How technology is changing travel retail.

The week before last, we received the “Best Omnichannel Experience Award” for our omni-channel eCommerce product for Frankfurt Airport at AOE at imagine 2016. Although I was not directly involved in the project, a project of this size naturally brings the various challenges into an overarching discussion. We therefore had an intensive internal discussion on the topic of travel retail. My colleague Steven Bailey has already written an interesting article about this. On the other hand, as a frequent flyer, I can experience the various changes practically every day at the airports. The industry is indeed in a state of upheaval. An upheaval that is exemplary of how technology is changing the starting position of market participants.

(Reading time: 6 minutes)

Fundamental change in the aviation industry

We would have to go a long way to capture the changes in their entirety. I won’t do that at this point. It should be said that the aviation industry has basically reached saturation point and that the use of new and more technology, for example, has increased the efficiency and safety of aviation enormously. Although the volume can still increase, and paradoxically will do so if prices fall, things do not look so good for relevant efficiency increases. This is also because cost advantages are generally passed on to customers rather quickly.

Digital technology made the low-cost providers possible in the first place, above all Easyjet, the pioneer in Europe. These new players in turn put the large, established airlines under pressure as short-haul routes came under pressure. The reaction of the major airlines is that they themselves are trying to tackle short-haul routes with low-cost offers. As a result, margins are falling and the actual business of handling the flight is becoming increasingly uninteresting. Not uninteresting per se, of course, but there is no longer any real money to be made. The margins are simply too low for that.

(Advertising at the gate: no longer valid, some airlines also allow you to make comprehensive purchases on the plane)

Alternative sources of income

And so all market participants, airports, airlines and travel retailers are looking for alternative sources of revenue. We are all familiar with differentiation through various pricing models that separate out partial services (e.g. extra pay for baggage, food, speedy boarding, etc.). The airlines have implemented this quite successfully. Compared to the past, this is still a core service. But the boundaries are fluid.

Speedy boarding, for example, is always linked to the core service. But it is actually a new service. You could get into a wonderful discussion about definitions. I won’t get into that either.

Rather, I think it is clear that the airlines are striving to find additional, alternative sources of revenue. One that they have had for a long time is in-cabin/in-flight shopping. You all know it: cigarettes, make-up kits and all sorts of “shish-kebab” can be purchased on the plane, albeit rather inconveniently.

The situation is not much different for airports. Their core services are also under price pressure because airport charges are part of the end customer price. Airlines pay close attention to which airports offer a good price/performance ratio in this respect. The reaction of the airports is to expand the other decoupled services. This applies above all to parking. Parking is usually a significant source of income for airports. That is why airport parking is usually incredibly expensive. And will remain so.

The second major source of income for any airport is travel retail. The airport does this by renting space to retail companies, usually at turnover-based prices.

So everything is connected: The more people fly through the airport, the more revenue the retailers make and the more alternative revenue the airports have, the cheaper the airport’s prices for the core services are.

For as many people as possible to come, the flight connections must be as good as possible. In order for this to be as good as possible, as many airlines as possible have to come. They do this when the prices are low and the airport is interesting in terms of passenger numbers. A bit of a “chicken and egg problem” that can easily result in a downward or upward spiral for the airports.

Duty-free provider

For their part, duty-free providers had an easy game for a long time: the regulatory requirements allowed them to sell without paying taxes. Prices were generally less transparent and more predetermined. In addition, flying was more exclusive and tended to bring wealthier people into the stores. As they didn’t come as often, people treated themselves or their loved ones to more when flying. Back in the 70s, 80s and 90s.

The emergence of low-cost airlines has changed the passenger profile. The low ticket prices now enable many people with a smaller budget to fly. As a result, the average duty-free purchases are smaller, but this is offset by the influx of new consumers.

In addition, and most consumers are completely unaware of this, duty free has no longer been possible in Europe since July 1999. There is no more tax-free shopping in the EU. Travel retailers have cleverly and creatively turned this into so-called “Travel Value”: reduced prices largely at their own expense.

Low prices as a unique selling point are therefore still present in the customer’s perception. In everyday practice, however, I always find another (stationary) provider who sells the product at a lower price in comparison. More and more people are making these price comparisons. The image of customers doing a price check on their smartphones is already relatively common.

Travel retailers are therefore also under considerable pressure. Not all of them can see this directly in their balance sheets, but it is these rather “tectonic” market shifts that are increasingly putting the individual players under pressure.

What does digital technology have to do with it?

Quite simply, the availability of information about products via smartphone means that customers are increasingly making different purchasing decisions today. Just like everywhere else.

In addition, new, technologically supported commerce concepts can create a better shopping experience. After all, it’s not always great to buy something offline, carry it around with you and so on. What is sometimes great, e.g. having a look and buying something, can be quite tedious in other cases.

Digital technology can make a significant contribution to creating a more rounded customer experience that is optimized for the customer. This is an opportunity for all market participants.

Growth through improved customer experience

And all players have recognized this: airlines, airports and even a few travel retailers. One initiative resulting from this realization is the omni-channel eCommerce portal we have implemented. The airport provides the infrastructure to offer duty-free providers this customer experience. A perfect symbiosis from a strategic point of view, but very complex from an operational and infrastructure point of view.

No Winner takes it all

However, airlines also have excellent opportunities to increase their share of this business. While consumers generally don’t even know the duty-free retailer by name, the airline enjoys above-average brand awareness. It is also the first real touchpoint in the entire customer journey. It can take the customer by the hand. Just as it does with flights and guides them through the product range.

For the actual trade, it can simply make use of e-commerce. Goods can be sent home instead of being taken away directly. Same-day delivery is important in this respect, but I don’t consider it a basic requirement.

In addition, the airline has the customer in its “store” – the aircraft. Nobody can leave. No one is distracted. If you now offer the customer a shopping vessel: E.g. a tablet with a really simple and convincing shopping app home delivery directly or pick-up at the arrival airport, that would simply be the better shopping experience.

In addition, it is not at all impossible that airlines will open their own stores. They would probably even have a pretty good chance in negotiations with the airports. Not necessarily at the large airports, where it is not entirely clear who is more dependent on whom. But at the smaller ones in any case. If Easyjet were to leave Basel, for example, there wouldn’t be much left of Basel Airport.

The losers in this game are most likely the travel retailers themselves. With a few exceptions, they have all failed to develop digitally in the domain in which they are really good, namely retail itself. They have practically zero eCommerce and digital expertise. This was not strategically recognized for a long time and some still assume today that they are de facto unassailable because they have the best prices (sic!) and the retail space.

But things haven’t worked out at all for the travel retailers either. Because their biggest trump card is actually their retail experience. Not necessarily logistics. But manufacturer relationship management and product design are exemplary. Like no other retail segment, travel retail knows how to create emotional products that are exclusively available in their stores. Brands like to talk about the sixth continent in the context of travel retail, that’s how important the business is to them.

It’s just a bit silly that user behavior is slowly but surely expanding to include digital activities. This development has so far been overlooked and underestimated. Especially because passenger numbers have skyrocketed. People thought and still think they are safe.

If travel retailers now manage to establish the same level of excellence online as they already have in the stationary sector, they can look forward to a great future. If not, it’s a matter of time before other players cut deep into their business.