If You Think Brexit Wont Affect Your Category… Think Again

There have been a few articles recently relating to Brexit. Most hail it as a “Huge Opportunity”. Of course, at a macro level, untying the UK from a stagnant Europe and seeking trade deals with those outside the Eurozone will present some big opportunities. It will also present risks too.

From a Travel Retail perspective, there are opportunities. Of course, there are. However…. And it is a BIG however… there are some things that should be considered from a commercial point of view. So, before we celebrate a return to the “good old days”, using the Liquor category as the example, let us take a moment to consider the scenario that everyone is expecting. In my opinion, the following could happen:

Prices Will Fall
Instead of single pricing for EU/NEU (a useful strategy for a number of reasons – some I am not allowed to write about), there will need to be a single price. A true Duty Free price. As a category, sales value will fall overnight. At current duty rates rates, a £30 ‘available to all’ bottle of Whisky is likely to fall up to 30%. To maintain cash value sales, volumes will need to increase by over 40% to maintain year on year sales.

Volumes Will Rise
Or so we hope. The mechanisms of our industry would suggest otherwise. Let us be positive here though. Let us argue that volumes will increase dramatically. The bottles fly off the shelves. Happy days for the Liquor brands? Hold that thought.

More Space Is Required
Yep. Space Planning is often the department that is overlooked but the last time I checked, stores didn’t have rubber shelves. If your volumes are increasing by over 40%, you need the stock on the shelves to support the rate of sale. Some already argue that Liquor is under spaced. Add a big leap in volumes to the mix and suddenly you have a problem.

More Transactions Mean Bigger Queues
OK… so more people shopping Liquor means more people need to be processed. This means that queue times are likely to be longer which means it will either put people off or they will not feel like they have time to shop other categories.

More Transactions Mean More Tills Are Needed
To counteract the issue above, the store would need to invest in more tills to reduce queuing time. More tills mean more staff. More staff mean more cost. More tills also mean more space taken from categories.

Costs Will Rise
OK, we have established that in this scenario, volumes do increase significantly. So, that means:

  • More deliveries to the retailer
  • More warehouse space required
  • More staff to move the stock
  • More deliveries out to store
  • More replenishment

All of this needs to be paid for. Who will be paying for that?

Concession Fee’s Will Need To Be Re-Negotiated
Concession fee structures will need to be changed to account for almost all sales being Non-EU. This means that the retailer could end up paying more to the airport as a percentage.

Profits Are Likely To Fall
Whilst I am not allowed to go into detail of the mechanics of product profitability, logic does state that the cash profit will fall if the price point falls. Also, you have an increase in costs to service the category to consider.

OK. So, … in the scenario above… the “opportunity of a generation”… we have established that sales are likely to increase. Marvellous. So how can we cope with a large uplift in the example Liquor category?

There are 4 key options available:

1. Take Space From Other Categories
This might mean stealing space from Beauty, Confectionery or Luxury. Whatever is the adjacent category in each store, that is the one that will most likely be affected.

The nature of Travel Retail stores is to have highly personalised areas and little in the way of generic space. This will lead to many negotiation’s being required to exit brands within the other categories AND/OR to get the Liquor brands to pay for the additional space and re-fits.

Store re-fits are notorious for taking a long time and this has an impact on total store sales.

2. Establish A Price Hurdle (The easier solution)
How do you control volumes? Increase prices. In this instance, you cannot really increase prices because the Liquor offer needs to be “Duty Free”. The other way is to create a hurdle price (i.e. the cheapest product in store could be set at £25 at a Duty Free price). This still enables retailers to offer a Duty Free price, it still allows profitability, it reduces cost pressures from massive volumes, it reduces disruption. All in all, it maintains stability in the short term but also encourages shoppers to “Buy Better” (instead of premiumise).

If this approach is taken, gone are the days of a cheap bottle of Smirnoff or a bottle of Bells for your holiday. It is about focusing on premium.

3. Massive Range Reduction
If the prospect of removing low priced lines are too much to bear, the other option is to massively rationalise the range. This would allow enough space for the fastest moving lines. By doing so, it squeezes the space meaning that lines will need to be taken out to accommodate. This of course makes the choice simpler for the shopper but might also make it a little boring. The most likely products to take the hit will be the super premium products. It is a trade-off that needs to be considered. I am sure there will be a number of brands that will be feeling nervous about this. There may also be increased pressure on brands to pay for space or pay listing fees. Let’s see what happens.

4. Stand Alone Stores (Longer Term)
There may be an argument that Liquor comes out of the main “Duty Free” store entirely and has it’s own stand alone store. This gives airports an opportunity to fill more retail space and allows the retailer to manage the Liquor operation separately. The space freed up could be used to list new emerging brands, test new categories and more. Some have been calling for Liquor to have free standing stores for some time.

Well, if you are in another category, it might be time to start getting a little nervous.

Whatever happens, Brexit is not straightforward. In an airport environment it is complex. Whilst some wave the flag of opportunity, there will be many more scratching their heads working out how this is all going to work.

Of course, there are further implications for airport operators. Increased operational activity (retailers moving stock from the warehouse to the store, increased staffing levels, increase security activity etc) leads to further complexities. Other stores may also feel the pinch as the ‘share of wallet’ may just move in favour of the core Duty Free offer once again.

And Finally…. The Shopper
Even now, shoppers really do not understand the concept of Duty Free. They get confused over allowances and what they can and can’t buy. Any change will compound the confusion further. This will present a challenge for the staff to overcome.

The above is not designed to be definitive. It is just my opinion of what may happen. After all, this is unchartered territory. I haven’t even covered what may happen to retailers across Europe as the effect of UK prices (combined with better currency rates) takes hold.

This is an exciting time for all. It will present many opportunities and many challenges along the way. The path to success is unlikely to be a straight one but it will be an interesting one.

As ever, thank you for reading.

Have a great week.

Kevin
e: kevin.brocklebank@oneredkite.com
t : +44 (0) 7739 752 272
w: www.oneredkite.com

 

Photo by Jesse Bowser on Unsplash