CANNES, France — Rattled by an unprecedented confluence of economic, social and political upheaval, the $62 billion travel-retail industry is looking for a revolution.
“The world is changing, and the question is: Are we?” asked Vincent Boinay, managing director of travel retail worldwide at L’Oréal. “Travel retail is changing because of the customers — the Millennials, the Chinese, the Brazilians, the Russians, the Indonesians. It’s changing at the speed of light. And therefore, we need to enlarge the portfolio that is available in the duty-free stores.”
“We need to disrupt the industry,” said Olivier Bottrie, president of travel retail worldwide at the Estée Lauder Cos. Inc. “We need to disrupt the way we do business in travel retail. There’s a disruptor in the room, and that disruptor is online.”
“Travel retail is one of the most volatile and sensitive markets, and we feel it,” said Jean-Guillaume Trouvin, managing director of export at Chanel. “KPIs [key performance indicators] are all blurry. It’s very hard to know is the market going well or not. So you go back to the basics of the brand — for entertainment, visibility, service and ultimate luxury.”
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The three executives were among those attending the annual Tax Free World Association convention, which ran from Oct. 3 to 7 here. The convention, which registered a 2 percent decrease in attendee count to 6,443 visitors this session, opened on a dour note in the cavernous Palais des Festivals et des Congrès convention hall as Erik Juul-Mortensen, TFWA president, pointed out that the global travel-retail business sustained a 2.7 percent drop in dollar sales (and 6.4 percent decline in local currencies) in 2015. It marked the first decrease in six years for an industry used to notching gains like clockwork.
However, Mortensen found cause for optimism in statistics supplied by Generation, the industry’s sales tracker, which noted that the global travel-retail business eked out a 0.8 percent sales increase in the first quarter of the year.
The beauty industry received a bonus when Mortensen identified the perfumes and cosmetics category as being the top gainer of all product segments that do business in airports, ferries and travel-retail shops, with a 7.8 percent increase in the three months.
“It is the locomotive right now,” Cédric Prouvé, group president of international at Lauder, said. “That means we are taking a bigger share of the total. So we want more space.”
Bottrie cited an instance when he was shown the plan for a new airport in a big European city. A total of 12 percent of the retail space was earmarked for the perfumes and cosmetics category, but one-third of the sales were expected to come from beauty.
The collapse of the overall business last year was triggered by a host of calamities, ranging from terrorist attacks in Europe and the Middle East to the plunge in currencies (the Russian ruble, for example, lost 75 percent of its value) to the U.K’s decision to pull out of the European Union with the unexpected victory of Brexit backers. The ongoing consolidation of airport operators plus pending elections in some countries have added layers of complication.
Julián Díaz González, chief executive officer of Swiss travel-retail operator Dufry, the largest in the industry with an estimated 25 percent market share, said, “We need to work together to increase the size of the business. What we are doing now is cutting the pieces,” stressing that the entire pie needs to be enlarged.
González urged the crowd to focus on the customer, particularly Millennials, and even tinker with engine of the business. “We need to adapt the travel-retail value proposition,” he declared, adding that there is too much sameness in the look of the shops from one airport to another.
He applied a similar sentiment to product development, explaining differentiation is necessary and that exclusives are key. He also predicted: “The emerging markets will drive the business in the future” and said: “We are in the middle of the most important transformation of travel retail.”
“It is so large and so varied, it’s complicated to find a trend really,” said Philippe Benacin, chairman and ceo of Inter Parfums SA.
Still, the channel remains more positive than regular price domestic markets. “In travel retail, our plan is to close 2016 with high-level [single]-digit growth. While in domestic, we are very happy if we are flat,” said Luciano Bertinelli, ceo of Ferragamo Parfums. “I am more positive in travel retail…because in the end, people are traveling. And when they travel they always want to buy gifts or for themselves.”
“If you look at the passenger numbers, they’re still increasing. But there is a shift to the patterns,” said Markus Stauss, marketing director of travel retail and export worldwide at Coty Inc.
He said, for instance, there might be fewer people traveling to Paris due to fear after the terrorist attacks, but that London has had an increase of passengers due to the weak pound following the Brexit news. Turkey’s unstable political situation has helped to drive traffic down in Istanbul’s Ataturk airport, to the gain of Spain’s tourist trade.
“Our consumers are adjusting more and more of their travel patterns depending on what they want to do,” continued Laurent Marteau, head of travel retail worldwide at La Prairie Group. “Do they come for leisure? Do they come for shopping? The Internet world makes it very easy for them to react. Before, it took three to six months before they understood what was going on. Now they just know straight away. This has changed a lot how business is done.”
A swell in passenger numbers doesn’t always translate into a sales uptick, though. In fact, estimates point to a conversion ratio of only about 15 percent in airports today.
“We have to reinvent ourselves, find new ways to serve and treat the customer,” continued Marteau.
“In the end, as a brand or as a supplier, we have to say: ‘OK, how do you make it attractive for the consumer that in the end entices him to go into the store and at the end they’re willing to spend?’ It has to be something special. That’s exactly why we do all the travel-retail exclusives,” said Coty’s Stauss.
A case in point is the company’s new “CK One destination” offer that involves an imaginative collection of five fun stickers denoting a specific city available in travel-retail stores to help personalize a flacon of CK One. Twenty-five destinations are currently available. London’s, for instance, includes drawings of a double-decker bus, Tower Bridge and a Beefeater.
“This is a gifting idea, as well as a souvenir,” said Stauss. “It’s also a funny way to sell a brand which is already on the market and bring news to it.”
Coty was also showing an easily portable, collapsible box, replete with attached ribbon, which could be given to a consumer for wrapping a fragrance.
Travel retail’s new paradigm entails a greater assortment, according to L’Oréal’s Boinay. That, in part, refers to a variety of retail environments. At TFWA, the beauty giant was showing its partners an interactive digital library of various in-store set-ups that may be implemented. “It can be enriched without limit,” said Boinay.
“I think there are many opportunities, clearly, with new technology,” continued Javier Bach, chief operating officer of Puig.
“Travel retail is an image-driver, but it is also a recruitment tool,” continued Boinay. That’s a main reason why makeup is a category being bolstered by L’Oréal in the channel, where it now takes center stage for brands such as Giorgio Armani in airport shops.
“Makeup in Asia, in China is still underdeveloped compared to other zones,” said Stefania Fabiano, general manager of L’Oréal’s Consumer Products Division in travel retail. “But it’s growing fast. Face products are still leading the market, but the rising middle class is looking for products like lipstick in luxury or mass-market brands. Color drives penetration in shops.”
She added it also tends to be an impulse or gift purchase.
Operators keep looking to grow their skin-care offerings, especially as the product segment in 2015 became, for the first time, the number-one category in travel retail — surpassing tobacco – with a 12.6 percent overall market share, according to Piermarco Luzzatto-Giuliani, global general manager for travel retail in L’Oréal’s Professional Products and Active Cosmetics Divisions. Generating travel-retail sales of less than $8 billion and 39.5 percent of the channel’s beauty business, skin care now ranks before women’s fragrances.
Skin-care brand La Prairie goes from strength to strength. It stands at plus-8.5 percent on a sellout basis, driven by business in Asia, which is up 15 percent, according to Marteau. He estimates the skin-care market overall is up 3.5 percent.
“We see the growth in skin care is slowing down,” added Luzzatto-Guiliani, who explained that’s a result of the makeup boom. “It’s also because we see that there is a quest for more discovery and more exploration. And this is driven by new consumer expectations. They always want better, more exciting innovation.”
He said they also are after factors such as more safety linked to growing concerns about pollution and chronic diseases, better and more advice, personalized service and a fantastic shopping experience. “They are transversal expectations among all travelers,” he said.
L’Oréal is heavily recruiting consumers through sun care, in zones such as Scandinavia, and through the further rollout of dermocosmetics centers. The company is also upping its digital ante. To better serve its retail partners and consumers, it has begun offering through screens information in nine languages about 2,400 products from seven of its brands.
Operators and brands keep looking to enhance service for travelers in a channel that has been shifting from mechanical growth, because of the building and renovation of airports that was at its peak five to 10 years ago, to organic growth. Upping the ante, too, is heightened competition due to the arrival of new categories, such as footwear and coffee capsules.
Chanel, beauty’s leader in European travel retail, has begun implementing what it calls a “passenger journey,” which spans from the taxi that drops someone off at an airport to when they enter an aircraft. This can include being welcomed with digital signage and in person after the security gate, plus drive-to-store animations.
“Travel retail is, for the moment, in cosmetics still a wholesale business,” continued Trouvin.
He stressed the importance of the three-way airport, operator and brand partnership becoming closer than ever. “For us the opportunity to connect with the client is absolutely enormous,” continued Trouvin, adding that data sharing can only bolster this.
“The boundaries of channel distribution, of interaction between brands and markets and consumers is blurring. To me the biggest opportunity is if brand owners and retail operators work together in a closer manner than we have done today,” echoed Puig’s Bach. “Still today, I think it’s a very traditional approach where retailers act as someone who buys and sells merchandise, and we are selling to them but not necessarily exchanging information about the consumer and how to develop this shopper journey in a way that is for them easy, relevant, convenient — which they already get in some other channels of distribution. To me, it is probably the biggest opportunity.”
Lauder’s Bottrie agreed, saying the three key players, and even the credit card companies, should be pooling information and “talk about how we are going to optimize our traffic.”
Prouvé said: “We need to work on all the touch points of the journey.”
Bottrie interjected: “We will have to use digital — a lot of it — to make the business work. It’s a big education and one that may mean the first thing that the airports need to understand is that there is a risk of becoming not as relevant for the travelers [without it].”
Trouvin sees the future in a variety of factors, including “visual merchandising” entertainment. Between Sept. 3 and Oct. 3 with Gebr. Heinemann and Frankfurt Airport, Chanel No.5 L’Eau was experienced by passengers in a creative, unusual setting. A Chanel “path” was set up for people to discover and experience the scent. At the end, there was a “raining room” set up beneath the glass dome of Terminal A.
Retail presentation is highly important, as well, for Kay Spanger, executive director of categories and logistics at Heinemann. “You cannot continue to have all the time this famous back wall and counter in front of it and think that the people are taking your merchandise,” he said.
Going against the grain, the executive added he has heard enough about “reinvention” and Millennials as solutions for future growth. “There is far too much talk about this,” he said, emphasizing instead a need for more differentiation overall, if anything.
As an example, Spanger pointed to the Copenhagen airport, where shop turnover can’t keep pace with an “excellent increase” in passenger traffic. There is an influence from what he describes as “low-cost consumers who are flying low-cost and who are buying low-cost.”
Regarding service, Groupe Clarins has been promoting its strategy of enhancing the experiential aspect of “destinational travel,” according to Jonathan Zrihen, group ceo at the Paris-based company. “Price advantage is less important. We put together kits intended to be more interesting to the customer. We ask about destination and we started to do sampling. If you are going to Nice, why don’t we give you some sun protection?”
Inside its stand, Clarins had displayed large murals of women in different holiday locations with a list of products suggested for each locale. “The crucial part for us is to engage consumers,” said Zrihen.
“We want to be beauty companions,” said Christian Laurent, president of the travel retail and export division at Clarins.
The company also has been working on innovations, principally involving the Internet. Zrihen noted that when someone books a flight to Asia, they can download what products are available in travel retail at their terminal. In another program, consumers can order an item online and have it delivered to a destination hotel. “The Clarins web site becomes the retail operator,” he observed.
Also on the retail front, DFS Group on Sept. 28 opened its highly anticipated 75,600-square-foot store in a 13th-century building Venice. The strategy was to make the location a magnet for international traffic, according to Ariel Gentzbourger, senior vice president and general merchandise manager of beauty at of DFS Group Ltd. The 7,535-square-foot beauty retail space is heavily stocked with skin care and makeup in a quest for a hoped-for Asian audience, for instance. Fragrances comprise only 30 percent of the assortment, compared with its 50 percent-plus market share overall in Europe.
“Our customers are looking for a sense of place and destination,” she said.
Overall, travel-retail executives said there are myriad reasons to remain upbeat despite the challenges, with investments being made at every level, from airports to stores to brand owners. “[It] has many reasons to continue to be optimistic,” said Puig’s Bach.
Referring to statistics cited by TFWA’s Mortensen indicating that airline passenger traffic is expected to increase 5 percent annually through 2035, Lauder’s Prouvé said: “There are no industries that are growing like that.”
Still, optimism should not lead to complacency, executives said. “We in the industry need to think differently,” said Bottrie. “How do we reinvent travel retail? Let’s self-disrupt before somebody else does.”