Editor’s introduction: Irish state-owned travel retailer Aer Rianta International (ARI) appointed Ray Hernan as Chief Executive in August, charged with maintaining the company’s growth trajectory, and consolidating its recent expansion into new markets.
Hernan comes with a strong track record both in retail and travel, including aviation. He was Chief Executive of Dublin department store Arnotts, Director of Finance with Selfridges in the UK, and Chief Financial Officer at upscale Irish retailer Brown Thomas. He also spent ten years as Director of Finance at Ryanair. Before joining ARI, his most recent position was as Chief Executive of Irish state-owned bus company Bus Éireann.
He joins ARI at a fascinating time in the company’s, and the channel’s development. ARI runs retail businesses in 12 countries and the stores that it operates directly and with joint-venture partners have a combined annual turnover of more than €1 billion. In The Moodie Davitt Report’s latest rankings of the world’s travel retailers (based on 2017 turnover), it ranks 13th, making it a medium-sized player in a highly competitive market where the biggest are fast becoming even bigger through acquisition and the ability to fund aggressive bids for the world’s most valuable airport concessions.
In this, his first major interview since taking the job, Herman acknowledges, as his predecessors did, that ARI needs to stand out in different ways. It must do this, he notes, through its partnerships and relationship-building, its agility, talent development and its skills as a retailer, from buying to customer service.
“When people come to the airport, they are often surprised, pleasantly or otherwise, and they may not know what the offer is, so we can do a lot more on pre-travel engagement.”
Amid the rapid digitalisation of retail, he also says that travel retail needs to be better at engaging with the potential shopper before they travel to the airport, and to deliver on the omnichannel shopping opportunity that travel environments offer. This is a key area of focus in his new role.
Hernan talks about his early impressions of the company and of the industry, offering an experienced retailer but industry newcomer’s views of the way business is done in the channel, acknowledging all the while that he still has much to learn. He also talks about building on ‘The ARI Way’, about investment priorities and about how he would like ARI to be seen by business partners and by shoppers.
The Moodie Davitt Report: Ray, how would you sum up your philosophy as a retailer?
Ray Hernan: I have always had a simple mantra: treat the customer the way you would like to be treated. I try to influence staff I’ve worked with in that regard. You earn respect, and I hope to earn the respect of my own staff and of the partners we work with. My experience is that when you do that, you also get respect back. But I don’t only want to say it, I want to make sure I deliver on it every day.
What have been your early impressions of the business of travel retail since you joined ARI?
Even though I have been in retail for a long time, travel retail is very different. That brings its own opportunities but also its own challenges. As an industry, travel retail is probably a little behind other channels, for one in terms of the way we market and promote ourselves. In the past, the industry might have seen our audience as captive but that is not good enough any more, and most people acknowledge that.
On the High Street, we recognised some time ago that we needed to have much more personalised, direct communications with the customer, and I’ll be championing that at ARI. When people come to the airport, they are often surprised, pleasantly or otherwise, and they may not know what the offer is, so we can do a lot more on pre-travel engagement. That’s how the High Street has had to react amid all the noise from other retail channels, and we can do a lot more work on that.
Travel retail is underpinned by strong passenger growth, but the understanding of travellers in all its complexity is not where it needs to be. So while we all want to maximise purchasing power by having a global, centralised view of the world, it ultimately has to become a local view to satisfy the needs of the customers.
How can the industry, and ARI as a company, tackle that challenge?
How we market the opportunity in the airport is key, but how we share data on the customer is not joined up. It’s about having clear, usable data, and avoiding replication, and all of that ultimately means having better partnerships.
In my short experience so far, our relationships with many airports are not aligned well enough in terms of the customer journey. We know passengers are time poor but also that early ‘go to gate’ calls are not conducive to maximising retail. In planning that customer journey, some airports do it better than others. Those that do it well see the benefits in performance. You need efficiency, but there’s work to do on aligning with airports and brands on using their databases so it becomes a win-win for everyone.
People talk about PAS (passenger average spend) and say that we’re not growing at the same level as passenger volumes. But the challenge is not about ATV alone, it’s about getting more people into our stores. And pre-travel communication is central to that.
Conversion is very low in the industry, and that’s the big opportunity. Disrupting the passenger journey is one thing, but we need to get the offer front of mind before they arrive. We need to reinforce the fact that we offer good value, great products and that we’re good at delivering a great customer experience, with creativity in promotions, the use of digital and so on. And I believe we are good at many of these things; we just need to tell people about them more.
What are your initial views on ARI the company, and the culture you are now working in?
People in retail are very passionate about what they do and how they sell, and that applies just as much at ARI as at any of the very good retailers I have worked with. That’s a positive sign. At the front line people are very keen on gathering product knowledge. If they know the story well, it brings the product to life.
There is also a feeling of wanting to innovate, and be first to market. Given our size we need to be nimble and innovative to be relevant in the industry and to the customer, and to continue punching above our weight.
There is a strong, positive culture already. I want to give people the belief that they can try new things, without being afraid of failure. I’m also keen to try and simplify our internal processes. It is complex within the company purely because of the partnership structures we have, and that can sometimes means decision making isn’t easy. We can simplify that and become better aligned with those partners.
Have you established a view on the company structure and how well it works given ARI’s size?
It’s probably too early to call in detail. On the organisation, we have very good people but need to continue developing more people internally. We call what we do ‘The ARI Way’ but we do need people to deliver it. We have put many of our managers through a programme at Cranfield University that was developed for our business and it’s something we want to develop. If we want to grow more than organically we need more people coming up through the ranks, and be confident that they will be the backbone of how we do things around the world, in terms of customer service and in engaging with partners.
More generally ARI has probably become a smaller fish in a big pond. We were the fifth largest travel retailer a decade or more ago, about half the size of the largest. Now we’re one seventh the size of the biggest player (Dufry), although we have grown, and grown organically. If we are to compete we need to maximise our purchasing power because concession fees are going up. We need to get that centralised benefit, while still maintaining local partners’ control in their own marketplaces. Centralisation has benefits but knowledge of the locality and the customer is critical too.
You mentioned size and the challenge of purchasing power. How can ARI compete in a world where there are bigger retailers with deeper pockets?
We have to be brilliant at the basics, in customer engagement, in the environment we sell in, and it’s not only about the concession fee we are prepared to pay. We must have a clear view of the full offer that ARI brings to the table. It may be a challenge to compete with the big players on concession fees, but we have a lot to offer. We bring great service, a bespoke element to what we do, we are nimble and agile, have a great heritage and are deeply trusted.
Financial risk will always be an issue for us because of our size, and because we are a state-owned organisation. We will do due diligence around every market, as we should, and our parent DAA has been very supportive. It’s an objective of theirs that we help grow their non-aeronautical revenues, and one way to do that is for ARI to thrive. In retail, there’s the saying, ‘sale vanity and profit sanity’. So whatever we do, the business needs to be sustainable.
Given that approach, will the focus be on concessions growth and consolidating what you have, or would an acquisition even be on the agenda to accelerate expansion?
Acquisitions are not on the radar right now. Our focus is on solid organic growth. I am conscious that having entered new geographic regions, at Jakarta and Auckland, we’re only ever going to get the benefit of scale if we challenge in those regions. That’s something we have to progress but it won’t be by buying into an airport or paying a fee that is not sustainable. It’s about the right size of airport that fits our remit.
We’re also of a scale that we cannot take too many things on at once. Whatever we do, let’s do it right. We have a good business development team led by John Boland and we’ll support that team.
What are the big operational and investment priorities for you today?
We were successful in our tender in Abu Dhabi and it’s critical that we deliver on that launch, which will hopefully come at the end of 2019. That would be a real sign of intent that we can deliver on an airport’s vision, no matter how high it sets the bar. It’s an absolute priority for the team. Aligned to that we’ll make sure we have got all the brands onboard to ensure a ‘wow experience’, with great fit-outs that complement the airport’s own investment.
We have other big investments next year in our existing portfolio. In Larnaka, Cyprus we’ll embark on a big refurbishment drive in Spring. That business has been challenged recently with the Russians not spending as much as before, and with UK travellers affected by currency and Brexit concerns. The customer journey there is not conducive to encouraging spend. So we plan an entirely new layout, with new locations, walkways, counters and the full store will be transformed. It will take in the F&B as well as the retail. All of that will drive the business forward in terms of penetration.
The other key programme is Dublin Terminal 2, where we are delivering an entirely new store layout in the coming months. That began with the opening of the new liquor shop in August. It has shown solid growth, a little behind target in the early weeks but the trend is improving. It will accelerate as people get used to the new layout, and that store was built to take advantage of the completion of the T2 space in 2019.
What is interesting in that new store is how we are displaying new products, notably gins, and it’s clear to me that we’ll have to continue evolving our offer faster and more often than we ever did before. We need spaces to move products in and out faster in future. Even the way we structure refurbishments every five to ten years, with brands, may have to evolve. You see more people flying more often and the same old offer does not drive PAS. We need newness more often.
What other influences can you draw on in the role?
I came from two very different businesses. There was Selfridges, Arnotts and Brown Thomas, where service was the priority. I want to bring that customer-centric approach to this business, but balance it with my time at Ryanair, where we had a clear understanding at all levels within the organisation of what our model was. If we could come up with a model that could be rolled out simply and efficiently, taking the methodology and processes from Ryanair on one hand, and the customer service element from Selfridges on the other, that is something I’d like to deliver. Fundamentally it means doing the basics really, really well.
Speaking at an event in June in Dublin (Future Travel Experience), DAA’s new CEO Dalton Philips said the airport needed to focus heavily on driving costs down, mainly to attract new airlines but also across the business. What does this mean for ARI?
I don’t think DAA will ever be the lowest cost airport operator and ARI won’t either. We need to have a balance of being efficient but recognising that we have a brand offer that is exclusive and some of it is luxury. We have to get the dynamic balance right. You have to assess how you operate, and ARI is no different there.
I’m certainly not coming in with an agenda to cut, cut, cut. Dalton is challenging us to make sure we operate with efficiency, but that is not all about reducing cost. It means the way our processes work are simplified, whether that is getting passengers through fast, the way we promote, leverage technology, spend on capex, all of those things.
What about technology and the online offer and how that is presented? What is the opportunity and what are the plans?
We need to improve our online offer. It’s not only about e-commerce. It is another shop window to customers so they can recognise our value, our exclusivity, our breadth of offer. Most airports have a wide range available online, and we need to be better. We will roll out a new concept for e-commerce next year in Ireland [from April -Ed] and at other key locations. It’s about being a shop window and communicating with the customer. It’s about leveraging content and about mobile technology, all areas we will invest in. The e-commerce aspect will be a shop window but also have a transactional element.
Will that come under The Loop shopping brand? What’s your view of the wider marketing of duty free through retailer’s own brands?
I’m asking what awareness there is of The Loop at Dublin Airport and in our wider estate. It is not rolled out everywhere. It was an attempt to build a brand but how well is it understood? Are we The Loop or are we Dublin Duty Free with a logo? The key question is: does it resonate and is it relevant? If so, great, we’ll run with it and expand it.
We’ll investigate that question and assess how we brand location by location. We want to declare what ARI stands for, have a backbone offer that we can operate in most locations, and then massage that to the local marketplace each time. If we can support it from the centre, you get a consistency of approach.
How do you view recent ARI performance and what targets are you setting?
2017 was a strong year. ARI climbed +12% in turnover, but tighter margin meant a rise of +8% in profits. 2018 has been more mixed geographically. We have seen a solid performance in Canada and the Middle East is doing well with some new locations coming on stream. Cyprus is challenging, and at Jakarta it’s too early to say but the business is bedding down and the full transfer of passengers to the new terminal is not complete yet. Now it’s all about hitting the ground running in 2019.
As to targets, the company rolled out a 2020 strategy several years ago, and that was always to be reviewed, as it is at the moment. I don’t see the major pillars of strategy changing, but they may be nuanced.
Finally, how would you like ARI to be known as a retailer and as a business partner during your time as CEO?
I want to build on the reputation that ARI has. It is a well-earned and well-grounded reputation based on what the company has delivered for many years. Being open with all our partners and being direct and clear in our messaging is key. Our partners must know that when we commit to something, we deliver on it. I’d like to think that partners, suppliers and customers will all trust us to deliver.