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The week before last, we at AOE were honored with the “Best Omnichannel Experience Award” at the Imagine 2016 for our omnichannel E-Commerce solution for the Frankfurt Airport. Though I wasn’t directly involved, a project of this scope and magnitude naturally causes the various challenges to be brought to the forefront in an overarching discussion. Our internal exchanges of ideas regarding the topic of travel retail were therefore correspondingly intensive. My colleague Steven Bailey has already written a thought-provoking article on the subject. On the other hand, I, as frequent flyer, can observe the different changes in the airports practically every day. Fact is, the industry is being transformed. An upheaval that is exemplary for how technology changes the initial situation for the stakeholders in the market.
To grasp the changes in their totality we would probably have to go far afield, something I will forego for the moment. Just so much, the aviation industry has basically reached a saturation point and e.g. the use of new and more technology has significantly increased both the efficiency as well as the safety of aviation. And though the volume can still be increased, something which paradoxically will be the case in light of falling prices, it doesn’t look as good for relevant improvements in efficiency. One reason being that, as a rule, cost advantages are usually transferred to the customers rather quickly.
Discount airlines such as Easyjet – the pioneer in Europe – were only made possible through digital technology. In turn, these new players exerted pressure on the big, established airlines, especially in short-haul flights. The reaction of the large airlines is to try to gain a foothold in these short-haul flights themselves with low-cost offerings. This shrinks the margins, thus making the actual core business, handling flights, increasingly uninteresting. Not uninteresting per se of course, but the airlines can’t really earn money with flight processing any longer. For that the margins are simply too small.
And so all market participants, airports, airlines and travel retailers are looking for alternative sources of income. We all no differentiation through various price models, in which some services are decoupled from the business (e.g. paying extra for luggage, on-board meals, speed boarding, etc.). The airlines have implemented these models quite successfully. Though this is still part of the core business, when compared with the business in the past, the boundaries are blurred.
For example, speed board is generally part of the core business, but in reality it’s actually a new service. Now, one could quickly become involved in a principle discussion about definitions, but I’ll let that alone.
Something that is quite clear, though, is that the airlines are making every effort to find additional, alternative sources of income. One which has been there for a long time is in-cabin-/in-flight shopping. Everyone is familiar with the concept; cigarettes, cosmetic articles and all sorts of bric-a-brac can be purchased in the aircraft, though the process is usually quite cumbersome.
The situation isn’t very different with the airports. Their core services have also come under pricing pressure, because the airport fees are part of the end customer prices. Airlines check very carefully which airports offer the best price-performance ratio in this regard. The reaction of the airports is to further expand their decoupled services. First on the list here is parking. Usually, parking represents a considerable source of income for airports. Because of this, airport parking is often unbelievably expensive. And this will remain so.
The second large source of income of every airport is travel retail. Usually, the airport leases floor space to retail companies based on revenue-dependent pricing.
Thus, everything is interconnected: The more people that fly through an airport, the more revenue retailers earn; and the more alternative income sources airports have, the cheaper the airport can price its core services.
So that as many people as possible come, the flight connections offered must be excellent. For this, many airlines have to use the airport. And this they do, if prices are low and the airport has an adequate number of passengers. A little bit of the “chicken-or-egg” problem, which can easily spiral downward or upward for the airports.
Duty-free vendors in turn have had an easy game for quite a long time: regulatory specifications enabled them to sell without taxes. In general, prices were less transparent and specified more strongly. In addition, flying was more exclusive and usually brought more affluent people into the stores. As they didn’t come as often, they treated themselves or their loved ones to more goodies during the flight. Back in the 1970s, -80s and -90s.
The advent of discount flying changed the passenger profile. Thanks to low ticket prices many people with slimmer wallets can also book a flight. The consequence: Average duty-free purchases have gotten smaller, but this is compensated by the steady stream of new consumers.
In addition, and this is something most consumers don’t even know, duty free hasn’t even been possible in Europe since 1999. There is no longer any tax-free shopping in the EU. Travel retailers have been clever and creative and used the situation to create the so called “Travel Value”: Reduced prices, largely on their own account.
Bargain prices as a USP are thus still very much present in the perception of the customers. In daily practice, however, I can always find another (stationary) supplier who sells the product at a comparatively cheaper price. More and more people compare prices upfront. Very often, one can observe customers checking prices on their smart phones.
Travel retailers have thus come under considerable pressure, as well. Not all of them can see the results in their bottom lines, but it is these rather “tectonic” market shifts which are increasingly creating difficulties for the individual players.
The answer is simple; due to the availability of information about products on the smart phone, customers are increasingly making different purchasing decisions. As everywhere else.
In addition, because of new commerce concepts supported by technology, a better shopping experience can be created. For, today it is not always simply great to buy something offline, then lug it along, etc. What can be great in some instances – e.g. to browse a little and buy something – can be quite tiresome at another time.
Digital technology can have a considerable impact on creating a more balanced, more optimal customer experience. This is an opportunity for all market participants.
And all players have recognized this – from the airlines to the airports and even some of the travel retailers. An initiative based on this realization is the omnichannel E-Commerce portal, which we implemented. With this, the airport provides the infrastructure, so that the duty-free providers can benefit from this customer experience. From a strategic perspective it’s the perfect symbiosis, though very complex operationally and with regard to the infrastructure.
But the airlines also have excellent conditions to increased their share in this business. For, whereas the consumer generally doesn’t even know the company name of a duty-free retailer, the airline enjoys an above-average brand awareness. It is also the first real touchpoint of the entire customer journey. The airline can guide the customers, as it already does during flights, and lead them through the entire product range.
For the retail transaction itself, the airline can simply utilize E-Commerce for starters. Merchandise can be delivered to the home instead of having to take it along. In this regard same-day delivery is important, though in my opinion it’s not a prerequisite.
Also, the airline has a captive audience in its “store” – the aircraft. No one can leave, no one is distracted very much. If one can now offer the customer a shopping vehicle, e.g. a tablet with a really simple and convincing home-delivery or airport-pickup app, then this would easily be the better shopping experience.
Beyond that it’s not inconceivable that airlines open their own shops. When negotiating with airports they would probably be in a very good position. Not necessarily with the big airports, where it’s not quite clear who is dependent upon whom. But definitely with the smaller ones. If, for instance, Easyjet would leave Basel, then there wouldn’t be much left of the Basel Airport.
The losers in this game are likely to be the travel retailers themselves. With few exceptions they have all missed out on further developing their core business, namely retail itself, with digital means. Here, we find virtually no E-Commerce or digital expertise. Strategically, this wasn’t recognized for the longest time – and some still presume, at least in part, that they are de facto untouchable, since one has the best prices (sic!) and shop floors.
Nevertheless, the final chapter hasn’t been written for travel retailers. For the ace up their sleeve is in fact their retail experience – not necessarily logistics – but the manufacturer-relationship management and product design are exemplary. Like no other retail segment, travel retail knows how to create emotional products, which are available exclusively in their stores. In the context of travel retail, the brands like to talk about the sixth continent – that’s how important this business is for them.
It’s a little unfortunate that user behavior is slowly expanding to include digital actions. Until now, this development has been underestimated and the players have missed the boat, first and foremost because passenger numbers have exploded. One had a false sense of security – and continues to do so.
If travel retailers are successful in achieving the same level of excellence in their online business as in the stationary segment, then they can look toward a terrific future. If they aren’t, then it’s only a matter of time before other providers cut deeply into their business.
Aviation & Travel
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