Heathrow Airport management stresses the importance of clear, consistent messaging about the value proposition in the duty free categories, led by wines & spirits

UK. “We are reaffirming a long-standing relationship”. That’s how Heathrow Retail & Property Director Fraser Brown hails 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 says.

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 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.”

Engaging and experiential: The Johnnie Walker pop-up in T5 that ran from late May to 19 June

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 (and tobacco) 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.

“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.”

The contract extension offers Dufry the chance to compensate for the pandemic-blighted period of the current concession

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.

Heathrow continues to seek approval for VAT-free shopping airside after the damaging decision by the UK government to end tax free sales and VAT rebates for outbound tourists

“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.”

Despite its challenges, Heathrow remains a highly attractive location for brands to showcase their latest launches and campaigns. Through April and May, YSL Travel Retail EMEAI partnered with World Duty Free in three interactive podium animations at Heathrow

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 organised tour groups from China were well informed and aware of the processes around 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.”

Staffing challenges remain acute across UK airports, including Heathrow; Brown says that concessionaire service levels are good and will improve further

The other key pillar on which Brown and his team are rebuilding the offer is space. Here, 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, and getting the experience right. Then the money will come.”

In praise of Heathrow queues

No-one (not even, whatever they say, the Brits) much likes being in a queue, but at least they reflect demand. And demand is what Heathrow Airport and its food & beverage operators and retailers, starved of customers for so long during the pandemic, desperately need.

Click to read more from The Moodie Blog

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.”

*This article first appeared in The Moodie Davitt eZine for June. Click here for the full version.

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