. “That, then, dictates which brands we should propose to them, what should be the language of our sales staff, [and] what services we want to offer. That is all dependent on the customer mix. And when the customer mix evolves, your business evolves.”
Along with travellers themselves, dominant travel routes and hubs have also changed significantly in recent years. “If you look at the Advance Passenger Information (API) world data, London Heathrow is still currently the world’s most important hub, with 70 million passengers. Today, Dubai has nearly 60 million passengers, but by 2018, after all the construction that they’re doing, their capacity will be 90 million. I think we will definitely see a shift geographically. If the Middle Eastern airports, by increasing their capacity, also increase the number of destinations they serve, then the passenger numbers will follow,” said Muriel Zingraff, a travel retail consultant and former head of travel retail at London Heathrow. “In Dubai and in Abu Dhabi, they’ve taken a clear decision that travel retail is of huge importance,” she continued. “The square footage that has been dedicated to retail has made the airports a lot bigger and more like huge shopping malls. The Middle East is expecting to pretty much double their global airport sales.”
The burgeoning opportunity has shifted the way airports generate revenue. “Asian airports like Hong Kong or Incheon in Seoul have clearly looked at travel retail as a main source of revenue,” said Zingraff. “It means that they get 60 to 70 percent of their revenue from non-aeronautical revenue of which retail is the majority. The aeronautical revenue, which is basically the charge per passenger by the airline in those airports, is not the biggest source of revenue, which has definitely shifted the importance of space given to travel retail within [existing] airports and new airports being built. In 2012, Global Airport Retailing placed Asia-Pacific airport retail spending at $12.2 billion, while Europe was $10.6 billion and the Americas were $7 billion. By 2016, Asia-Pacific is expected to be $23.2 billion, almost doubling airport sales, whereas the Americas will only grow to $10.1 billion and Europe will be at $12.4 billion.”
But, in what is perhaps the sector’s most significant shift, market leaders are not only targeting new consumers and new geographies but also expanding their focus from traditional travel corridors like airports to travellers themselves, whether they are passing through transit hubs or city centres.
Tapping Travellers, Not Just Travel
“‘Travel retail,’ which is an expression that defines retail outlets located within travel environments, has evolved into ‘traveller retail,’ which is using any retail outlet to harness growth by international travellers. Brands have started to realise that travellers do not shop only in airports. They shop everywhere, especially on the high street,” said Sfez.
“If you structure your business in terms of geography and not demography, if you see that you’re selling a lot to Chinese, what would be your reaction? You would open stores in China. But the cash register is actually in France or Italy or Singapore. The way brands read their sales should focus on the identity of the consumer — demographics not geographies,” Sfez continued.“I think those that will be successful will start to consider [all] shoppers as tourists and integrate tourism-marketing techniques. What is really important is to be known before people leave, not only once they are already at their destination.”
DFS is doing just this kind of point of origin marketing. “We talk about customer touch points, so we try to be in contact with the customer when they are thinking about the journey,” said Schaus. “We do that through alliances with travel magazines, websites or blogs, and travel booking organisations. The travel agent might post them a programme which includes visiting a DFS store and, on the plane, there might be something telling them about DFS and so on. We are regularly in contact up to the moment when they arrive in our store, where they shop and we register them into our loyalty programme. Then we can stay in contact with them after they leave and go back and maybe ready for them for their next trip.”
The company is also increasingly targeting travellers with stores placed beyond traditional travel corridors with recently rebranded ‘T Galleria’ locations in city centres. “The downtown model stemmed from the idea that when you were in the town, when you were flying off you had little time at the airport but a lot of time in town,” said Schaus.
“The model requires the opening of new stores, clearly. But the advantage versus airport located stores is that retailers will have to pay market rent, while airport space costs can be higher,” said Solca. “It can make sense to serve travellers both at the airport and in the centre of town. Tourists may have more time to spend when they are in town, while they may be just zooming through the airports. It seems an appropriate strategy.”
But do new downtown locations put DFS directly in competition with own-brand boutiques? “You could say, yes, it is competition, but we don’t see it like that,” said Schaus. “I think that the way of shopping is different between going to a downtown travel retail store, like T Galleria, and going to the boutique. It is not the same thing. We get a lot of people who are still in the mode of discovering luxury brands, of learning about them. We offer a wide selection and guide them through it. [Travel retailers and boutiques] are complementary and that is going to stay so, as long as there are customers who want to be educated.”