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CIR

Industry predictions for 2017

What does the future hold for duty free and travel retail? CiR shares five predictions for the industry in 2017.

January 2017 | by Garry Stasiulevicuis, President

The duty-free and travel retail market is facing a number of rather unique challenges as it steps into 2017. The channel has already seen two years of lacklustre growth – a contraction in 2015 and flat in 2016 (based on CIR estimates) and this is a big worry given that global tourism in this period was very buoyant. Tourist arrivals grew by +3.9% to 1,235 million, according to the latest UNWTO World Tourism Barometer.

These divergent results of growing traffic and stalling DF&TR sales mean that while the underlying travel trends remain positive, passengers are less willing to spend as extravagantly as they used to – and this has led to decreasing spend per head. The factors causing this change of behaviour over the past two years range from the Chinese government’s strict clampdown on duty free allowances for returning PRC travellers, the significantly weaker rouble (since mid-2014) affecting Russian spending, to terrorist activity changing tourist flows to markets like Turkey and France, and a great deal of currency turmoil globally.

In this article, rather than look behind, we look at 2017 to assess the trends that will shape the DF&TR channel in the coming 12 months. We have picked out five key areas. 

1. Digital disruption

The move to online shopping by consumers has gained greater momentum. New data from Eurostat covering the EU-28 markets show that in the past decade, in every age group, online shopping has risen substantially from 49% to 66%.

Overall, the share of shoppers turning to e-commerce is highest among the 16-24 and 25-54 age groups (68% and 69% respectively). However, markets vary considerably with the proportion of e-shopping ranging from 18% of Internet users in Romania to 87% in the UK. The most popular types of goods and services purchased are clothes and sports goods.

Generally well-heeled passengers travel with at least one web-connected device and are increasingly turning to them for information using wifi at airports (often available free) – and that includes retail services.  

This year expect travel retailers and airports to seize the initiative and become an active part of the consumers’ online experience, rather than simply dabbling with it, as the omni-channel approach begins to take practical shape. They will invest more to offer not simply online ordering for collection at the airport, but full payment and home delivery options.

Frankfurt, for example, has already started to digitalise the airport journey and services – including retail – and, from January, began offering home-delivery options (and not just pre-orders) with its biggest retail partner, Heinemann. The channel will therefore start to compete more directly with more familiar online marketplaces (such as Amazon) in order to safeguard their share of sales. In doing so travel retailers may also have to become more price competitive.  

2. Retailer-landlord relationship

Pressure to be more competitive will increase this year. Travellers have the means to compare products and prices – another reason perhaps why spend/head has been falling in DF&TR. Airports, via their representative body Airports Council International, are fully engaged in raising their service quality standards – and shopping is a core component of that.

Airports will therefore be looking more closely at the performance of their retail service – and how to improve it without compromising on actual sales. It should therefore come as little surprise that in December, Fraport, the owner and operator of Frankfurt Airport, followed in the footsteps of Paris Aéroport (formerly Aéroports de Paris) by forming a 50:50 joint venture with its DF&TR concession partner, Gebr Heinemann, to operate 27 shops at Frankfurt.

This model shares the risks and the rewards while maximising synergies and is a logical and mutually beneficial way to meet future challenges in the airport shopping space. It also gives airport landlords a better understanding of the pressures that retailers face and a more balanced view of this profit centre and eventually may also pave the way for a revision of the fairly inflexible highest-bidder-wins model that still exists in many locations around the world. 

3. Look east for growth

The resilience of tourism has been very welcome for the DF&TR business – but recent impacts (such as sustained terrorism in Turkey) and currency fluctuations (for example following the Brexit vote) show that tourist flows can change dramatically – more on this below.

Based on UNWTO data for 2016, and on forecasting, it is Asia Pacific that will remain the driver for international tourist arrivals. Last year by region, Asia Pacific grew by +8% fuelled by demand from both intra- and inter-regional source markets. Africa also had a strong rebound at +8% after a very weak period.

The Americas at +4% was in line with the global average, while Europe’s +2% and the Middle East’s -4% reflected security and safety concerns, even though some holiday markets in southern Europe such as Spain had very good growth. North Mediterranean tourist destinations have taken up the slack of terrorist-hit North African markets such as Tunisia and Egypt.

This year, based on current trends, the UNWTO projects worldwide tourist arrivals to grow at +3% to +4% led again by Asia Pacific and Africa (both at +5% to +6%); the Americas (+4% to +5%), and the Middle East at anything between +2% to +5% due to the volatility in the region, while Europe will trail (+2% to +3%).

There is a shift taking place from West to East that will become dramatic over time when taking longer term forecasts into account. According to airport analyst, DKMA, more than half of the eight billion additional passengers projected to fly over the next 20 years are expected in Asia Pacific. Other large markets such as Iran are also quickly developing their tourism potential after the lifting of years of harsh UN economic sanctions – and traffic growth there is already in a high gear.  

4. Low-cost carriers

Low-cost carriers (LCCs) are going to have a bigger role in delivering customers to duty-free shops as they continue to make share gains against legacy carriers – particularly in emerging markets where the propensity to travel is rising. LCCs account for 25% of the global market.

Data from RDC Aviation Economics indicate that between 2007 and 2016 the compound annual growth rate (CAGR) for LCCs was +7.1%, while the total global market (including all commercial flights) achieved only half of that at +3.5%. In the decade, runaway growth came from Central and South America – but across all regions including mature ones, such as Europe and North America, LCCs have been outperforming.

The business model of LCCs allows them to be very responsive to demand – down to the route level – and they currently also have the benefit of relatively inexpensive fuel. This flexibility will be especially important in 2017 with political and economic instability looming (more on this in the next section).  

Players such as Ryanair, easyJet, Southwest and AirAsia have leading roles in many of their respective markets and are increasing their power and presence at top airports. London’s Stansted and Gatwick are two examples in Europe, and Kuala Lumpur in Malaysia, with dedicated terminals becoming more common to accommodate them.

The decision by some full-service carriers to take more of a ‘no frills’ approach – for example British Airways started this in January by dropping free food and drink on its short-haul routes – will also blur the lines, most likely favouring LCCs. Meanwhile the move by Norwegian Air Shuttle into the intercontinental market is another sign of the dynamism and adaptability of LCCs. While LCC’s currently only handle a small share of international passenger traffic (13%) they are growing faster than regular carriers at +23% versus +10%.

5. From Brexit to Trump and beyond…

At the macro level, expect political and economic uncertainty to continue in 2017. The UK prime minister, Theresa May’s January pronouncement that the country plans to fully leave the European Union single market opens the door to the possible revival of duty free sales between Britain and EU markets further down the line. In 2017, the news is likely to lead to more cautious spending and travel plans from Brits, not least due to the weak pound: they may continue to travel, but their spending will reduce.

Meanwhile, in the US, President Donald Trump has quickly started to unravelled multilateral free trade deals, starting with the Trans-Pacific Partnership, which is now dead in the water, as he moves towards what he terms “fairer” bilateral pacts instead. The established NAFTA deal with Canada and Mexico will also undergo some reviews, and the EU’s still fledgling TTIP agreement with the US is unlikely to escape scrutiny.

Turning around decades of fostering free trade and greater globalisation will have an immediate impact on how corporations view their businesses around the world – and 2017 will be a year of taking stock and evaluation, as car makers have already started to do. Such a big change of direction will need digesting and it is quite feasible that business travel will be a casualty of this policy reboot in 2017.

In the meantime, from a travel perspective, currency flux such as the pound sterling’s dramatic fall following the June 2016 Brexit vote – and subsequent high spending in the UK from tourists such as the Chinese – show the opportunities that can arise from political change. Spending by overseas visitors to the UK in 2017 is predicted to reach £24.1bn/$29.8bn (+8% up on 2016) according to VisitBritain. 

In the US too, the dollar has been on the slide this year as markets remain jittery on Trump’s trade policies, but the currency remains high relative to pre-2014 levels and that has encouraged Americans to travel and spend more. If Trump’s brash initiatives do not impact the US dollar too heavily, Americans should retain the confidence to continue their spending sprees abroad, which will help make up for the fall in per head spending seen from the Chinese.