Nostradamus was not alone in having forebodings about 1999. With the UK duty- and tax-free market enjoying a boom, proposals to abolish European duty- and tax-free privileges in 1999 threaten to stall the market; and with it a valuable revenue seam for UK airport operators, airlines and ferry operators.
Mintel estimates that UK duty- and tax-free sales were almost 1.2bn in 1996. In relative terms, this volume of business may be no larger than the annual turnover of some of the UK’s smaller grocery chains, yet progress in the sector has been particularly buoyant, with growth of about 75 per cent since 1991. Mintel forecasts that the sector could reach sales of just over 1.4bn in 2000 – assuming that it overcomes the hurdle of 1999.
Duty- and tax-free sales within European Union territories account for about two-thirds of the UK duty free industry’s total market value, which means almost 800m of sales is under threat.
Three key factors have underpinned the growth of duty- and tax-free retailing in recent years: a virtuous circle of increasing passenger numbers, growth in the amount of retail space and a much improved quality of retail on offer.
Passenger volumes are the key arbiter of demand in this sector. Trips made by UK residents are up 46 per cent compared with 1991 and inbound visits by overseas travellers have increased by 60 per cent in the same period. By any retailing standards this is a dramatic increase in available “footfall”.
It seems there will be further growth in the future. More people are travelling as standards of living rise, as the business outlook improves, and as demand is induced by supply-side incentives. All these are increasing the number of travellers, and putting people in front of duty- and tax-free shops.
With a deeper reservoir of passengers, duty-free operators inevitably want a bigger shop-window. At airports, which account for about 55 per cent of the UK duty- and tax-free account, there has been a major escalation in the amount of retail trading space available on both sides of passport control. The BAA, for instance, added 175,000 sq ft of trading space at its airports in 1995 and 1996.
Ferries too are introducing larger, more open shopping spaces and specialist boutiques in prominent parts of the ship. Shopping has become the focus for radical upgrading programmes with more ships extending their retail areas.
More recently, in order to give it fair competition with the cross-Channel ferries, Eurotunnel was granted the right to sell duty- and tax-free goods at its terminals in France and the UK, and as a result Le Shuttle has trebled its original duty-/tax-free space.
But it is the widening retail mix and the much improved ambience of duty- and tax-free facilities which signal the most obvious change.
Retailers have come to recognise the concept of the “transumer”: a consumer in a state of transit, who acts, thinks and shops in a different way to consumers in the high street. People are in a different psychological state when travelling. The so-called “happy hour” takes place after the traveller has received a boarding pass and has a reduced sense of anxiety. It is at this stage that travellers spend money in different ways from when they are in the high street.
In the past, anything other than alcohol, tobacco and fragrances were badly thought-out add-ons, the selection was frequently dubious and lacking in clarity. Thus the traditional “general store” approach is being replaced by focused retail brands. Take a walk on the airside at Heathrow Terminal 4, and the roll call of retail names shows the diversity – Harrods, Thomas Pink, Austin Reed, Tie Rack, Bally, Caviar House, Disney Store, Hamleys, to name but a few.
Retailers’ skills have evolved from the generic to the expert. Greater availability of trading space has enlarged the range and depth of shopping amenities, and quickened the trend towards specialisation and niche propositions. So, in addition to the appearance of established high street names, a new generation of product-specific facias are also being created.
The two central players in the UK market, Allders International (now owned by Swissair’s trading arm Nuance) and Alpha, have brought concepts such as Wine Bin, Whiskies of the World, Glorious Britain and Booksplus to the market.
EU legislators are doubtless wary of the adverse sentiment their decisions may provoke. Although essentially a perk, duty- and tax-free shopping has a popular following. This is highlighted by a recent Mintel survey which showed that 44 per cent of respondents had made a duty- or tax-free purchase in the past 12 months.
Chart 2 shows that spirits were the most widely purchased category by a strong margin, with almost one-third of the sample claiming to have purchased these. Cigarettes and perfumes/fragrances are the next most heavily purchased categories, some way ahead of an assortment of less popular and quite disparate product areas.
So, what of the future? If the law is revoked and duty free is allowed to continue in the EU – and there is a strong body of sentiment which believes that this will be the outcome – the growth in passenger numbers and strength of demand will sustain current trends. The underlying economic and demographic factors are favourable, and the supply of retail space is being increased to meet this demand.
If duty and tax free is abolished in the EU in 1999, this will impact on about two-thirds of the current sector value.
Non-EU duty and tax free will probably not be totally immune either. For provincial airports, servicing a mainly European network, there may be little economic incentive in maintaining a duty-free operation which caters for a small volume of long-haul passengers.
However, demand for some form of travel shopping will continue. It will invariably become less price-led, and the emphasis will switch to premium ranges with a high element of exclusivity. The UK may even follow the lead of the US and Germany with new style “value” or discount shops.