How Digital Duty Free Disruption Can Generate New Ancillary Revenues For All Stakeholders

© 2015 Millennium Aviation, Inc. – All Rights Reserved

Q1 – 2015, March

Business Model Transformation - Quarterly

Can Digital Duty Free Disruption Drive New Sales?

In the digitally powered circular economy, business models focus on renewal, sharing and servicei. In

the airline or air transportation business, affiliate marketing is becoming mainstream in order to reach all

targeted customer groups and segments. As such, the shortest path to all customers and profitable growth

is not a straight line particularly for duty free sales.

Airlines have traditionally offered duty-free products for sale onboard aircraft. Duty free stores in airports

have proliferated around departure halls and increasingly as duty-free stores at arrival points with shops at

destination before baggage collection. But with aircraft not representing the ideal retailing environment,

airlines such as Delta Airlines stopped in-flight duty free sales in late 2014 altogether. Elsewhere, locations

such as Dubai International Airport have fully embraced and trumpet the ultimate luxury shopping mall

experience supported by high-profile lottery-style events with sales now reaching over USD 2 billion.

In addition, SkyMall, a magazine distributed in seat-back pockets

nationwide, and whose parent company in January 2015 filed for

bankruptcy protection, is another sign of changing times. Much like duty

free trolleys, thick magazines add to aircraft weight and equally

important, changing consumer tastes and the fact that most people bring

personal electronic devices - PED (such as tablets) on board, is making

the old business model redundant.

The relaxation of flight-mode regulation regarding PED and social media

usage combined with the rapid deployment of onboard FlyFi essentially

allows in-transit crowds to join the online retailing crowd. Duty-Free

sales might as well digitally transform to online portals and allow duty-

free purchases at any point in time (booking, airport, in-flight, in-transit

destination). Airlines such as Air Canada already offer their own duty-

free boutique portal online, but what is missing is an integrated platform that services the global market

with relevant territory, customs, retail and concessionaire rules and data incorporated.

(In-flight) Duty Free transformation through digitalization broadens the retail appeal. A global

content-driven affiliate network brings new players and a re-energized revenue potential

worth billions of dollars. by Ricardo V. Pilon

http://www.runwaygirlnetwork.com/wp-content/uploads/2015/02/skymall3.png

Page 2 © 2015 Millennium Aviation, Inc. – All Rights Reserved

2 Can Digital Duty Free Disruption Drive New Sales?

By the numbers

Global travel retail is worth circa USD$60 billionii, however less than 30% of all

customers enter a store and only 20% of them buy somethingiii. In-flight retail

sales have a static 7% share of the overall market. Yet in the duty-free industry,

retailers are unaccustomed and resistant to external marketing spend and prefer

“captive audience” strategies, such as “walk-through shops”.

Of all duty-free sales around the world, Europe represents the largest market

(42%) followed by Asia (27%) and the Americas (23%) whilst the rest of the

world is growing in sales. In these markets, airports dominate the business with

a total share of 57%, while airlines and ferries only come in last (7%). Cruises,

Diplomatic, Border Store and ancillaries in fact still occupy the no. 2 spot

(36%)iv.

Today, only 10% of European travelers use the internet to search for information

on the shopping opportunities in the duty-free industryv, such as comparing prices

with other retail channels. But almost half of all travelers indicate they want to

obtain relevant information from the duty-free stores online. However, the duty-

free landscape is scattered with relatively unknown retail brands and travelers do

not have the tools and information to plan their duty free searches and purchases.

Again this is where a global community can come together and establish high

visibility and facilitate a full marketplace where supply meets demand, rather

than each store attempting to go it alone.

Poor availability of accurate information on territory, customs,

retail / concessionaire rules is currently inhibiting the

proliferation of duty-free sales in an online world. In addition,

security issues and baggage rules could force an industry re-think

towards collection at arrivals stores, rather than carry-on

departure sales.

Most airlines have not yet optimized their booking in-path

ancillaries to include duty-free airport store sales, nor have

online travel agents (OTAs). Traditional travel agents do not

even have the capability to distribute such products due to legacy

technology and lack of affiliate marketing programs.

Consumers are demanding DF market related shopping info. In

some cases, shopping is the purpose of travel. Many know what

they want to buy, but do not have the information. In addition,

tobacco restrictions are forcing smokers to go online to find

information as to how and what they can buy at a discount.

There are over 3.2 billion passengers

traveling by air each year, flying on

1,397 airlines operating 36.4 million

flights through 3,864 airports.

Duty-free stores or concessionaires

can tap into this market online by

transforming their business model

Duty free sales is still big business. It has potential to triple in size to over USD 100 billion per year in a digital

world based on arrival sales, or home delivery, rather than carry-on

departure sales.



Increase revenues

Enhance offerings

Increase share of wallet

Create stickiness and increase loyalty

Monetize in-path bookings process

Attract new customers

Personalize ancillary in-path

Reduce logistics (DF)

Reduce complexity

Eliminate returns handling

Travelers’ Objectives

Global resource for local information

Rich and accurate information

Search based on rules / profiles

DF regulations and restrictions

Enhanced shopping experience

Deals and promotions

Comparison shop

Transactions and delivery

management

Airlines’ Ancillary Objective

Duty-Free Shop Objective

Increase revenues / profits

Attract more customers

Increase visibility

Improved web marketing mechanism

Broaden retail appeal

Broaden product range

Airport Operator

Increase concessions / revenues

Improve airport appeal

Adopt airport (shop) city concept

Attract more business

(airline operators, aviation-related

business, and concessionaires)

What is missing is an integrated

global platform, acting as a

marketplace for supply and demand,

providing relevant territory,

customs, retail and concessionaire

rules and data incorporated.

Airlines could financially benefit

without any involvement in

fulfilment operations and

managing returns, simply by

directing travelers to the global DF

affiliate platform.



The Digital Solution – A Global Affiliate Program

The value proposition of a digital solution for a network of the duty free world that

can connect travelers & shoppers with suppliers, airport and concessionaires is very

strong. There are therefore a few initiatives already on their way.

A number of new players are entering the scenes, although with different models:

www.dutyfreeonarrival.com appears to be the only multi-lingual full content

database that incorporates all territory, customs and restrictions information &

store links for all countries. The site also offers a mobile device App.

www.dutyfree.com is a leading domain, but a relatively inactive site. It features

a spectrum of products and destinations, but no regulations or links to retailers.

www.taxfreetravel.com was established in 2008 as an English language

informative blog for travel retail with detailed content.

www.kayak.com have included some shop details on some of their language

sites, but only for airports.

www.shopnfly.com is a start-up offering a price comparison format, mainly

via a mobile App. Recently claimed an agreement with El Al to enhance online

sales.

www.shoppair.com launched in 2011 and have also marketed their variation

for prospective travel retail e-commerce based on airport/airline retail

cooperation. IATA and ACI now seem to be discussing such initiatives.

www.dutyfreeaddict.com is another new entrant, primarily offering

commentary on Tax Free prices for electronics and beauty products.

Individual retailers and concessions are launching their own sites with

marketing attempts through social media. Lotte, a major Korean Retailer now

offers a Partnership arrangement to 3rd parties.

The winner and leading network will move the DF

industry into the internet age and address consumer

demand for pre-order online retail through destination

and product specific information, which is what the

consumer requires (destination, rules, products, prices).

This simplicity will generate incremental sales and

ancillary revenue for all stakeholders.

Duty-Free on Arrival

(www.dutyfreeonarrival.com)

appears to be the candidate that can

most likely become the leading DF

global network.

http://www.dutyfreeonarrival.com/

http://www.dutyfree.com/

http://www.taxfreetravel.com/

http://www.kayak.com/

http://www.shopnfly.com/

http://www.shoppair.com/

http://www.dutyfreeaddict.com/




Benefits for All

Product Brands

The network will give high-end brands the opportunity to target

their marketing spend in specific travel retail markets directly to

destinations and to an interested audience. The brands will be able

to target their customers by nationality, destination, travel mode and

outlet. They will also have the flexibility to redact advertising from

culturally sensitive areas (liquor) in applicable countries.

New or secondary brands can obtain cost-effective exposure in a global network, while other travel-

related merchants (such as ground transportation, currency exchange) can access arrivals traffic

before they are even inbound.

Travelers & Travel Agents

It will also offer a unique web information portal enabling travellers to obtain advance details of a

multitude of global shopping opportunities and prices in duty free retail outlets, security regulations,

customs restrictions, brand and pricing data, with a pre-order facility for merchandise delivery on

arrival, or departure. In certain circumstances, even home delivery can be facilitated. This also

avoids customs confiscations, carry-on and other airline baggage issues. Travel Agents can make

revenues for the first time from duty free because every shopper needs to buy a ticket first.

Airline Retailing

Airlines will be able to enhance a (customizable) in-path booking process and

generate revenue on a Cost-per-Click (CPC) basis by directing shoppers to the DF

network. This also allows the sale of products without the need for costly inventory.

DF Retailers / Concessionaires

The DF network will generate incremental sales and address the historically low

store penetration and increase the appeal to a wider selection of products. Using

the DF network as an efficient web marketing mechanism to create inbound traffic

will result in sales and profit growth. For those products that can be delivered to

destination-based locations, new processes will reduce inventory carrying costs. In

some cases new retailers can enter the market without the need for a physical airport

concession.

Concessions could also act as 2nd tier retailers of travel-related products, such as

transport tickets, event tickets, hospitality when the DF network becomes a wider

shopping community. 2nd tier partner revenues will be generated from airport train

operators, airport coach operators, currency exchange, limo/taxi operators.



Airports

Airports will be able to showcase their infrastructure on airport pages on the DF

network, thereby attracting retailers, brands, and concessionaires. By building their

own airport page (targeting both departing and arriving travellers) with their own

content hosted by the DF network, airports can tap into the affiliate program for

additional revenues such as parking.

Global Duty-Free Affiliate Network

The global online duty-free affiliate network will converge the marketplace through web, data and

mobile, a platform merging over 3.2 billion air travellers and many more interested in shopping for

duty free articles, by land, sea or air.



The global online duty-free affiliate network will work as depicted below. It would also sell pages on its

portal for which content can be added by countries, cities, airports, product brands and other merchants

that want to reach and interact with the traveling public.

HOWDUTY

FREE

WORKS

DF NETWORK SHOWS AN

AD OR LINK FOR A STORE,

OR CITY/AIRPORT

TRAVELER CLICKS THE AD

OR LINK

AFFILIATE

MARKETING

CUSTOMER IS SENT TO

DF STORE THROUGH

TRACKING LINKE

CUSTOMER MAKES A

PURCHASE ON

STORE SITE

DF NETWORK RECORDS THE

PURCHASE AND DETAILS OF

THE TRANSACTION

THE PURCHASE IS

CONFIRMED BY STORE AS

VALID SALE

THE TRANSACTION IS

CREDITED TO DF NETWORK

DF NETWORK GETS PAID

THE COMMISSION



i McKinsey Quarterly, Service Innovation in a Digital World, February 2015. ii Generation Research Sweden, 2013. iii Smith, Ivor, www.dutyfreeonarrival.com, 2015. iv Generation Research Sweden 2009/2010. v Gohel, K., Duty-Free International Online, www.dfionline.com, 10 February 2015.

Author: Ricardo V. Pilon, Managing Partner, Millennium Aviation, Inc.

Millennium Aviation, Inc. is a boutique coaching firm specialized in business model and profitability enhancement. It

specializes in profit maximization and business model innovation in commercial aviation. The firm was founded in 1995

and has served 216 customers. Millennium Aviation is based in Canada, and offers world-wide service out of Montreal,

Amsterdam and Singapore with a team of Senior Associates and three strategic partners. The company enables its

customers to revive, grow, or sustain profitability by identifying strategic blind spots and using techniques to address

them. The company applies its proprietary Transforming to Profits® Business Model Transformation Process and

Methodology. It includes a toolbox that consists of techniques, practical exercises and specific metrics.

millavia.com / transforming2profits.com

@millavia / @rvpilon


http://www.dfionline.com/

http://millavia.com/