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Formula 1 of Retail

After I passed the security at the Milano Malpensa Airport, I had to stroll through a large corridor in order to reach the gate for my flight back to Istanbul. It was no coincidence that the corridor was long, winding and enclosed by brands such as Hermes, Armani, and Gucci etc. Amongst the many curious and creative efforts of the final point of supply chains, this one stood out particularly during my trip to Europe this summer.

Retail is the sale of goods and services from individuals or businesses to the end-users. From vending machines to department stores, nature of the products, customer segments and availability of the products molded the medium of retailing over the course of history. For luxury items with relatively inelastic prices, such as perfumes, colognes, liqueur, designer clothes etc., we have the famous, airport Duty-Frees. First established in Dublin in 1947, these retail outlets offer the benefit of exemption from certain local or national taxes and duties. Shocked by terrorism, epidemics and recessions, airport retailing still remains strong, with an average growth of 12 % since 2009.

The customer demographic in the airport is more affluent than at malls due to the influx of business and international travelers. However, there is a remarkable degree of uniformity between shoppers of different nationalities called the golden hour. While waiting for their flight, the passengers are surrounded by duty free shops and other retailers to kill time. During this time period where the passengers’ guards are down, the idea of cheaper booze and tobacco cause passengers to reach for their wallets.

In 2013, travel retailers’ revenues reached $ 60 billion according to Generation Research and sales at airports are forecasted to grow 73 % from 2013 to 2019 according to Verdict Retail. With more airport projects across the globe, a shift in the market is inevitable. Asian airports are already outselling that of Europe’s and Asian airport retail sales are expected to reach more than the double of the European airport retail sales by 2016.

It is clear that, impulsive or planned, people like purchasing at the airport shops. Airport shops are liked and used by the passengers. However, the challenge is to make them as accessible as possible. Some examples include vending machines for electronics, online ordering to pick up at the airport (before flight or on return flight) and ordering at the airport to be shipped to an address.

Airport Customer Survey

Duty Frees are not only good outlets for the brands that target travelling customers, but also a good source of revenue for the airports as well. When airport incomes were cut down by regulators and budget airlines, non-aeronautical income became more important. The growth is nourished mainly by the increasing number of passengers. However, the appetite of the consumers combined with the brands’ ability to capture them also play a significant role in this growth.

When the increase in revenues of the airport retailing is realized, many airports raised their share of sales by 10 – 15 %. Under pressure, many smaller firms couldn’t turn profits and had to submit to bigger players. In fact, the share of the top 5 players in this market has risen from 19 % in 2005 to 40 % in 2013. As we have witnessed the airport shopping evolving from a side business to a major sector, the future looks brighter for the industry.

Barbaros Serter
Driven by his passion to solve problems and his love of challenges, Barbaros studied Industrial and Operations Engineering program at the University of Michigan. Graduated in 3.5 years from this world's 2nd best IOE program, now he is pursuing his Masters again at the University of Michigan, focusing on International Finance and Business Management. Working in various positions ranging from product development engineer to investment analyst, his passion for challenging complex industrial problems makes him steer towards strategical consulting.

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