Is Duty Free Suffering from Boiling Frog Syndrome?

By: Antonio Luis Rodolfo, Travel Retail Consultant • email: luisrodolfo213@gmail.com info@trunblocked.com

This article is about new business opportunities in the air transport market and ideas on why and how duty free operators should urgently join forces before more business is taken by online players.

Time is Money

No other industry knows better than travel retailers the importance of time to help increase spend per passenger and shop conversion rates.

‘Time’, of course, is also called ‘Dwell Time’. Some studies point out that for every additional 10 minutes the passenger stays on the airport airside area, the propensity to shop increases by 30%. All travel retailers know only too well the positive effect on sales every time there is a flight delay!

‘Dwell time’ is also sometimes simply designated the ‘Golden Hour’ (the average time a passenger is free and relaxed for shopping around the airport), which is essentially the ‘moment of truth’ that airports, retailers and brands need to communicate effectively to convert passengers into buyers.

Imagine that, if instead of just the one ‘Golden Hour’ there were several ‘Golden Hours’? Inflight, of course, delivers this.

Usually passengers spend much more time inside a plane – especially long haul flights – than at airports and normally with less stress levels, since they have already passed all airport hurdles (check-in, passport control, security) and managed not to miss their flight!

It is well known that Duty Free on-board sales:

is not a significant business compared with other duty free channels (US$ 2.6bn, around 5% of total annual global Duty Free sales).
its turnover has remained more or less flat during the last decade.
only around 1.5% of pax make purchases on board, with an average spend per pax between US$1 – US$2.
airline indicators are very low when compared with airport benchmark references: +30% passenger shopping penetration, with global duty free sales per departing passenger of +US$ 25.
further, some airlines have decided to stop on-board sales altogether – e.g. Delta, American and, most recently, United.
However, it is also fair to take the following into consideration:
airlines sell duty free on-board using a small and unattractive trolley with a restricted number of products that normally passes fast along the aircraft corridor.
airlines are providing more and better w-fi connections on board, and that is genuinely opening new business opportunities for online business and players.
by 2020 an estimated 50% of the world’s aircraft will be connected to meet the aspirations on millennial travellers (SITA source) and this revolution will enable passengers to transfer their digital lives from ground to air. This, in turn, will open up new business opportunities in ways that were not hitherto achievable.
the current global airline traffic surpasses 7 billion passengers and is expected to double by 2029 (ACI Source).

So, isn’t there enough room for serious improvement in the duty free airline channel? How many industries have these expected growth rates today? And this, coupled with a wealthy ‘captive audience’ and dwell time to kill?

What is the new idea and opportunity?

The new idea consists on offering airline passengers products – and not just the normal duty free core categories. These new products consist of destination services, e.g. book a restaurant, hotel, buy a special tour trip, that can be bought online:

before the flight and be delivered to the passenger’s on-board seat
during the flight and be used in the destination city

The passengers could access online offers via airline seat entertainment screens or via their own mobile tools, using a wi-fi connection.

Note, only about 50% of holiday expenses are currently made with hotels, airlines/flights and rental car companies, and so other services will be disrupted and digitalised as well in the near future. An effective early/post engagement in the traveller trip cycle could increase the ATV (average ticket value) by more than 2.5 times!

Apart from the potential to capture additional revenues, there is also a unique opportunity for Duty Free operators to enlarge the touch points during the traveller journey (not only in the airport) and be more relevant for the traveller.

What are the threats?

If Duty Free operators and airlines are not interested to invest (as it appears, except for a few brave ones), then who else could be better

positioned, with enough capital and agility to invest in this channel? What companies are fighting hard to have a ‘stake’ in every world business? Who have a clear ‘one-stop-shop’ customer strategy focus?

Certainly the biggest external threats come from the huge online retailers (Amazon, Ali Baba, OTA’s (online travel agencies) and metasearch engines (Expedia, Tripadvisor, Google). They are in a better position than Duty Free operators to communicate with the passenger and know in advance when and where they are travelling. Some are already proposing similar products with very competitive prices and convenient service. For example, Ali Baba has that information since most Chinese travellers use Alipay to pay for their trips.

Following the online retailers dynamics, their high ambitions and credo (the winner takes it all!), innovation and consistent acquisitions and partnerships, it is not that difficult to figure out that they can easily pilot a new travel retail platform powered by their technology and meaningfully disrupt the Travel Retail and Duty Free market.

It’s a US$ 65 bn industry, with forecast year-on-year growth of 7.9% for duty free sales by 2025. So it is a very significant business not to be on the major online players’ radar and almost certainly a logical step in their roadmap travel strategy. It is only a matter of time until they enter the DF&TR market and become a reality for everyone to face.

What is the DF/TR industry doing and what can it do?

The industry talks a lot about reinforcing Trinity co-operation (airports, retailers and suppliers), the importance of sharing consumer knowledge and data, differentiate the channel’s USP against other channels, work together to create more value etc… But is DF& TR truly generating the value that it could? What if there was no passenger growth?

Of course, industry passenger growth is benefiting overall Duty Free sales growth but, at the same time, it is also hiding inefficiencies and lack of attention to other realities and ‘details’. Isn’t it time to get out of this comfort zone and take a long, hard look around?

How much, for example, is DF & TR currently losing to downtown shopping and online channels? How much will it lose in the future? What if the Trinity approach was simply not enough anymore? Wouldn’t it make sense to finally engage other players – airlines, for example, the key ‘owner’ of the traveller, and talk more of a ”QuadTrinity” strategy. Or could just a new Trinity be more effective that include airlines, but not airports?

Duty free operators need airlines more than they can imagine and airlines have plenty of choices to find other partners.

There is a quote from Jack Ma (Founder of Ali Baba) from his company’s early years of expansion: ”EBay may be a shark in the ocean, but I’m a crocodile in the Yangtze River. If we fight in the ocean, we lose. But if we fight in the river, we win!”

I would rephrase and adapt Jack Ma’s quote to the DF & TR industry to fight against online retailers and disruptors: ”If we just fight on the ground, we lose. But if we fight on the air, we win!”

To ‘conquer the air’, duty free operators need to lead and drive this digital challenge and not let other players occupy that space. For that, the top duty free operators should effectively trust each other and work together for the sake of a bigger purpose and mission. It’s a lifetime opportunity! So what are they waiting for?

There are some initiatives of this type of collaboration, e.g Heinemann with Lufthansa and Wizz Air, the development of airport travel blogs and content from Munich Airport and a few other modern apps and websites. However, all of these will not be enough to win global travellers’ hearts and minds for duty free shopping against the powerful forces of the online giant traffic generators and their huge brand awareness.

Duty Free operators need to quickly establish the rules of this common vision and collaboration in order to protect the DF & TR channel against online retail players an invest in a common global DF & TR online platform to be leveraged, amongst others, onboard the airline passengers’ seat entertainment systems.

To effectively offer a ‘one-stop-shop’ platform concept, which covers all travel products and services in a kind of ‘Destination Booking Platform’ that enables passengers to plan, book and pay for all travel products – before flying and during the flight.

To win the battle, Duty Free operators really need to think and act like an online retailer, have a single customer point of view, build strong content together and understand the new ways of communicating with consumers and engage with them along their trip cycle process.

Do note again that additional revenues are not just coming from selling the core duty free categories, but also: destination services offers, airport services, affiliate marketing programmes, advertising, collecting DATA about the traveller that can be used for several other purposes (e.g real time market surveys, loyalty schemes), and build a sustainable relationship and communication with the traveller community.

Don’t let others control your DATA, as this is the new ‘oil’ which everyone is ‘silently’ fighting to control!

All this will surely also contribute to increase airline ancillary revenues, which are needed and are keen to surpass 40% of total revenues.

Finally, if Duty Free operators do not lead this opportunity and occupy this space, others will! Again, it is only a matter of time, and a lot value will be lost for the DF & TR industry if it keeps waiting in its comfort zone – just like the boiling frog parable! So, now is the time to walk the talk, be prepared to take risks, invest in innovation, execute and learn fast!