A Surprise Pandemic Win For Border Stores At One Of The World’s Biggest Travel Retailers
It is easy to forget that the duty-free channel is not just about airports—and the pandemic has put that into sharp focus. In Asia, downtown offshore sales in Hainan have soared, attracting the attention of players like Alibaba and China’s department store groups, while airport stores in Hong Kong International and Singapore Changi airports were deserted.
At global travel retailer Gebr. Heinemann, based in Germany, a similar story has unfolded, this time at duty-free border shops. The business barely gets any attention in normal times, but it came into its own during the pandemic by doubling its share of company sales from 12% in 2019 to 21% last year. Airports slumped from their dominant 78% share in 2019 to 63%.
Admittedly the pie is now much smaller as Heinemann’s controlled turnover shrank 67% from 2019’s €4.8 billion to €1.6 billion in 2020. But the border benefit has caused a significant shift that may not be all that temporary if international airport traffic does not pick up this year. And it is a segment that European rivals such as Dufry (with total turnover of €2.4 billion in 2020, down 71%) and Lagardère (down 60% to €1.7 billion) do not play in to a significant degree.
Border shops were always the number two channel after airports for Heinemann and the company expects them to return to their 2019 sales level relatively quickly.
Exceeding previous year’s border sales
Heinemann’s border business is mainly concentrated in Eastern Europe were generally less restrictive Covid-19 regulations allowed shops on several frontiers to thrive, particularly in the summer of 2020.
In a report, the company says: “When international travel came to a standstill, shopping at border crossings became increasingly important. The company’s operations in Bulgaria and Romania performed very well during this period, partly exceeding sales of the previous year.”
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It was a similar picture in the Czech Republic, Slovenia and Croatia, despite business closures that spanned several weeks. But it was not the case further east. In Russia, Belarus and Georgia, both retail and distribution businesses came to an almost complete standstill in the wake of rigorous lockdowns.
In a Zoom call with journalist this week, chief operating officer Raoul Spanger admitted that the channel mix helped the company last year. “2020 was yet further affirmation that we are better off using different channels to balance risks more effectively,” he said. “Our first ramp-up started in June and July 2020 and it was the border business.
“We had strong traffic and these shops helped support regular households with daily commodities. They actually bought more than they did in 2019. The border business helped us to get out of the disastrous turnover situation in April and May.” There was a similar trend on ferries, as previously predicted.
Greater efficiencies for a new start
Heinemann is now preparing for the restart of air travel—and subsequent gradual improvement in retail sales which it believes will happen from July. “Our goal this year is 50% of 2019 turnover, with a full recovery in 2023,” Spanger said.
During this build back—which includes a substantial new store footprint at Berlin Brandenburg Airport—the company plans to have more efficiencies in place. These include better curated products assortments (but slashed by 30%), stock buffers for popular products, and data-driven, shopper-centric tools.
Also launching this summer is HeiCloud, Heinemann’s internally-developed, automated cloud-based platform for ordering and communicating with its distribution customers and, in the medium term, with the company’s own retail sites. The investment here—and the company’s stated intention to “develop its role as a holistic distribution partner”—is a reaffirmation of Heinemann’s distribution/wholesale business which is the foundation of the 142-year-old family business.
In 2013, the wholesale business accounted for 25% of turnover, but in line with the general trend in duty-free towards gaining a stronger retail and consumer-facing presence, that share fell to just 17% by 2019.
A strategic wholesale comeback?
Thanks to the pandemic, Heinemann’s distribution backbone made a comeback with a share rebound to 22%. That was because among the company’s two core segments, retail had the bigger slump at 68% to €1.2 billion while distribution decreased by 57% to €0.4 billion. While the company did not comment on plans to rebalance the business further in favor of distribution, this may well be the footing it takes going forwards to ensure stability.
For the first time, the company is also advancing sustainable practices across all areas of the business. “We are convinced that responsibility in times of crisis and shaping a sustainable future are more important than ever,” said CEO Max Heinemann.
Efforts include, for example, successive reductions of greenhouse gas emissions at the point-of-sale and in logistics; applying circular economy principles in shop design; a more sustainable product selection; and reducing plastic and disposable products.
Dirk Schneider, Heinemann’s new chief commercial officer, said: There is a clear expectation from customers. The question is how we implement sustainability so that travelers get a sense that we care about people, planet and products. Purchasing is taking a clear direction towards sustainable packaging and fair production.”
A good example of the latter is Tony’s Chocolonely a brand Heinemann has championed for a while, culminating in its recently-opened first standalone airport store at Amsterdam Schiphol.
Unlike its European competitors, Heinemann has not directly ventured into foodservice. That changed last year with the launch of Smartseller, a joint venture with Frankfurt-based travel catering specialist Casualfood.
The move allows both partners to present small and regional airports with a convenience retail and food offer from a single source. “Up to now we’ve had no chance to roll it out but we will now start with Munster and Leipzig airports (in Germany) and Ljubljana Airport (in Slovenia),” Spanger said.
Other key strategy and operational changes that could boost sales include:
Regional context—moving away from a uniform, branded look to presenting stores differently at each location. “Every store must become a ‘just here’ place,” said Spanger. “It’s no longer about making our brand recognizable by looking the same everywhere, but by looking different everywhere.”
Asian downtown duty-free—a new retail concession in one of Macau’s new hotel resorts will open in August/September, expanding Heinemann’s presence in Greater China and giving it a foothold in a destination popular with Chinese travelers, who are steadily ramping up again.
New subsidiary Gharage—at the start of the pandemic Heinemann quietly launched this innovation hub skewed to digital. Led by former creative director of Mutabor Design, Lennard Niemann, it will identify promising new business models “that build a bridge to the company’s core business.” Heinemann’s CEO Max Heinemann commented: “Digital natives—Gen Z and Y—shop differently and we need to penetrate these customers to a much bigger extent. The future is about marketplaces and we need to broaden our perspectives to ideas that are surpassing us outside our industry.”
Financially, notwithstanding the revenue collapse last year, Heinemann claims to be in a sound position with its independence unimpaired. The company concluded a syndicated loan agreement with its five principal banks in January 2020 just before the onset of the crisis giving it some room to maneuver.
“Despite the tough hit from the pandemic, our belief in travel retail is completely unbroken and we intend to play a very active, co-creative part in moving this industry forward. We were in an industry that was somewhat comfortable in that it was always going in one direction. The pandemic grounded us (and) we are ready to come back even stronger than before,” said Max Heinemann.