LONDON, United Kingdom — Travel retail typically plays second fiddle in brand communications, which emphasise flagship mono-brand stores. But, people travelling account for 40 percent of global spending on personal luxury goods, with 12 to 13 percent captured by the specialised and globally dispersed travel retail channel.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.These channels each have their own characteristics. Airport operators typically charge rent as a percentage of sales, which limits the potential upside for retailers as it reduces their operating leverage. Additionally, airport locations normally come with guaranteed minima attached. These can be expressed as absolute dollar amounts, in which case the retailer bears a traffic, consumer mix and execution risk. More frequently however, the dollar amounts are linked to traffic volume, in which case the retailer carries the consumer mix and execution risk only.By contrast, the economics of downtown travel retail are similar to those of traditional luxury retail operations under fixed rental cost agreements. These stores typically have higher potential for operating leverage. Downtown and border shops compete directly with tax refund and display the same fundamental dynamics; fast growth with the continuing rise in traveller numbers, susceptibility to travel disruption and dependence on key brands. However, downtown tax free stores follow the business logic and constraints of the traditional high street, where tax refunds are available.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.Diverse approaches to a complex channelLVMH 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.Will travel, will spendThe 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.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).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. For example, the weakness of the yen and the euro have encouraged a sharp increase in spend in Japan and the Eurozone, primarily by Chinese consumers — and by Chinese professionals arbitraging price differences by buying in Europe to sell then in China through specialist websites. By the same token, Japanese consumers have withdrawn from international markets. Meanwhile, the stronger United States dollar is feeding hopes of a revival in international American spend worldwide. Currency fluctuations have also been partly responsible for a nominal slowdown in market growth in the last three years.Conversely, regional diversity helps cushion the impact of external shocks. The buoyancy of Asian and Chinese demand has been further support. By the end of 2010, the travel retail market had fully recovered from the 2009 financial crisis and even exceeded the 2008 level — a strong performance in Asia-Pacific and the Middle East more than offset a slower recovery in Europe and Latin America.The regional figures also underline the growing importance of emerging-market travellers. They are expected to be one of the main forces behind the forecasted doubling of air traffic in the next 15 years, including sharp increases in domestic air traffic in developing Asia and Latin America. This offers a potentially rich target for travel retail.The result is a positive double-whammy outlook for travel retail, as emerging market nationalities are also the biggest spenders per passenger. Travel retail should therefore continue to grow faster than the personal luxury goods market.Luca Solca is the head of luxury goods at BNP Exane Paribas.