how digital duty free disruption can generate new ancillary revenues for all stakeholders
TRANSCRIPT
© 2015 Millennium Aviation, Inc. – All Rights Reserved
Q1 – 2015, March
Business Model Transformation - Quarterly
Can Digital Duty Free Disruption Drive New Sales?
In the digitally powered circular economy, business models focus on renewal, sharing and servicei. In
the airline or air transportation business, affiliate marketing is becoming mainstream in order to reach all
targeted customer groups and segments. As such, the shortest path to all customers and profitable growth
is not a straight line particularly for duty free sales.
Airlines have traditionally offered duty-free products for sale onboard aircraft. Duty free stores in airports
have proliferated around departure halls and increasingly as duty-free stores at arrival points with shops at
destination before baggage collection. But with aircraft not representing the ideal retailing environment,
airlines such as Delta Airlines stopped in-flight duty free sales in late 2014 altogether. Elsewhere, locations
such as Dubai International Airport have fully embraced and trumpet the ultimate luxury shopping mall
experience supported by high-profile lottery-style events with sales now reaching over USD 2 billion.
In addition, SkyMall, a magazine distributed in seat-back pockets
nationwide, and whose parent company in January 2015 filed for
bankruptcy protection, is another sign of changing times. Much like duty
free trolleys, thick magazines add to aircraft weight and equally
important, changing consumer tastes and the fact that most people bring
personal electronic devices - PED (such as tablets) on board, is making
the old business model redundant.
The relaxation of flight-mode regulation regarding PED and social media
usage combined with the rapid deployment of onboard FlyFi essentially
allows in-transit crowds to join the online retailing crowd. Duty-Free
sales might as well digitally transform to online portals and allow duty-
free purchases at any point in time (booking, airport, in-flight, in-transit
destination). Airlines such as Air Canada already offer their own duty-
free boutique portal online, but what is missing is an integrated platform that services the global market
with relevant territory, customs, retail and concessionaire rules and data incorporated.
(In-flight) Duty Free transformation through digitalization broadens the retail appeal. A global
content-driven affiliate network brings new players and a re-energized revenue potential
worth billions of dollars. by Ricardo V. Pilon
Page 2 © 2015 Millennium Aviation, Inc. – All Rights Reserved
2 Can Digital Duty Free Disruption Drive New Sales?
By the numbers
Global travel retail is worth circa USD$60 billionii, however less than 30% of all
customers enter a store and only 20% of them buy somethingiii. In-flight retail
sales have a static 7% share of the overall market. Yet in the duty-free industry,
retailers are unaccustomed and resistant to external marketing spend and prefer
“captive audience” strategies, such as “walk-through shops”.
Of all duty-free sales around the world, Europe represents the largest market
(42%) followed by Asia (27%) and the Americas (23%) whilst the rest of the
world is growing in sales. In these markets, airports dominate the business with
a total share of 57%, while airlines and ferries only come in last (7%). Cruises,
Diplomatic, Border Store and ancillaries in fact still occupy the no. 2 spot
(36%)iv.
Today, only 10% of European travelers use the internet to search for information
on the shopping opportunities in the duty-free industryv, such as comparing prices
with other retail channels. But almost half of all travelers indicate they want to
obtain relevant information from the duty-free stores online. However, the duty-
free landscape is scattered with relatively unknown retail brands and travelers do
not have the tools and information to plan their duty free searches and purchases.
Again this is where a global community can come together and establish high
visibility and facilitate a full marketplace where supply meets demand, rather
than each store attempting to go it alone.
Poor availability of accurate information on territory, customs,
retail / concessionaire rules is currently inhibiting the
proliferation of duty-free sales in an online world. In addition,
security issues and baggage rules could force an industry re-think
towards collection at arrivals stores, rather than carry-on
departure sales.
Most airlines have not yet optimized their booking in-path
ancillaries to include duty-free airport store sales, nor have
online travel agents (OTAs). Traditional travel agents do not
even have the capability to distribute such products due to legacy
technology and lack of affiliate marketing programs.
Consumers are demanding DF market related shopping info. In
some cases, shopping is the purpose of travel. Many know what
they want to buy, but do not have the information. In addition,
tobacco restrictions are forcing smokers to go online to find
information as to how and what they can buy at a discount.
There are over 3.2 billion passengers
traveling by air each year, flying on
1,397 airlines operating 36.4 million
flights through 3,864 airports.
Duty-free stores or concessionaires
can tap into this market online by
transforming their business model
Duty free sales is still big business. It has potential to triple in size to over USD 100 billion per year in a digital
world based on arrival sales, or home delivery, rather than carry-on
departure sales.
Page 3 © 2015 Millennium Aviation, Inc. – All Rights Reserved
3 Can Digital Duty Free Disruption Drive New Sales?
Increase revenues
Enhance offerings
Increase share of wallet
Create stickiness and increase loyalty
Monetize in-path bookings process
Attract new customers
Personalize ancillary in-path
Reduce logistics (DF)
Reduce complexity
Eliminate returns handling
Travelers’ Objectives
Global resource for local information
Rich and accurate information
Search based on rules / profiles
DF regulations and restrictions
Enhanced shopping experience
Deals and promotions
Comparison shop
Transactions and delivery
management
Airlines’ Ancillary Objective
Duty-Free Shop Objective
Increase revenues / profits
Attract more customers
Increase visibility
Improved web marketing mechanism
Broaden retail appeal
Broaden product range
Airport Operator
Increase concessions / revenues
Improve airport appeal
Adopt airport (shop) city concept
Attract more business
(airline operators, aviation-related
business, and concessionaires)
What is missing is an integrated
global platform, acting as a
marketplace for supply and demand,
providing relevant territory,
customs, retail and concessionaire
rules and data incorporated.
Airlines could financially benefit
without any involvement in
fulfilment operations and
managing returns, simply by
directing travelers to the global DF
affiliate platform.
Page 4 © 2015 Millennium Aviation, Inc. – All Rights Reserved
4 Can Digital Duty Free Disruption Drive New Sales?
The Digital Solution – A Global Affiliate Program
The value proposition of a digital solution for a network of the duty free world that
can connect travelers & shoppers with suppliers, airport and concessionaires is very
strong. There are therefore a few initiatives already on their way.
A number of new players are entering the scenes, although with different models:
www.dutyfreeonarrival.com appears to be the only multi-lingual full content
database that incorporates all territory, customs and restrictions information &
store links for all countries. The site also offers a mobile device App.
www.dutyfree.com is a leading domain, but a relatively inactive site. It features
a spectrum of products and destinations, but no regulations or links to retailers.
www.taxfreetravel.com was established in 2008 as an English language
informative blog for travel retail with detailed content.
www.kayak.com have included some shop details on some of their language
sites, but only for airports.
www.shopnfly.com is a start-up offering a price comparison format, mainly
via a mobile App. Recently claimed an agreement with El Al to enhance online
sales.
www.shoppair.com launched in 2011 and have also marketed their variation
for prospective travel retail e-commerce based on airport/airline retail
cooperation. IATA and ACI now seem to be discussing such initiatives.
www.dutyfreeaddict.com is another new entrant, primarily offering
commentary on Tax Free prices for electronics and beauty products.
Individual retailers and concessions are launching their own sites with
marketing attempts through social media. Lotte, a major Korean Retailer now
offers a Partnership arrangement to 3rd parties.
The winner and leading network will move the DF
industry into the internet age and address consumer
demand for pre-order online retail through destination
and product specific information, which is what the
consumer requires (destination, rules, products, prices).
This simplicity will generate incremental sales and
ancillary revenue for all stakeholders.
Duty-Free on Arrival
(www.dutyfreeonarrival.com)
appears to be the candidate that can
most likely become the leading DF
global network.
Page 5 © 2015 Millennium Aviation, Inc. – All Rights Reserved
5 Can Digital Duty Free Disruption Drive New Sales?
Benefits for All
Product Brands
The network will give high-end brands the opportunity to target
their marketing spend in specific travel retail markets directly to
destinations and to an interested audience. The brands will be able
to target their customers by nationality, destination, travel mode and
outlet. They will also have the flexibility to redact advertising from
culturally sensitive areas (liquor) in applicable countries.
New or secondary brands can obtain cost-effective exposure in a global network, while other travel-
related merchants (such as ground transportation, currency exchange) can access arrivals traffic
before they are even inbound.
Travelers & Travel Agents
It will also offer a unique web information portal enabling travellers to obtain advance details of a
multitude of global shopping opportunities and prices in duty free retail outlets, security regulations,
customs restrictions, brand and pricing data, with a pre-order facility for merchandise delivery on
arrival, or departure. In certain circumstances, even home delivery can be facilitated. This also
avoids customs confiscations, carry-on and other airline baggage issues. Travel Agents can make
revenues for the first time from duty free because every shopper needs to buy a ticket first.
Airline Retailing
Airlines will be able to enhance a (customizable) in-path booking process and
generate revenue on a Cost-per-Click (CPC) basis by directing shoppers to the DF
network. This also allows the sale of products without the need for costly inventory.
DF Retailers / Concessionaires
The DF network will generate incremental sales and address the historically low
store penetration and increase the appeal to a wider selection of products. Using
the DF network as an efficient web marketing mechanism to create inbound traffic
will result in sales and profit growth. For those products that can be delivered to
destination-based locations, new processes will reduce inventory carrying costs. In
some cases new retailers can enter the market without the need for a physical airport
concession.
Concessions could also act as 2nd tier retailers of travel-related products, such as
transport tickets, event tickets, hospitality when the DF network becomes a wider
shopping community. 2nd tier partner revenues will be generated from airport train
operators, airport coach operators, currency exchange, limo/taxi operators.
Page 6 © 2015 Millennium Aviation, Inc. – All Rights Reserved
6 Can Digital Duty Free Disruption Drive New Sales?
Airports
Airports will be able to showcase their infrastructure on airport pages on the DF
network, thereby attracting retailers, brands, and concessionaires. By building their
own airport page (targeting both departing and arriving travellers) with their own
content hosted by the DF network, airports can tap into the affiliate program for
additional revenues such as parking.
Global Duty-Free Affiliate Network
The global online duty-free affiliate network will converge the marketplace through web, data and
mobile, a platform merging over 3.2 billion air travellers and many more interested in shopping for
duty free articles, by land, sea or air.
Page 7 © 2015 Millennium Aviation, Inc. – All Rights Reserved
7 Can Digital Duty Free Disruption Drive New Sales?
The global online duty-free affiliate network will work as depicted below. It would also sell pages on its
portal for which content can be added by countries, cities, airports, product brands and other merchants
that want to reach and interact with the traveling public.
HOWDUTY
FREE
WORKS
DF NETWORK SHOWS AN
AD OR LINK FOR A STORE,
OR CITY/AIRPORT
TRAVELER CLICKS THE AD
OR LINK
AFFILIATE
MARKETING
CUSTOMER IS SENT TO
DF STORE THROUGH
TRACKING LINKE
CUSTOMER MAKES A
PURCHASE ON
STORE SITE
DF NETWORK RECORDS THE
PURCHASE AND DETAILS OF
THE TRANSACTION
THE PURCHASE IS
CONFIRMED BY STORE AS
VALID SALE
THE TRANSACTION IS
CREDITED TO DF NETWORK
DF NETWORK GETS PAID
THE COMMISSION
Page 8 © 2015 Millennium Aviation, Inc. – All Rights Reserved
8 Can Digital Duty Free Disruption Drive New Sales?
i McKinsey Quarterly, Service Innovation in a Digital World, February 2015. ii Generation Research Sweden, 2013. iii Smith, Ivor, www.dutyfreeonarrival.com, 2015. iv Generation Research Sweden 2009/2010. v Gohel, K., Duty-Free International Online, www.dfionline.com, 10 February 2015.
Author: Ricardo V. Pilon, Managing Partner, Millennium Aviation, Inc.
Millennium Aviation, Inc. is a boutique coaching firm specialized in business model and profitability enhancement. It
specializes in profit maximization and business model innovation in commercial aviation. The firm was founded in 1995
and has served 216 customers. Millennium Aviation is based in Canada, and offers world-wide service out of Montreal,
Amsterdam and Singapore with a team of Senior Associates and three strategic partners. The company enables its
customers to revive, grow, or sustain profitability by identifying strategic blind spots and using techniques to address
them. The company applies its proprietary Transforming to Profits® Business Model Transformation Process and
Methodology. It includes a toolbox that consists of techniques, practical exercises and specific metrics.
millavia.com / transforming2profits.com
@millavia / @rvpilon