Allders dea; could open skies for BAA

The Swiss are about to risk their reputation for sound business thinking and financial rectitude by gambling 145m on a chain of duty free shops. The directors of Swissair, the country’s state-owned airline, would be “out of their minds” to go ahead with an acquisition of Allders’ duty free division, according to Panmure Gordon’s transport analyst, Nigel Davies.

Allders’ profitability is tied to its contracts with BAA to run duty free shops in UK airports. But BAA is the other bidder in the two-horse race to buy Allders International, which runs 110 airport and 112 cruise ship duty free shops around the world. Swissair is bidding 145m – BAA values it at 130m – even though it knows that if its offer is accepted by the Allders board BAA still holds a trump card – the ability to terminate Allders’ duty free operations in the UK in favour of other operators.

A more fundamental issue is why either bidder is so interested in a company that operates in a fragile environment, when any deal could create more problems than it may resolve. There are healthy profits to be made in duty free retailing but often they are greatly reduced by the airport operator – and, for a quarter of Allders outlets, that means BAA. BAA has an annual turnover from duty free retailing of 307m.

While the sanity of the Swissair bid is questioned by some analysts, others wonder whether it is BAA which has lost its marbles. BAA may find that rival airport operators take fright at its incursions into their territory through the Trojan horse of the Allders duty free shops. Allders has successful operations at top European airports, including Copenhagen and Paris’ Charles de Gaulle.

Operators of these airports may be less than pleased for BAA to get its hands on information about numbers of passengers and the kind of travellers passing through their terminals – the justification for the Allders bid. Transport analyst Ian Wild at BZW says airport operators will be tempted to kick a BAA-owned Allders out for fear that it could use the information to prepare its own bids to run the airport sites.

Allders shareholders will make a decision on which bid to accept in a special meeting in June.

BAA is looking beyond the UK’s shores for its future growth, since there is little room for further expansion here. It is close to completing its refurbishments of terminals at Gatwick, Heathrow and other UK airports and its proposed Terminal Five extension at Heathrow and the rail link to Paddington are about as far as it can go in the UK.

The operator has turned its sights to the international market, running retail operations in US airports at Pittsburgh and Indianapolis, and is now preparing to buy into Australian airports when they are privatised at the end of this year. A multi-billion pound deal is expected, and BAA is considering funding this with a stock market rights issue.

For BAA – valued at about 5bn on the stock market – the 130m acquisition of Allders International would be a drop in the ocean.

The deal would do little to enhance its profits, up more than ten per cent to 366m in 1994-95, but it would provide the airport operator with that currency of pure gold for the Nineties’ marketer – information.

The proposed deal for Allders is driven by the demand for knowledge on the customers passing through its shops. The market data is crucial to BAA, which has seen its successful airport retailing operation slip in recent years.

In 1994, BAA’s total income rose over seven per cent, yet retail space rose 11 per cent. Passengers passing through rose 6.9 per cent and there was some inflation. In other words, the growth in income was considerably fell short of its potential.

BAA blames this fall on refurbishment work which it claims put off retail customers. But it also said it needed more information about passengers’ shopping habits, to find out how best to market goods to them. Such data could be amply provided by the Allders acquisition.

The proposed axing of duty free between European Union countries in 1999 is a further force propelling BAA into the Allders deal. It may lose the lucrative European duty free market, but would still have the non-European operations of Allders.

Central to BAA’s ambitions must be the creation of a single global image for the company. It shares a problem with one of its most important customers – British Airways – of having the prefix “British”, which may be seen as undermining international ambitions.

BAA changed its name from the British Airports Authority in 1987, substituting the acronym instead. But the implication of Britishness is still there.

BAA needs to decide what it is offering consumers. It has diverse interests, spanning the handling of flights, running the airports and, its most profitable side, running duty free and tax-paid retail operations. It has also branched into factory outlet centres.

The company must decide what it stands for in the eyes of its consumers, including business customers such as airlines, retail customers such as Dixons and, perhaps most importantly, the travellers who pass through its airports.

It spent 2.2m on television advertising last year and launches its latest consumer campaign through Bates Dorland next week, encouraging travellers to phone in and find out about buying duty free goods at British airports.

But if it is to become a truly global operator, it will need to come up with a corporate image and corporate advertising that adequately reflects this. Chief executive Sir John Egan is thought to favour some kind of name change for the company.

If all this wasn’t enough, the Civil Aviation Authority has heard from a cross-party committee of MPs that BAA should lose its monopoly of airports in South-east England to introduce an element of competition between Heathrow, Gatwick and Stansted. While some observers do not really consider this a serious threat, regulators have a habit of taking unexpected decisions.

In the unlikely event that the regulator does force BAA to sell some of its UK airport interests, it will just hasten the company’s push into the international arena.

BAA needs a period of reflection to establish itself as an easily recognisable global brand for its various customers. Doubts remain as to whether buying Allders will clarify or merely confuse the issue.