Driving duty free sales across Heathrow’s four retail pillars
Heathrow Retail & Property Director Fraser Brown speaks to us about Dufry’s extension to its contract, and about staffing and other challenges for commercial partners at the London gateway. By Dermot Davitt.
“We are reaffirming a long-standing relationship”. That’s how Heathrow Retail & Property Director Fraser Brown refers to the agreement to extend Dufry’s duty free contract at the London gateway for three years until November 2029. The operation at the travel retailer’s single largest airport location encompasses 24 stores and 13,000sq m of space across the terminals – the extension also reinforces Dufry’s strong position in the UK where it operates shops at 25 airports. Speaking to The Moodie Davitt Report, Brown says that the conversations between the parties have been “about evolving the offer post-COVID”. “We have built in three additional years to the collaboration on which we will need to work really hard,” he adds. More specifically, Heathrow Airport management has heightened expectations of its duty free partner built around what Brown calls his four pillars of retail: digital, experience, space and offer.
“On digital we will pushing each other as part of the collaboration to do more, and we will certainly be pushing them more on experience.”
“The opening of our new Johnnie Walker pop-up with Dufry, JCDecaux and Diageo (pictured below) is a good example of something immersive, experiential and important. We need to continually up our game. Across all retail people expect a better experience in the store. It needs to be much more than stacking up a product and making sure it’s spaced properly. So we will drive digital and drive the experience in-store.” Heathrow is also seeking clear, consistent messaging about the value proposition, which is particularly relevant in the duty free categories of liquor & tobacco. With the UK reverting to a duty free pricing regime for EU-bound travellers on alcohol since Brexit, this represents a big opportunity. Brown says: “We will be pushing on a number of fronts on the well-known brands, and demonstrating along with Dufry that we offer value for money versus what consumers would get on the High Street. “But also, in alcohol, there is a sub-category of luxury, in which we can help the brands elevate their experience. We are the best place for them to speak to those luxury consumers because of the demographics of travel retail and of Heathrow in particular.
The immersive Johnnie Walker experience at Heathrow Airport Terminal 5; pictured opening the pop-up in late May were (from left) Diageo Global Travel General Manager Europe & Americas Nick Cook, World Duty Free Commercial Director Eve Fifer, Diageo Global Scotch Director John Williams, JCDecaux UK Chief Partnership Officer Helena Kavanagh and Heathrow Airport Retail & Property Director Fraser Brown
“We are going to push Dufry hard on the offer part, getting the ranges and getting the price right. That means reinforcing great relationships with big brands such as Diageo, but equally challenging them on Britishness as well, and Sense of Place. We want them to work with British or English winemakers and spirits brands. We did that very successfully together with Chase when that brand was independent [it is now part of the Diageo portfolio -Ed]. We aim to continue to do that, to find British brands, not just in the duty free categories but across the board.” Price, and conveying a price advantage, is more of a challenge in what were formerly the tax free categories, notably beauty and luxury, since the UK government axed airside tax free sales. With beauty such a critical category, Heathrow, Dufry and the brands combined continue to offer VAT-free equivalent prices, so consumers get the benefit at the airport against the High Street – absorbing the difference to remain price-competitive. Brown says: “On beauty I would imagine that we will continue to take the pain of that margin support for the foreseeable future. I won’t say forever, and we will keep everything under review as I’m sure will Dufry and the brands. But we need to be able to demonstrate value versus the High Street. “Communicating the price message is not easy. Before the UK government changed the rules, across the vast majority of categories, if you were flying outside the EU, you didn’t pay VAT, whether you were buying a £10 Accessorize scarf, or a £10,000 Rolex.
Rebuilding the network: World Duty Free at Heathrow T4, which reopened earlier in June
“Now we do have a more difficult message to explain to travellers on pricing. Some of the brands we are working with are offering a discount versus the High Street, JD Sports for example. But most luxury brands are not, though some will offer a gift with purchase, or exclusive products that you cannot get on the High Street. “We need to communicate the price and value message through our partners in-store and via heathrow.com at various digital touchpoints. We all have a job to do on that. “There is margin pressure on beauty. But I think if we get the top-line sales right, whether it be on beauty, alcohol or confectionery, then we'll be successful.” More broadly, Heathrow and its partners continue to argue for a form of tax saving that can be applied to airside sales beyond dutiable goods. “On the decision that the UK government took on tax free products, we disagree with it and continue to protest and say it is wrong. We continue to advocate for some form of tax free shopping airside. With the UK having left the EU we are also making the case for arrivals duty free, as a good thing for the aviation sector that doesn’t damage the domestic market. “We continue to lobby government on these matters but meanwhile we will focus on offering value under the rules in place.” Is the message around tax free savings working to date?
Brown says: “We don’t yet have good data. It’s too early to tell because passengers are only now coming back but they are not the same demographic as pre-COVID. So any analysis now is not comparing apples with apples. “Overall, per passenger spend is pretty good at the moment across most categories. We are seeing an impact on high-end luxury, although it’s early days to tell the full impact. The other factor is this so-called ‘revenge spend’. And the question is, how long will that last? Is this a travel retail honeymoon period? We don’t yet know and we have got to be careful if we think this is a sustainable success.” One path to rebuild spend, notably in luxury, will be the eventual return of Chinese travellers, but Heathrow is not planning for them in the short term. Brown says: “The crystal ball on the return of Chinese travellers is cloudy. We are planning cautiously though not for 2022. The questions for us are when will the market open, and then to what extent will Chinese travellers be prepared to come to the UK to shop domestically and at the airport?” He notes that in the past, members of pre-organised tour groups were well informed and aware of the processes around d tax free shopping, at the airport and downtown. Highlighting the loss of this tax free benefit to shoppers on- and off-airport through new government rules, Brown says: “I’m sure once they return will understand the VAT position clearly. We will have to see whether that has an impact. “If I was a luxury retailer in Rome, Milan, or Florence, I would probably be looking forward to a bumper Summer 2023 as consumers from China come back for the first time after three years. If I was in those markets or others in Europe I would have confidence that they are going to spend because it’s still VAT-free, as opposed to not being VAT-free in the UK.”
Price and value messaging is a critical tool in driving liquor sales today (T2 pictured)
The other key pillar on which Brown and his team are rebuilding the offer is space. Here, he says that under the updated agreement, Heathrow will “challenge Dufry to use the space more intensively”. He adds: “Now that doesn’t mean more product each square metre. It could be more experiential, because that ultimately might drive more sales, but we want them to innovatively look at how intelligently and cleverly they are using every single square metre. “Space remains at a premium and we are getting back towards capacity now having re-let some vacant spaces in the terminals. We are not going to be able to build our way to success by providing more space. So they are going to have to work with us really intelligently on how to use the space they occupy. “With this new agreement, fundamentally it gives us three more years to collaborate really strongly on those four pillars of digital, experience, space and offer. “The objective here is simple, and it’s twofold. One, to deliver the best duty free experience. And two, from that experience to deliver world-class financial returns for all of us. And I say it deliberately in that order. If we get the experience, right, I’m an absolutely firm believer that we will get better financial success, for our different businesses and our people.” Brown sees Heathrow’s role as very much a hands-on partner in the retail business, and has previously said that being a ‘passive landlord’ is not its remit. Building on this, he says: “If we weren’t a passive landlord pre-COVID we certainly are not going to be passive through COVID. My team are working incredibly hard with brands like Johnnie Walker and retailers like Dufry to make sure that we deliver the best possible experience, whether it’s the detail of the staffing situation tomorrow, and getting the experience right. Then the money will come.”
Heathrow and its partners are staffing up to face the challenges of recovery in the months ahead
Brown also addresses the wider conditions for trading at the airport as Terminal 4 reopens – an encouraging development (from 14 June) that will grow capacity and offer opportunity for commercial partners. Staffing for the airport and those partners remain a challenge, alongside others. Brown says: “It is difficult. We have wage inflation, we have raw material inflation and a labour shortage. The UK has had two labour market challenges when most markets have had one in COVID. Here the second one is Brexit. The government statistics in the UK show that there are more job vacancies than those that are unemployed. “Obviously, people left aviation as an industry because aviation industry employers had to scale down. Some of those colleagues went back to their home European countries and may not necessarily come back. It is really challenging. You can’t just advertise, interview and then offer somebody a job and have it signed off on Monday. For all the right reasons, there’s a vetting and the security process to get through that lasts longer than a matter of days.” Like the airport, business partners still have an urgent need to recruit. Brown says: “The individual retailers don’t yet have as many people as they would want in the stores. But they have enough to open the stores safely and to offer a good level of service. We did have a period of restricted opening hours as a way to manage the people challenge, but now the vast majority are open from the first to last flights. Importantly too, the shelves in retail are well stocked so we are not seeing shortages. “In food & beverage, the main challenge is people. The reason you might see a restricted menu is that it allows a kitchen to operate with fewer colleagues. It’s not necessarily because you don’t have the raw materials but more that you need the people to make up the meals. “We are working with them to overcome this and at the moment, we have got pretty much everything open. We did have a challenge because a few food & beverage operators closed through COVID. We have replaced most of those units operated by Casual Dining Group and Carluccio’s across the terminals, and are reopening many of those spaces still.” New operations include a partner called Vagabond in T5 that sells wine and beer by the glass where you tap, pay and dispense yourself, alongside the chance to buy from a traditional casual dining menu. Other high-volume units now open in T5 include Giraffe and Wagamama through the TRG Group, Gordon Ramsay’s Plane Food, Starbucks through SSP and the biggest Pret A Manger in the world. “From a capacity point of view we are getting there,” says Brown. “We have got enough seats, we have got enough offers, it is just making sure we have enough people. It’s a similar story in T2 and T3, and will be a phased opening in T4. We will have plenty of food & beverage capacity in T4. We are working with those operators to make sure they have got enough people to operate these units.” On where Heathrow stands today, Brown says: “At Heathrow we want to offer the best airport service in the world. We pride ourselves on the Skytrax awards that we get for travel retail, we pride ourselves on the ASQ scores, and how we have done as a hub airport versus the bigger hubs in Europe. “The service that we are offering today is a good one, but it’s not a level that we would aspire to. And we want to get back to that level of service.”
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