UAE. A leading Middle East airport company senior commercial executive has hit out strongly at what he claims is supplier inaction over the impact of currency fluctuations on retail price points and the consumer value perception in Middle East airports.
In an extraordinary Open Letter to the trade via The Moodie Report, in which he asked to remain anonymous, he wrote:
“It saddens me greatly that I have to write on a subject that is in my opinion one of the most critical issues facing the Middle East, namely the exchange rate impact on the value for money proposition within Middle East duty free.
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Beauty is in the eyes of the beholder: The slump in the value of the Pound Sterling has meant that the price of a leading fragrance at London Heathrow Airport Terminal 5 is around £10 cheaper than at Dollar-linked airports in the Middle East |
“This mail has been triggered after I was speaking to a customer yesterday who was engaged in a heated discussion with one of the sales personnel on the shop floor regarding the retail price and the fact that the same sku was £10 pounds cheaper at Heathrow.
“I tried to explain that this was a result of the exchange rate impact but their response was so simple in explaining a customer’s mindset. Simply put they said: “˜Well just reduce your retails then, as there is no way I am buying anything in this store’ and walked off.
“Unfortunately the customer was placing the sole accountability on the retail operation for “˜ripping them off’. I believe that the knock-on impact of word and mouth can potentially damage the image of our business further.
“Historically Middle East operators were invoiced in the currency of origin. Due to the volatility of exchange rates, they agreed with the brands to invoice in US$ to allow margin maintenance, which is critical in concession-based operations. During the past two years brands have increased COGs – in some cases two or three time a year – and certain categories by up to +25% in one move.
“The rhetoric which the suppliers used to justify these increases focused on three core elements, namely:
• The exchange rate impact on their profitability,
• The increases in manufacturing costs due to packaging costs doubling, etc,
• The retail price differential within the Middle East due to the exchange rate impact.
“Retailers were faced with a “˜take it or leave it’ attitude and as a result the RRPs increased on core categories to maintain margin – and, oh sorry, the brands’ integrity with positioning and retail price points.
“Today on average a bottle of perfume is a minimum £10 more expensive in the Middle East than at London Heathrow; key liquor skus are +28% more expensive than at Heathrow; and I am sure that the price parity between GBP and the Euro retails reflect a similar story.
“In the “˜golden days’ brands took the position that regional pricing was based on the market conditions. The fact that the Middle East has the lowest gross margin returns worldwide whilst delivering the largest volume growths in core categories year-on-year consecutively fell on deaf ears in respect of margin returns.
“The Middle East was the cash cow of the industry for brands operating within this channel of distribution. Sadly, nothing has changed and the profitability has increased further as result of the US Dollar’s value today and price increases over the last two years.
“Forgive me if I am naïve but the words “˜duty free’ imply that there is a cost saving in the mind of the consumer. So it is impossible to explain to a customer why a bottle of 12yo Scotch is +28% more expensive than at the airport they left from, and why their favourite perfume is £10 more expensive, solely due to the exchange rate impact – the subject of my in-store conversation with that angry consumer yesterday.
“The easy solution would be to take the hit and reduce the retails. So, for example, a 1 litre bottle of a leading international deluxe Scotch whisky currently retailing at US$33.20 would be retailed at US$23.20. But guess what? The brands would be up in arms and threaten to stop supplying because of the regional impact on their retail price positioning, which would be blown out of the water.
“Putting the legalities of this aside, there are multiple ways a supplier can stop delivery; for example they would discover manufacturing issues or supply chain mistakes etc. etc.
“There has to be recognition – and, more importantly, action – from the brands to address this issue. In a business environment where global traffic is suffering horrendous year-on-year downturns, we should be doing all we can to promote duty free and engage those customers who are still travelling with a real value proposition.
“Airport authorities and retailers are being pro-active as indeed The Moodie Report highlighted recently with Airports of Thailand making major concessions on the concessionaires’ costs at Bangkok’s airports. It is about time the brands come to the Trinity and deliver what they all preach – that the customer is the most critical element of the Trinity mix.
“The saddest part of all, I fear, is that this will fall on deaf ears in much the same manner as the margin differentials discussions.
“If ever there was a justification to evaluate the Trinity concept there is none stronger than today’s market conditions. Without our customers’ confidence in the offer we are promoting specifically within the current economic environment, the damage is potentially irreversible for us all.”
The Moodie Report invites feedback – named or anonymous – on these views via The Moodie Forum below.
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