The Analyst – Australian downtown tax free shopping outstrips airport duty free

Ivo_favotto_analystThe Moodie Davitt Report introduces the latest feature in our new series, The Analyst, written by The Mercurius Group Founder & President Ivo Favotto*. Here the long-time travel retailer, now Sydney-based consultant examines the growth of Australia’s Tourist Refund Scheme and its potentially far-reaching implications for the on-airport duty free and travel retail sectors. 

The views expressed in this column are not necessarily those of the publisher.

Tax paid retail sales to international travellers under the Australian Government’s Tourist Refund Scheme (TRS) have grown by a phenomenal +209% over the past seven years. This far outstrips the growth of on-airport duty free – with industry proposals set to drive it even further.

Under the Australian version of the scheme, international travellers (either Australians or foreign visitors) purchasing tax paid goods in downtown retail stores are entitled, under various easily met conditions, to claim a Goods and Services Tax (GST, Australia’s version of VAT) refund after clearing customs on their departure from Australia.

Following a post-global financial crisis downturn towards the end of the last decade, the TRS has roared back to life in recent times, achieving growth rates of more than +30% over the past two years of reported data as highlighted in the chart below.

Analyst graph
Australian TRS annual growth rates [Source: Australian Customs and Border Protection Service Annual Report and The Mercurius Group analysis]
GST refunds via the TRS have grown by a compound annual growth rate (CAGR) of +17% over the past eight years.  By contrast, on-airport duty free sales Australia-wide have grown by a CAGR of around +6% (although individual airport growth rates will vary).

The Australian Government now waives A$167 million (2014/15) in GST revenue, in return for a net economic benefit believed (by Government) to come from two sources. The first is from retail turnover occurring in Australia that might otherwise happen elsewhere. The second is from tax free shopping encouraging visitation to Australia – particularly from Asia – that might otherwise have not occurred.

The growth of the TRS is believed to be driven by:

  • Growth in visitation to Australia and therefore retail spend by Chinese visitors, many of whom cite shopping as a key component of the international travel experience, according to the Australian Government’s International Visitor Survey.
  • Recent reforms to the TRS which have made it easier to claim (e.g. increasing the purchase window from 30 to 60 days prior to departure and allowing aggregation of receipts from a single retailer to enable the A$300 threshold to be more easily reached).
  • A proliferation of downtown retailers using the TRS system and hence a higher proportion of international travellers using the scheme – a probable response to the growth of Chinese visitation.
  • A sharp increase in the value of each GST refund claim, with claim size jumping by more than 17% in the past year alone – again likely to be driven by Chinese visitors. TRS transactions are big. The average GST refunded per claim in the past year was A$218, suggesting an average transaction of well over A$2,200 (Australia’s GST rate is 10%).
  • Currency factors (the A$ has depreciated by more than 30% against key currencies such as the US$ over the period).

The Tourism Shopping Reform Group (TSRG) – a loose collection of organisations whose aim is to lobby government to privatise the TRS system with a view to significantly growing it – estimates that Chinese nationals account for around 35% of the dollar value of all TRS claims.

Unusually, the Australian Government allows local citizens to make GST refund claims and the TSRG estimates they account for another 35% of the dollar value of claims. Australia is virtually unique compared to the rest of the world in this regard. Most countries exclude local citizens from claiming GST/VAT refunds due to concerns about cannibalisation from the domestic market (and hence a tax revenue leakage without offsetting economic benefits).

The attractiveness of the Australian TRS to international travellers is further enhanced by the also unusual fact that the Australian Government levies no fees or commissions on refunds. The full amount of the GST paid by international travellers is refunded.

While no official data is published on the categories of products being purchased, anecdotal evidence suggests a high proportion is accounted for by luxury fashion, jewellery, cosmetics and destination products (such as wine, powdered milk, sheepskin everything and vitamins/supplements).

Recent public submissions to government by the TSRG reveal that industry proposals to privatise the TRS system will materially increase the uptake of the TRS system among international travellers. According to Australian Customs, only 4.5% of international travellers make a GST refund claim, while the TSRG believes 7% to be possible, in line with international benchmarks. If the trend continues towards ever higher average transaction values, these proposals could see the value of retail sales under the TRS double over a short period of time.

It is not surprising therefore to note the TSRG’s claim that it is supported by a plethora of domestic shopping lobby groups including peak organisations such as the National Retail Association and the Shopping Centre Council of Australia, as well as major mall owners Westfield and AMP. And of course, the TSRG also claims support from major brands familiar to the travel retail industry including Louis Vuitton, Tiffany & Co, Burberry, Bulgari and Salvatore Ferragamo, all of whom have domestic retail operations in Australia (some also have travel retail operations). The TSRG is also supported by one of the leading private sector tourism refund operators, Global Blue.

Fashion first: Tiffany joins the new luxury line-up at Sydney T1
Tiffany & Co is among the brands to support the Tourism Shopping Reform Group. It recently opened a store at Sydney Airport Terminal 1

The amazing growth of the TRS has potentially far-reaching implications for the on-airport duty free and travel retail sectors.

In terms of sales, it is likely that some of the TRS sales would cannibalise from on-airport duty and tax free shopping. Just how much it would cannibalise is debatable.

It is estimated that a reasonable proportion of TRS sales come from product categories not well represented on-airport – for example Louis Vuitton, very high end jewellery and fashion/couture. Arguably, these assisted-sales categories are more suited to the less time constrained downtown retail environment. And while the on-airport shopping experience in Australia is evolving to include these categories (note Tiffany’s recent opening at Sydney Airport or JR Watch Co’s at Melbourne Airport), the downtown offer remains materially stronger at this stage (and will likely continue to do so).

But sales of categories such as cosmetics and destination products through the TRS may well cannibalise from the on-airport offer even if there are other forces at play. These include the luxury of time/exposure (international travellers may have more time and be exposed to more shops downtown than at the airport) and the role played by organised tour group shopping (supporting downtown options), particularly among Chinese visitors.

What’s certain is that while on-airport duty and tax free sales have been growing, they have not kept pace with the TRS’ growth, despite having (albeit limited) access to exactly the same international travellers. Airport duty and tax free’s share of the total duty and tax free market in Australia is estimated to have fallen from around 45% in 2007/08 to less than 30% today. So in this sense, the TRS is acting as a disrupter of the previously cosy position of airports in relation to retail sales to international travellers.

Another area where the TRS’ growth is impacting on the on-airport sector is passenger facilitation and customer service. The need for the physical processing of refunds by customs officers in dedicated locations post emigration often results in significant queues at peak times. This is especially true at major international airports such as Sydney and Melbourne. The TRS in this regard is a dwell time sink hole for these airports and retailers alike, impacting on the limited time key passengers (e.g. Chinese and locals) have to shop in the relatively time-poor airport environment. As there is a direct causal relationship between dwell time and retail spend, this costs the on-airport sector real sales dollars.

So while airports and their duty free operators alike may agree that the TRS plays an important role in encouraging international passenger visitation to Australia, the current strong growth of the TRS is not without its challenges for the sector in terms of increased competition – especially for key Chinese and local customers – and passenger facilitation/customer service perceptions.

And what if the TRS was to double in size?

Even though Australia has been in election mode (the Federal election was held on 2 July), there has been no mention of TRS reform. But the TSRG – driven by powerful self interest – is unlikely to give up its ambition to grow the scheme materially.

Please visit The Mercurius Group website for more information and analysis.

Previous articles by The Analyst:
‘Brexit’ and the five stages of grief
What does ‘Brexit’ spell for European travel retail?
Australia bucks retailer consolidation trend

*About Ivo Favotto

Ivo Favotto has a long and distinguished record in the airport and travel retail sectors. A trained economist, he entered the airports/infrastructure sector with Australia’s Federal Airports Corporation in 1992 as GM – Planning & Economics.

He later built a highly successful international airports/infrastructure consulting practice, working with three firms – Bach Consulting, Arthur Andersen and URS Corp – and advising many of the world’s leading airports, governments and investors in the areas of retail planning, master planning and privatisation/transaction support.

In 1998 he established the market-leading Airport Retail Study, selling it to Moodie International so he could join The Nuance Group (now owned by Dufry) as Executive Vice President – Strategy & Business Development in Zürich. He later returned to his native Australia as Director – Sydney Airport before being named Executive General Manager of Duty Free & Luxury, Pacific for Lagardère Travel Retail.

The Mercurius group LogoHe has now formed The Mercurius Group, a Sydney-based consultancy focused on industry research, consultancy and benchmarking studies. The company also assumes responsibility for revamping and relaunching The Airport Commercial Revenues Study (ACRS), which Ivo founded (as The Airport Retail Study) and sold to Moodie International in 2007 as part of an informal alliance between Mercurius and The Moodie Davitt Report.

Contact: Tel: +61 423 564 057; E-mail: ifavotto@themercuriusgroup.com; Website: www.themercuriusgroup.com

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