RETAILING AT DUBLIN AIRPORT:
A GROWTH STRATEGY FOR THE NEW MILLENNIUM - Download MS Word file

Introduction:

Mr. Stephen Duffy, Marketing Manager for Dublin Airport's Retailing outlets, was on his way to meet with his marketing team. As he strode through Dublin's bustling terminal his thoughts were racing: Aer Rianta's profits up 15 per cent to £52.3 million in 1998; sales at the Dublin duty free up 20% to IR£82 million - fantastic! A decision to float Aer Rianta now seemed certain. Compact being implemented. Lots of change on the way. Proposed abolition of intra-EU duty free was the big fly in the ointment: £30 million off bottom line profits was a lot to make-up. Not just up to Dublin's marketing team, but Aer Rianta’s Dublin flagship store is the group's biggest and best business unit must lead the way. What a challenge! Still, all the options were on the table, choosing the right way to go was the trick. Over-night change would be impossible. Repositioning and redefining a business was a long-haul process - not for the feeble hearted. With multiple issues: pricing, merchandise mix, outlet location, promotion, and customer culture. The Icelanders were a live example of international marketing. Stephen swung open the door of the meeting room and greeted his team.

An international marketing challenge

The Icelanders are an interesting example of pure shopping and, in theory, Dublin duty-free should be ideally placed to market its offerings to them. These visitors, who rarely stay longer than a few days, come to Dublin to shop. They spend on average £1,500 per head in downtown stores, but the spend in duty-free is a tiny fraction of that figure. What is wrong? Why don't they shop in duty-free, why don't they buy? Take alcohol as an example. In Iceland, very few stores sell liquor and those that do sell it at an exorbitant price. In Dublin airport, a bottle of whiskey costs half the down-town Dublin price and still the Icelanders don't buy. Icelanders have one of the lowest rates of alcohol consumption in the world. Is this because there is a lack of supply, because of price, are there legal restrictions on what can be brought into the country or is it purely a cultural phenomenon?

How to entice Icelandic shoppers (and other non-EU passengers) to spend more at Dublin duty-free is the key question. Even in the area of tax-free products, the airport is performing below its potential. Part of the problem may lie with the powerful influence that shopping tour guides have in choosing shopping destinations, but crowded airports have eroded discretionary time (dwell time), and the risk perceived in deferring shopping until the last hour compounds the situation. On arrival, passengers off the Icelandic flight are targeted with duty-free shopping brochures that develop an awareness of the potential of shopping in duty-free prior to boarding. Although they are in Dublin airport two hours before their return flight, various processes reduce dwell time. Checking-in and a 'tax-back' cash-refund facility provided by a commercial institute eats into the time available for duty-free shopping. (Queuing for the tax-back facility can take anything up to forty minutes). Part of the problem might lie with the fact that Icelandic passengers may fear that what they are looking for may not be available at the airport. Part of the marketing challenge is to make sure that the product is there and secondly to reinforce that message through promotion and advertising at the airport. There may be a problem in delivering value to the Icelandic customer in the sense that the merchandise-mix is not what the Icelanders want. Dublin duty-free is lacking in a number of leading brands - Rolex, Diesel, Barbour jackets and so forth - these are the products the Icelanders seem to be buying, but duty free doesn't actually sell them....

Aer Rianta

Aer Rianta has recently achieved a new status. It is no longer merely an agent of the Government but is a fully commercial semi-state company responsible for managing Ireland's three State airports and associated activities. The company now has control of all its assets and will be liable to pay corporation tax and rates. Options for the future of Aer Rianta include the continuance of the status quo, privatisation, a strategic partnership or flotation. A consultant's report now with the Government is thought to advise some form of flotation. The company is in the process of implementing Compact for Constructive Participation, a joint company/union initiative that emphasises partnership and flexibility.

Aer Rianta's primary objective is to provide safe and efficient facilities and services at the three airports at the lowest possible cost to airlines and passengers. The company is profitable and growing and all indicators are positive. (See Appendix A, p.9 for a 1997 five-year financial summary, Appendix B, p.10 for a 1997 five year ratio analysis and Appendix C, p.11 for 1997 passenger traffic statistics). 1998 was a record year for passengers with a total of 14.8 million using the airports at Dublin, Shannon and Cork, an increase of 11% over 1997. Dublin airport handled an additional 1.3 million passengers. Traffic for the first quarter of 1999 is growing at unprecedented levels, averaging growth rates of 20% at each of the three airports. The company attributes this success to growth in the economy, the maintenance of very competitive access costs and the introduction of new route networks. Twenty-three airlines now use Dublin Airport providing services to sixty-one scheduled destinations. Aer Rianta is currently carrying out a comprehensive review of its airport charges which have not been increased since 1987. The chairman, Mr. Noel Hanlon, puts forward the view that the current level of airport charges does not provide an economic return on the capital expenditure requirements for developing the three airports. However, Ryanair, one of Ireland's biggest airlines, constantly complains about the level of Aer Rianta charges and has flown a kite about the possibility of opening a second airport at Casement Aerodrome.

Capital investment spend at Dublin Airport between 1990 and 1996 averaged IR£16 million per annum. A major capital investment programme is now underway, with forecast capital expenditure at Dublin Airport between 1998 and 2001 set to reach IR£275 million. The duty free shopping area has doubled and the final improvements will bring the capacity of Dublin airport to 20 million passengers and serve passenger and airline needs with the most up to date facilities and improved customer service standards. Although in 1999, 20,000 car spaces will be available at Dublin airport, at peak time demand can barely be met.

Aer Rianta has a long history of involvement in the duty-free business and can claim to have invented the concept by opening the world’s first airport duty-free shop at Shannon in 1947. Dublin Airport's duty free retailing is the Group's most profitable business unit and the company's flagship store. In 1998 the three Irish duty and tax-free shops continued to perform exceptionally well with sales revenue amounting to £105 million. The proposed abolition of intra-EU duty and tax-free sales in June 1999 will have a significant effect on Aer Rianta’s cashflow and profitability and the company has lobbied strenuously against its abolition. Most of its revenue derives from the sale of duty free goods. Initially abolition was to take place in 1992, so a seven-year deferral gave the company time to prepare. In 1988 "Aerofirst", a joint venture company set up by Aer Rianta and the Soviet airline, Aeroflot, opened new duty free shopping facilities at Moscow Airport. The success of this venture inspired Aer Rianta to set up a subsidiary, Aer Rianta International (ARI) to develop commercial ventures both within Russia and in countries in Europe, Asia and the Middle East. ARI has the management contract for the duty-free shops at Eurotunnel, one of the largest duty-free operations in Europe. Although the volume of sales reached record level in the Eurotunnel operation, ARI’s contract with Eurotunnel expires in 1999. The collapse of the Russian economy affected duty free in Moscow and St. Petersburg. In 1998 ARI invested IR£9.45 million in acquiring the concession for 7 duty free shops in Canada, its first duty free venture in North America. All of ARI commercial activities are either joint ventures or management contracts. Capitalising on the trend towards airport privatisation worldwide, ARI bought into airports in Birmingham and Dusseldorf, both of which are performing beyond expectation. Other business interests include eight Great Southern Hotels and in 1998 the company established Property as a separate business division with the mandate to develop a property portfolio. The Group is now engaged in the development of a business and technology park at Cork Airport. During 1998 the Group divested certain business activities, its US mail order business and its interest in Aer Rianta Bewley Ltd.

Retailing at Dublin Airport: a changing business

For Aer Rianta, duty-free retailing at Dublin Airport is a very successful 'associated commercial activity' and Dublin duty free is the largest earner in the Group. Up to June 1999, departing passengers could expect to save approximately 50 per cent on whiskey and maybe 60 per cent on cigarettes as against average UK/Irish downtown prices. In addition to tobacco and liquor, the outlet also offers a good selection of tax-free branded products. As and from 1st July 1999, if the abolition occurs, the intra-EU tax free side of the business will disappear and the company will join other retailers in a Value-Added-Tax (VAT) scenario. Aer Rianta will pay VAT on the cost price of goods and pass on a charge of 21 per cent VAT to customers. However, for some time to come, the company may still have a price advantage. In addition to being VAT free, duty-free shops are also Excise free. Informed sources all indicate that duty-free outlets will continue to be Excise free for a period of two and a half years. The amount of Excise charged varies by product category, for example, the element of excise on perfume is very small, only a few percent, but on the average bottle of whiskey the excise approximately equates to 30 per cent of downtown price and nearer to 40 per cent for tobacco.

Although there are no planning regulations to restrict it, landside retailing (retailing outside of the boarding areas) has not developed in Irish airports. Two reasons contribute to this phenomenon - 70 per cent of Aer Rianta travellers are either Domestic or UK passengers, both of whom have a strong duty-free culture. The second reason is even more cogent - increased passenger numbers have put space at a premium. Dublin airport has fewer landside retail outlets now than it had four years ago because the physical dynamics of moving passengers has to take precedence.

Supplier arrangements

Duty-free is a worldwide industry and companies that supply this industry distinguish between the duty-free and duty-paid market. Suppliers have two separate divisions with different departments, different people, and different negotiation strategies for duty-free and duty-paid. This is so for tobacco and liquor and for most leading duty-free brands. Aer Rianta undertakes a form of collaborative buying, as opposed to centralised in the conventional sense of the word. While other retailers, e.g. Tesco, have centralised control in every sense of the word, Aer Rianta doesn't have this. However, there is close collaboration on issues pertaining to price negotiation with suppliers. While there has been an element of polarisation in supply sources, generally the duty-free market is supplier driven; suppliers come up with concepts, sometimes in collaboration with the retailer, but the main impetus is often from the supplier. Own-label brands have been considered, but no decisions have yet been taken.

Merchandise selection

Liquor and tobacco form an important part of the merchandise offer and are strategically positioned within the store. An 'exclusive to duty-free' range of products was conceptualised by some of the spirit companies and Dublin airport sells some exclusive whiskey products but the general offer is available downtown, at double the price. In Aer Rianta's duty-free outlets, the selection of merchandise has evolved on an historical basis, e.g. blue-chip products such as Waterford Crystal and other major brands must be stocked to meet the demand of the tourist market. As the Group's most proftable business unit, the Dublin store has the widest product range and grouping. The recent successful addition of a Manchester United Shop to Dublin's offer was supplier driven, but the denim store which is targeted at the younger traveller and stocks both Levi and Wrangler, is an Aer Rianta concept. At the moment, signage within duty-free is disrupted because on-going physical developments render signage out of date every two weeks. Space constraints also affect decisions on concession offers. At the moment about 15% of turnover comes from concessions. In 1990/91 the company introduced scanning for duty free goods and a system is now being developed for tax free goods. This technology speeded the check-out operations and helped with stock control but had little impact on merchandise range.

Pricing strategy

Aer Rianta has a deliberate policy of pitching their price below most UK operators and is happy that customers have a positive price perception, certainly for liquor and tobacco. Management occasionally spot-check prices downtown, and respond to negative feedback on prices. For example, via special offers, some downtown stores were undercutting tax-free prices for jeans, which led to Aer Rianta taking "lots of fire on pricing structure." The company reacted in a very positive way from the customer's point of view, reducing prices substantially (and hence margins) to maintain competitiveness. But even duty-free shops could never compete with some markets, e.g. in the US, Levi 501s cost 24 dollars.

Promotions

In-store relevant promotions and brochures themed around events are used to target specific groups of travellers, specific markets, e.g. Americans arriving for St. Patrick's Day, Rugby Groups, and so on. More general day-to-day and point-of-sale promotions are used to boost sales. Within the last few years, advertising themes have become a little daring, not quite what would normally be associated with a semi-state company. One particular advertisement used a skunk to highlight the desirability of purchasing perfume at Dublin Duty-free with the copy: 'Who forgot to get their perfume at Dublin's Duty Free?' The advertising is designed to have mass appeal to the travelling public. Eighty to ninety percent of advertising resources are concentrated on tax-free products such as electronics, sun-tan lotions, gifts of all descriptions, rather than duty-free products. Media buy tends to focus on billboards, but radio has been used and 1998 was the first time a press campaign was used. Research subsequently, recorded the highest ever advertisement awareness levels. The campaign featured a 'Famous Names Significantly Reduced' theme that was thought to be better suited to a press campaign (Appendix D, pps 12-13 illustrate). The theme was used flexibly in different publications, e.g. when buying space in the likes of Image Magazine, a skin-care product was the focus.

Market Research

Dublin Duty free conducts both qualitative and quantitative research. The qualitative research is undertaken by a specialist organisation and focus groups are drawn from a passenger mix. In addition to demographic profiles, the marketing team has a knowledge of markets by country of residency, e.g. purpose of travel and what people's perceptions of duty-free are. Do they have a duty-free culture? Do they like duty-free shopping? For example, using a Likert rating scale, subjects were asked to respond to the statement: 'I really enjoy browsing in duty-free shops'. Respondents were then categorised by residency, e.g. Irish, UK citizens, European mainland, and North American residents. That particular question yielded the information that mainland Europeans and Americans browse a lot less than their UK and Irish counterparts. Other research uncovered the information that both Europeans and Americans buy less, with Americans buying the least. Dublin Retailing also has information on who buys what, e.g. one in every ten passengers buy perfume and of those who buy, 60 per cent are Irish. Gender differences have been identified - e.g. women enjoy browsing and shopping more than men do.

If contemplating introducing a new product category, e.g. a new range of leather goods or introducing computer software products, "we would look to market research to validate whether we are going in the right direction or not. In other words, we try and get some feedback from customers as to whether they would purchase such a range if we were to list them in our range of products in Dublin airport".

About 60 per cent of passengers make a purchase in Dublin Duty-free. The nature of the purchase varies between different merchandise grouping, cigarettes and liquor sales are higher, perfumes and tax-free gifts less so. Airports measure market share, or market penetration, by the number of transactions divided into the number of passengers. However, because one passenger could arguably constitute three transactions, it is reasonable to assume that the penetration rate is somewhat over-stated.

Dublin Duty-free has made many in-store changes based on feedback from market research. Four years ago, negative feedback on congestion, product location, accessibility to retail outlets, the general tiredness of the retail offer and an absence of quality customer care prompted management to invest in revamping and refurbishing the stores. Follow-up research has shown that customers appreciated the changes. The extent of customer satisfaction is measured in a quantitative survey carried out once yearly at a peak and non-peak time. Most rating factors have shown significant improvement, e.g. value for money, product range and layout of shops. Helpfulness of staff has shown some improvement, but despite training programmes, customer- care programmes and quality management programmes, 'there is still a long way to go'. Staff incentives focus on sales commission and prospects of promotion, which are somewhat limited. The duty-free shops have a slow rate of staff turnover, and some staff, supervisory and others, have been in place for more than twenty-five years.

UK Data

• During the early 1990s, despite the recession that affected UK high street retailers, airport retailing boomed.

• Total retail sales at UK airports rose from £380 million in 1989, to £550 in 1993, an increase of 45 per cent (Corporate Intelligence, 1994).
  
• For specialist shops (i.e. those which are not duty-and tax-free) the rise in sales has been more spectacular - an increase of 220 per cent (from £25 million in 1989 to 870 million in 1993).
  
• In 1993/4, British Airport Authority (BAA) ,whose airports account for 80 per cent of the UK market, reported that 42.6 per cent of its turnover came from rental income from its retail concessions (Retail Verdict, 1995).
  
• Many retailers have experienced exceptionally good sales per square foot in airport shops, compared with similar outlets on the 'high streets'. Bookshops in London's Heathrow and Gatwick airports are achieving sales of between £2400 and £1800 per square foot (BAA plc and Corporate Intelligence 1994).

• Sales densities at Bally's Heathrow Airport shops are the highest in any of its UK outlets: between £2300 and £2600 per square foot. (Corporate Intelligence, 1994)

• The average spend per passenger is estimated at £6.40 (Daily Telegraph 12 Jan. 1994).

• London Heathrow and Gatwick airports currently attract many internationally known retailers such as Harrods, Liberty and Bally, as well as specialist retailers.

• Findings from Baron and Wass's research found that responsdents (83 per cent) looked around the airport shops. Some 75 per cent of the total respondents bought from the airport shops. However, only 57 per cent admitted to associating airports with shopping.

• Those who do make the association are more likely to browse and make a purchase in airport shops.

• In a survey of 1,984 domestic airport passengers in the USA, Butler and Jernigan (1993) concluded that air passengers had a low propensity to shop in the airport shops and generally experienced low levels of satisfaction with the merchandise on offer. The main purchases were 'reading materials and candy or other edibles.'

• The airport which provided the setting for the research paper regards retailing as a vital contributor to revenue and the aim is to increase commercial income by 5 per cent more than the increase in passenger throughput.

Case Questions:

1. Discuss the nature of Airport shopping.
2. Identify the key forces at work in the external environment.
3. In terms of Porter’s Five forces Industry Structure Model, identify the factors which impact on Aer Rianta.
4. As Aer Rianta’s marketing director, undertake a SWOT analysis to assess the competitive position of the company.
5. Consider the pricing strategies open to Aer Rianta in the event that intra-EU duty free sales are abolished.

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Mary Wilcox, School of Retail and Services Management, Faculty of Business, Dublin Institute of Technology, Mountjoy Square, Dublin, 1.

First published in Cases in Management and Strategy, Vol. 2, The Marketing Institute, 2000. Reproduced with permission.