Monday, 15 December 2014

Where Does the Money Go?

Where do travellers spend when they travel and how big is "the market?"  The way that some companies are structured means that it is only meaningful to understand what travellers spend in airport duty free shops when they travel, but we all know that this is only a fraction of what travellers spend on merchandise when they are travelling.  We also know that the competition for airport duty free shops in capturing a share of the travelling consumer's wallet is not non-airport duty free shops or shops in other airports, but shops in the places they visit.  This goes even for those categories that are typically thought of as the key categories for duty free shops - alcohol, cigarettes, beauty, confectionery - where the majority of their spend is also outside the airport environment. 

So, where do travellers spend and how big is "the market?"  We answer this question based on our surveys of travelling consumers, tracking their spending during the entire course of their trip, from the time they get to their home airport on their outward journey, to the time they pass their final buying opportunity on their way home, which may actually be in their home airport. Worldwide in 2014, international travellers spent $453 billion on merchandise. To put this in perspective, the global market for handbags and purses is estimated to be only $101 billion and the global market for chocolate is estimated to be about $100 billion, so the total market for merchandise bought by people when they are travelling is estimated to be worth more than four times these well established and popular categories that include some of the world's most famous brand names.  

Of the total spent by travellers, only $55 billion, or 12% is spent in airport duty free shops.  Interestingly, almost that much is spent in other duty free shops, which includes inflight duty free as well as border stores and off-airport duty free shops.  The largest amount is spent in boutiques, brand and specialty shops, which includes brand boutiques for the world's most famous fashion brands as well as specialty shops, for instance for watches and jewelry.  Almost as much, 22%, is spent in department stores. 

Keeping track of what travellers spend in duty free shops in airports is relatively easy because it is a closed market - everyone buying here is an international traveller who is qualified to buy in a duty free shop.  Estimating the impact of travellers on any other category is much more difficult because travellers are not identified systematically or as precisely as they are in airports.  Other means of estimation, such as by using tax refund requests or analyzing credit card information, must be used.  As a result, the global market for what people buy when they travel is not usually captured and tracked in the same way.  But, it is clearly big, and really important for many businesses in many locations, not just those in airports catering directly to international travellers.  Further, if you look at the global travel retail market in its entirety, not just the bit that is easy to measure, what you realize is that, despite all the attention that airports get, not much is really happening there.

And, this market is growing.  As reported in an earlier post, average spending by international travellers is down, but the total size of the market is growing because of the increase in the numbers of international travellers.  From 2012 to 2014, the market has added $19 billion in revenues.  During that time, department stores have added $7 billion, duty free shops have added $6 billion, as have grocery stores and discount outlets.  Non-duty free shops at airports have been the biggest losers, declining from $47 billion to $37 billion, which means that spending on merchandise at airports overall is actually flat.

Which areas of the world are the most lucrative for the travel retail market?  The map below shows where in the world travellers spend their money.  This map is based on our knowledge of the journeys travellers are making and their spending along the way from their home airport to the airports they fly into and out of, and the destinations they visit.  What is noticeable in this map is that North East Asia (China, Japan, Korea, Hong Kong, Macau), Europe and North America seem to be magnets for spending whereas South America and Africa are not.  These figures reflect both the frequency of international travel to or within these regions and their desirability as places to shop.  Those geographical locations that account for smaller amounts of spending tend to be regions where international travellers are fewer in number and where their preferences are to spend outside that particular region.

What do travellers actually buy when they are travelling?  The graph below shows the latest figures.  Men's and women's fashion capture the largest share of their spend, followed by alcohol and then leather goods and beauty products. 

What is interesting about this pattern is that very little of it is spent in airports.  The two graphs below show the proportion of each of these product categories that is spent in airports.  Only for cigarettes is a majority of spend in airports.  But, even for alcohol, which generally has such a strong presence in duty free shops in airports, it is still less than a majority of spending that happens there.  For the other most popular categories - men's and women's fashion, airports play only a minor part in capturing consumer spend.  Even for chocolate, which is also prominent in airports, only one third of spending is there.  The key implication of this for any airport or airport retailer is that the big win would be in capturing spend that is currently going elsewhere.  From an earlier post, we already know why this is happening - airports are convenient but they are not cheap and they don't offer much to choose from.  It is instructive that two of the categories that have the best performance at airports - cigarettes and spirits - both offer significant price differences at airports relative to non-duty free locations and, in the case of alcohol, have for years differentiated their offering from non-duty free locations so that it is quite possible that the only place in the world where you can buy certain products is at an airport.

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