At the end of Part 1, I said that I would discuss the following:
- Alternative Perspective
- A radical shift in model
Let’s dive straight in with an alternative position.
First, let’s take a moment to consider the points I made in Part 1.
- With terminology such as “Travel Retail”, “Duty Free” & “Tax Free”, shoppers either do not understand the terms or they end up focusing on price.
- Costs are rising due to the nature of our industry
- Concession charges are only getting higher and landlords are becoming increasingly demanding
- Landlords are putting price on the agenda by demanding that retailer offer the cheapest prices across a region
The industry is potentially about to start a race to the bottom (if we haven’t already). It doesn’t take long to realise that with costs rising and prices falling, demand will have to go through the roof to enable retailers to stay profitable. This drive in demand may occur through:
- increased passenger traffic
- more people converting into shoppers
- people spending more.
Of course, additional revenue/margin may come from selling space, advertising etc to brands.
Let us just consider these points for a moment. The nature of our industry is that conversion (the percentage of shoppers that buy) is actually remarkably stable (by location). It always makes me chuckle when you see quotes saying X% of passenger are NOT buying in the airport. It somehow reminds me of the quote – “There are lies, damn lies and statistics”.
Let’s just hold our horses and be realistic. You will never convert 100% of passengers. Ever. It just will not happen. There are a whole variety of reasons why this is the case. I have no doubt that you can think of at least 5 without even straining.
Most of us here at One Red Kite have spent time on the shop floor or analysing numbers from within a retailer. Take it from us, the effort required to get only an incremental extra 1% of passengers to convert (using the current existing model within Travel Retail) can sometimes be immense. There are also questions to be asked around whether it is even commercially viable to go to such lengths to drive conversion. More on that later in this series. For now, let us focus on the issue in hand.
The Danger of Falling Prices
The current discussions around price reminds me of the VHS market years ago. I remember being on the shop floor selling VHS players for £149. A little more than 12 months later they were £99. So, for sales value to just be maintained, unit sales will had to rise 51%. In a saturated market, this was practically impossible. Price competition killed the VHS market and retailers felt the pain. Luckily, DVD players and recorders came in to pick up at a premium price point. Consolidation or convergence has given electrical retailers a headache when it comes to driving year on year growth over several years.
“Ahh but price is so important” I hear a lot of people say. “You HAVE to be the cheapest” others say. These are fair comments but are they always true?
Is Price The Key Factor?
I recently ran a full one-week induction for 2 new starters. We discussed price and how important it is. “Probably quite important” they said. I asked them one simple question.
“How do you choose a bottle of wine?”
They both came up with a similar decision tree…. Colour, Region, Country, Grape, Price. They also talked about the reason for shopping – for themselves, for a gift etc. They mentioned that they might seek help from a relative for a recommendation. Price, although important did not dictate the purchase from the outset. There was therefore scope to influence them as they shopped. They wouldn’t go into a store and try and find a bottle below £7 for example, irrespective of its colour etc.
One thing to note was that location of the purchase didn’t even feature. I asked them about this and they both gave me the same response – wherever was nearest.
I then asked them where they shop for groceries. The response was interesting too. There was little in the way of loyalty and both would shop in multiple outlets ranging from Waitrose through to Aldi. The reason? It depended on where they were and what the wanted.
So…. If Price was such a critical factor, wouldn’t everyone just shop at Aldi or Lidl? Who in their right minds would shop at Waitrose, M&S Food or even Whole Foods? (for international readers, Waitrose and M&S Food are considered to be a premium food shopping experience). In fact, why don’t people just shop at market stalls? Well… people do don’t they!
I am sure you are thinking, “this is all fine Kevin but how does this relate to TR?”. Well, the answers to where people buy their wine and where they buy their groceries holds an important insight.
Today, people shop where it is convenient.
Convenience is king in a time poor society.
People are willing to tolerate price variances but the variances must be relative to the perceived value derived from paying more.
Here is another example. I went into a motorway service station recently. A bar of chocolate was 89 pence. That same bar of chocolate in my local store, 65 pence. I am not going to jump into my car and drive to another store, I wanted that bar of chocolate there and then. I paid the 37% premium.
On the flip side, would I pay a 37% premium on something that was £30 at the cheapest store? You would argue that no, you wouldn’t. I would say it depends on the circumstances.
The Value Of Convenience
People know that convenience locations charge more. It might be a railway station, it might be the local 7-Eleven or even a service station. People will often buy when it is convenience for them to buy.
It could therefore be argued that Airport stores are in fact luxury convenient stores. Life today is super busy and we do not always have the opportunity to shop in nice stores in city centres. An airport gives us that opportunity.
Does that mean airport stores can get away with premium pricing? Well… no. Remember, think about perceived value derived from paying more.
Price comparisons in a travel retail environment are likely to cause major issues for the market as a whole. In fact they could do more damage than the benefit they are trying to derive. Here is why….
Let’s say I am flying from Airport A to Airport B. A price comparison site for TR highlights that the same product is available in Airport F (which I am not going to and never likely to go to) is selling the product for £15 cheaper than Airport A, what do you think I will do? I might:
- Buy it anyway as I need it (but I might feel a bit miffed)
- Leave it thinking that Airport A is ripping me off
- I might wait and see what the price is in Airport B and may ultimately reject it
Personally, I think Airport F could be leaving money on the table! The other point to note is that there could be lots of reasons for prices to vary – shipping costs being a prime example!
KVI’s & Benchmarking
When I worked in Product Marketing for the electrical retailer, one term that constantly cropped up was KVI’s or “Known Value Items”. People have a handful of products that they “know” the value of. I say “know” because that too is fallible. Want proof?
Do this right now – ask people in your office, how much a pint (or litre – depending on which country you are in) of milk costs. The answers you receive will vary. So much for a “Known Value Item”!!
Key point here is that people rarely remember prices. They will often forget the price they have paid before they even leave the store. People are likely to make estimates.
So let us summarise here and take stock.
- Shoppers and passengers do not understand our terminology
- Price is not always a first thought (even though they may say it is)
- Today, people value convenience
- People are fallible – they will not always know comparable prices
- People often assess how much THEY are prepared to pay for something factoring in the convenience factor and other variables
The Airport Example
Now we have covered some key points, let us pull all of this back to the airport scenario. Remember I told you about Jill wanting to buy some perfume in Part 1? It wasn’t for her. It was a gift for her mum. It was a rare occasion where we both travelled for work. My mother-in-law moved in to look after our son while we ran a workshop for a client.
She wanted to return home with a gift and her favourite brand of fragrance was the plan. The airport offered convenience. She was browsed for a while and eventually made her choice. She wasn’t approached and no-one interacted with her. Because of that, she chose to check her phone and compare the price. The product was £25 cheaper on Amazon.
What would have happened had a sales person come over and interacted? Would she have checked her phone? No. Would she have been any the wiser? No. She would have been wrapped up in the sales process, learned something new about the product, even had it gift wrapped and presented to her in a beautiful bag.
She may (or may not) have found out at a later date that the price was cheaper elsewhere. She was buying an experience and convenience. Had she found out I think she might have been a little annoyed.
Does this mean that airport stores can charge what they want?
I wouldn’t advise it. I personally would encourage benchmarking against the LOCALmarket and then tracking the effect of price changes on performances. There are many variables to consider when looking at pricing. Whether you are a brand or a retailer, a thorough review of prices and the effect of changes on performance will highlight opportunities. It is important to remember however that Travel Retail IS different to domestic and so a straightforward review will not be enough to highlight opportunities and challenges created by changing prices.
Measure, Measure, Measure
With over 15,000 analytical hours under my belt working for WDFG, I would say that you can almost always unpack even the smallest amounts of data to find a story or an insight that could lead to big changes in performances. Particularly with Travel Retail data, there isn’t a standard process that can be followed. Data becomes like a rubix cube. You can twist and turn it and end up with a mess OR, you can see the clues to that lead to a solution.
Whatever you do, always measure it. Measurement is certainly key to getting the insights you need. Whatever data you have, you can almost always unpack it to create insights. For help on how to do that, contact me at email@example.com.
We have covered a lot of ground here. We have:
- Considered the effect of falling prices and what needs to happen to maintain sales
- Covered the surprising stability of conversion rates
- Seen examples where price is NOT always the first consideration
- The importance of convenience to shoppers and how TR is well placed for that
- Considered how price comparisons can be damaging to the industry
- Looked at “Known Value Items” and how estimates are often used
- Begun to look at ways to move focus away from price
- Considered moving away from benchmarking across airports and to focusing on the local market
- Placed emphasis on measurement – whether you are a brand or a retailer, whatever data you have, measure activity using tried and tested methods used by the best of the retailers.
With everything that has been covered, I bring it back to my original question – Is it time to re-position travel retail?
With rising costs, pressure on prices and increased competition from online (i.e. Amazon), incremental growth can be a challenge. Is there an argument to say that price competition is a dangerous path to follow? Of course, price will always be an important factor in any retail environment but…
Should the focus and therefore positioning be centred on convenience?
In Part 3, I will move this re-position question onto branding.
As ever, thank you for reading.