Publisher’s note: I have attended many conferences down the years where people criticise the retail model but come up with few solutions, writes Martin Moodie.
The ACI, supported by several leading duty free retailers (notably the sadly departed Guntram Brendel of Weitnauer Group), came up with its own tender code in the late 1990s, but its reception was only lukewarm at best. So at the recent Trinity Forum organised by Moodie International, I asked Dan Cappell, a long-time industry executive with experience of airport, supplier and retail management to provide his solutions, in an ideal world, to the dilemma of how to structure airport bids. What follows is my introduction, followed by how the Abu Dhabi Duty Free deputy managing director set about this trickiest of assignments.
“What if” are two of the most alluring but elusive words in the English language. What if I won the lottery? What if I’d sunk that two footer on the 17th? What if, what if”¦”
What ifs don’t, as they say, pay the rent. But this one might. What if I could structure my ideal tender? What if I was an airport authority that had the benefit of my own wisdom and experience down the years gained from wearing the hat of the retailer and the supplier?
Well we gave that “What If” proposition to a well-known industry executive, ex-Nestlé International Travel Retail general manager and now Abu Dhabi Duty Free deputy managing director Dan Cappell.
We said give us YOUR ideal tender, structure a bid at a hypothetical airport – but it has to be based on the following parameters:
* Delivering maximum benefit to the airport’s travelling consumers
* Delivering optimum sales
* Delivering appropriate financial rewards and incentives for all parties
Dan Cappell: For the past nine years that I have been involved in travel retail the tender process the outcome and the impact on our day-to-day business has been one of the most controversial, angst-ridden aspects of our business.
As recently as the January 2003 edition of travel retail business, three global players detailed what was wrong with the current tender financial structure.
All were critical, and all stated that unless change is implemented we will see a further decline in our business.
But not one of them really detailed any realistic solutions, ideas or positive steps to address the financial model. It was basically the same old whinging that we have all heard before.
Over bidding, linkage to pax numbers, no retendering, MAG v % of revenue etc etc: the same old complaints with no new solutions.
On multiple occasions the term “over bidding” is tabled as the rationale for the failure of the financial model. As little as 5 weeks ago a major concession was awarded in one of the key global airports. I shouldn’t name it”¦ but then again I shouldn’t do half the things I do so I will. I am talking about the liquor & tobacco concession at Hong Kong International Airport.
The outcome is already being criticized as a massive overbid and suppliers are already reacting negatively prior to the concession starting later this year.
Yet didn’t the winners of this bid (and every other bid that is made) base their business plan on the information provided by the airport authority in the belief that it was the right financial offer for their company?
And does the fact that the airport authority accepted such a bid therefore give the industry the right to place the blame at the feet of the landlord?
And does it give the industry the right to then openly attack the retailers who have prepared the offer? The fact that one operator believes they can generate a higher turnover/profit from a said location is surely the responsibility of the management within that company to deliver?
Conversely, don’t the losers then have to re-evaluate their own business plan and not revert to the simple solution of throwing stones at the competition? There is a BUT though to all this
– all tender offers are based on data provided by the airport authority, and in many cases this data is incomplete, based on unrealistic forecasts, is not transparent and some would say questionable in its accuracy.
Now, if this is true, then every link in the chain has the right to attack the relevant parties if the data is factually incorrect or misleading. This potentially leads, for example, to the winner being able to re negotiate at a later date.
This is extremely dangerous, there is then no incentive at all to construct the best commercial bid whilst there is a good chance that you will be awarded it and then be able to re tender!
Controversial observations and comments? Yes, in some peoples eyes. Commercially sound? In my opinion, no. Far sighted and visionary? Again, in my opinion, definitely not.
The fact is that each and every one of us has a point of view on the existing model and I believe if we are honest with ourselves generally speaking that view is biased towards which side of the table we sit on.
Let’s face it; we all get paid to deliver what our companies are demanding from us.
The fact that our bonus and overall remuneration is based or linked to changes in market share, higher overall % margin retained, turnover and volume objectives, not to mention third parties paying staff and personalization costs etc, creates a very focused approach to the way that we manage and think about the business.
We also live in a world of shareholder value and next quarter results. The pressures we all face actually reduce risk taking and thinking outside of the box rather than being open minded and risk orientated. Guaranteed income is a safer solution at the end of the day rather than percentages of potential income!
My initial reaction when Martin asked me to present in this session was that I was totally the wrong person. Yes, I have worn the supplier’s hat; yes I now wear the retailer’s hat and yes I now wear – at least part of the time – the airport hat.
But who Martin really needed was Harry Houdini, one of the greatest illusionists to have lived, such is the difficulty, some would say impossibility of presenting the ideal tender.
Some would say and truly believe that this industry, like Houdini, has been in a straitjacket for years. But unlike him, the industry can’t escape it.
To come back to the subject of my speech, the simple answer is that there is no ideal tender scenario that will meet all parties’ expectations. There are though some key ingredients that I believe we can implement and change in order to move towards equality within the commercial mix and more importantly exceed our customers’ expectations.
The starting point for this is to really establish an understanding of the core needs of each party. To highlight this, I am going to take you on a journey of a major new airport terminal that will be opened in January 2004.
CASE STUDY: SIDIKI AIRPORT
Sidiki Airport is owned and managed by one of the largest global airport companies, Besson plc. I am the commercial manager responsible for all revenue-generating tenders. I have an MBA from Harvard. I am well versed in the industry and don’t accept brown envelopes. And just to prove this really is fictional I also have a golf handicap of three!
Prior to detailing the retail tender framework, I want to take you through my company’s needs and requirements as an airport operator that in turn established the framework for the retail tender proposition.
– Sidiki airport handles 50 million pax a year.
– This is forecast to grow to 90 million by the year 2010.
– As of today we have 3 terminals that are running at capacity.
– Delays are occurring and due to security measures, we are asking passengers to check in a minimum of 2 hours prior to long haul and 1 and a half hours for journeys less than 3 hours.
Despite the airport bulging at the seams we are only achieving penetration into our retail offers of 30%; our conversion to purchase runs at 50% of penetration and our average spend per head is US$10.
Terminal 4 requires capital investment of US$850 million and in order to meet the 90 million pax forecast in 2010 we have an additional two terminals planned at a further investment of US$2 billion in the coming years. The interest alone on US$850 million runs at US$80 million a year.
In order that we can fund this investment, I need to generate that US$80 million a year alone just to meet the interest payments, regardless of any other costs we incur – not to mention a return for our shareholders.
I also need to convince my board that my income is generated on a long-term sustainable basis to help fund the expansion and development of the airport – to meet the passenger demand over the next 10 years.
We cannot afford to have good years and bad years in revenue and profit generation. This only creates havoc in our financial planning, not to mention shareholder dissatisfaction.
Commercial revenues play a key role in enabling Besson plc to meet our financial requirements. It is also imperative that we show real value and growth for our shareholders. For the last five years we have seen our revenue decline whilst our pax numbers have increased.
Obviously this is a major concern. Our research has shown that the confidence consumers used to have in being assured of a value for money offer (that does not necessarily mean cheap) has been severely damaged.
Recent surveys that we carried out revealed some concerning views. I have selected a brief summary of the main responses.
Let’s start with the pax quotes:
“Airport retailing is a rip off .”
“You no longer can buy duty free – can you?”
“Price saving, what saving?
“You can buy cheaper at home.”
“The offer is a con, fancy packaging and different sizes do not hide the fact that on a litre by litre or gram per gram basis, the airport is the only one making loads of money.”
“The offer is the same wherever you go, airports all look alike and you get a wider range in the domestic market.”
“The staff are so unfriendly and always look bored, they know nothing about the products that they are selling.”
But at our board meeting last week many directors laughed at this reaction.
“How can they think like this, we have 3 for 2 offers, “˜bogoffs’ [buy one, get one free] up to 50% off domestic market offers and opportunities to win cars, speedboats and motor bikes. Are these people blind?”
I then presented the data from our surveys with our retail partners and some key suppliers.
Here’s what the suppliers said:
“If the cost of doing business continues to rise to unacceptable and non-viable levels we will have no option but to withdraw from this channel of business.” Source: top 3 liquor house world-wide.
“These people do not understand that the channel of distribution is very small and we are not prepared to screw up our domestic market pricing structure.” Source: multiple suppliers across categories.”
“The problem with airport authorities is that they are the only ones making any money. My company is assessing if we will continue to focus on this channel – after all, it only represents less than 1% of our total business.” Source: major global tobacco supplier.
“The trade must start to be transparent with data, some companies will not even give us accurate market share data. How on earth can you expect to plan your business without basic information!” Source: multiple suppliers
“Not a day goes by when I do not receive another request for investment. It is take take take all the time with no guarantees in return. I might as well write a blank check.” Source: major confectionery supplier.
“You guys amaze me, you have refused to accept any price increases for the past 3 years and we have had a 15% rise on manufacturing costs over that period – now you want even higher margins.” Source: the vast majority of suppliers.
“People don’t buy in this channel, they place orders, the trouble is that they do not know the difference”¦ especially when you compare them to a Tesco buyer!” Source: Anonymous
Sadly the retailers’ thoughts were just as damning.
Retailers’ reactions:
“We thought that we were entering a partnership, not a one-way dead end street. There is no flexibility built in at all. Staff training? No way, we are focusing on reducing our costs and besides it is impossible to get really good sales staff for the salaries that we pay.”
“We cannot invest for the future when our contract is for only three years, our objective is taking as much money out of the business as we can to cover the tender costs and then hopefully make some money for ourselves.”
“Customer satisfaction? If I’m honest, we pay lip service to this, we talk a good game but the reality is that our sole objective is to maximize the revenue and profitability within the period of the contract.”
“The data that is given to us is minimal, it’s about time that transparent accurate data is made available for all parties.”
“Pax numbers are down, this is severely impacting our business”¦ but the airport authority doesn’t want to know.”
Whilst we will all have our own views on these quotes, the reality is that many of us in this room have uttered at least one if not more of them over the past 18 months depending on which side of the table one sits.
The key question is what should we do to address this, specifically in view of the tender documents that we will be issuing for terminal 4. The board agreed to reconvene allowing for due thought to be given to the structure of the tender. The template for the ideal tender is based on the results of this board review.
To establish the template a number of key factors had to be taken into account. Let’s highlight these key elements prior to detailing the tender guidelines.
My rationale for this is simple – unless all parties are aware of what the issues are, and the needs and visions of all parties, then the buy in to the tender guidelines will be minimal.
The key factors that have to be taken into account are as follows:
* Sidiki Airport Authority’s investment in airport infra structure over the next 10 years is forecast at US$2.85 billion.
* The length of the contracts must enable retailers to invest over a realistic period of time and deliver a profitable return that justifies the bid and investment.
* Suppliers have to see real internal growth year on year and be in line with group profit objectives.
* Travel retail is seen by many companies today as just another channel of distribution.
* All parties have to make a sound profitable return from the investment within the business.
* And, most importantly but perhaps the least discussed, that we have to exceed our customers’ expectations and create an environment that makes airport retail a destination location for our passengers whilst traveling.
My earlier remarks referred to Houdini, the greatest illusionist of all time. Let’s face it, if I could propose the ideal solution to these key factors, I would not be standing here”¦ the reality is though that as an industry we are reaching crisis point and whilst an analogy with Houdini may raise a smile or two, it is not an acceptable solution.
But change is.
As a wise man said in April, when questioned about the regional conflicts in relation to the impact on business in the UAE: “Change is not a crisis, it’s an opportunity.”
It is also in my view now time that we change as an industry. World events since 11 September 2001 have had a catastrophic impact on the global travel business. We can continue to bury our heads in the sand and talk about the good old days or we can take the opportunity and move forwards.
The tender construction has to address the key factors that drive our business:
– penetration in store.
– conversion to purchase.
– increase in spend per head.
– category growth across all sectors.
– providing real value for money (does not necessarily mean cheap)
– establishing the airport as a destination retail environment.
– exceeding our customers expectations.
These core aspects drive our business. They also determine the growth or decline in our revenues.
Time after time, I have heard that the tender should be directly linked to increases or decreases in total pax numbers, thereby compensating when times are bad.
Whilst this would undoubtedly help retailers with rent rebates linked to pax movements and I believe should form a core part of the tender agreement, I also say “˜wake up’ to those parties who always major on this subject.
The question that should be being asked is what about the 85% of customers who do travel yet do not buy anything?
In my view, this is where the focus has to be in any tender process/commercial agreement.
The most critical aspect of our business is our bottom line, the amount of cash retained in the bank.
It is not about 60% or 75% or 2.75 as appose to 37.5 mark-up. These are just numbers yet they rule a number of lives present here today. 75% of nothing is nothing!
The commercial agreement has to enable all parties to re-incentivise the consumer to shop at airports, increasing penetration and conversion to purchase.
Just imagine if all of us today had our bonus related to increases in penetration, conversion to purchase, spend per head and category growth, just how different our commercial discussions would be.
Working off a general consensus that the average global penetration base is 30% with a 50% conversion, it is important to establish some of the key factors that contribute to these statistics and actually stop us from changing these figures within the existing model.
Marketing initiatives on concourses/outside of retail locations to get people in store are stopped because airport authorities want to charge ridiculous rental costs – I was once quoted US$36,000 a week.
Demands for staff salaries, personalized display material and point of sale being fully funded by suppliers, on top of the costs of the promotion, reduce the consumer offer – making it an average offer rather than an exceptional offer.
The retail sku does not always have the added value, wow factor or significant point of difference to that in the domestic market that demands the consumer buys it.
The domestic market always takes priority over travel retail with many suppliers having to fight internally with domestic colleagues to justify their existence.
Retail offers in domestic markets are increasingly becoming better value and higher profile that those on offer in travel retail.
The commercial retail layout is based around the airport authorities’ needs, not those of a retailer’s or customer’s needs, hence making it more difficult for both parties to maximize the commercial opportunity.
Domestic market “˜best in class’ retail exceeds our customers’ expectations week in week out.
Lack of transparent data that allows one to make better-informed decisions/action plans.
Basic information that would allow better proposals to be made is withheld as if it is some kind of secret weapon.
These key points relate to all three parties in the chain
1. Concourse rental: airport authority
2. Promotional costs: retailer
3. Consumer offer: supplier
4. Retail layout: airport authority
5. Domestic market: suppliers.
6. Transparent data: all parties
The ideal tender therefore has to be able to address all of these key issues.
Sidiki Airport Authority’s tender construction has focused on addressing these core issues.
As a starting point, the three most critical elements of the tender composition are flexibility transparency and imagination. These are definitely not a standard benchmark in the existing model.
Flexibility in mindset and in the approach to business – if an idea is a good one, do it, if it fails try again, do not dismiss it.
Never hide behind the contractual blurb. If you are not committed to challenging yourselves to do better every day, you should not be doing the job.
Transparency in data and information, we talk about partnerships and working together, yet we build walls around ourselves and keep critical information within those walls as a power trip. Open book transparency is the only way forward.
Imagination: this is key, imagination in retail solutions, in promotional campaigns and executions, greater imagination in all new product development from suppliers with specific points of difference with the domestic offer etc.
I have focused on the “negatives more than the positives” for the past 15 minutes. These are real issues that we face as an industry and must not continue to ignore the warning bells that have been ringing since pre-abolition of intra-EU duty free in 1999.
Therefore the ideal tender guidelines are based on providing solutions to these issues.
The tender is based on 16 key criteria:
Besson plc, Sidiki Airport concession guidelines
1. The tender will detail all available data based on actual numbers to all parties in the chain in order that the very best retail/commercial propositions can be made.
2. 15 % of retail revenue to be base rent against a minimum turnover figure. The minimum turnover will be set/established on an average historical analysis of existing business.
This will then be directly linked/related to current actual pax numbers, with a lower percentage when decreased and higher percentage when increased – with a ceiling limit established.
3. Ceilings to be established based on actual pax numbers and existing spend per head data by category. Financial incentives will be allocated based on a direct ratio of pax versus increases in penetration, conversion and, of course, increases in spend per head with additional profits being split.
4. Maximum margin at retail set at 50%. Recommended retail prices to be benchmarked versus domestic market, with buy in and commitment from suppliers. Global parity by suppliers on recommended retail price policies excluding duty elements using the lowest common denominator. Buy in and commitment from suppliers that airport retailing will offer better value than domestic market.
5. Length of contract to be based on 10 year cycles with bi-annual review against agreed tender objectives.
6. Minimum investment requirements by outlet to be established for the duration of the contract. Penalty clauses will apply if this is not adhered to.
7. No additional costs to be charged for marketing/promotional activity within the airport to drive penetration and spend per head.
8. Introduction of star products at cogs plus 5% by category to be promoted 365 days of the year. Margin at retailer’s expense.
9. All multi-purchase activity to be based on 50/50 basis between retailer and supplier.
10. Business plans between retail and suppliers to be established linking direct investment to specific objectives, i.e. volume purchases, market share, display space agreement, category growth. Commitment to be gained from suppliers that any domestic offer that betters duty free be matched within the airport.
11. Besson plc management to attend quarterly reviews with retail and key suppliers. Agreed levels of instant flexibility to be granted for specific activities to address penetration, conversion and spend per head.
12. Implementation of category focus not brand specific, research has to be conducted on what the customer wants, how the customer shops and best in class parity established with domestic retail. More importantly, that the results/findings are implemented and reviewed in the bi-annual tender review.
13. Staff training is required for all staff on a minimum twice annual basis. Focus to be on customer service and product knowledge.
14. Retailers to conduct monthly customer surveys in addition to airport authority research and then publish the findings to all parties. Agreed action plans to be implemented based on findings. Results/follow up to be assessed at all commercial reviews.
15. Career progression and overall remuneration for management will be directly linked to category growth, higher conversion to purchase and increases in spend per head.
16. No party will be allowed to re-tender on the basis that the original bid was too high without all parties being able to re-tender.
The framework for the tender is based on agreeing a guaranteed fixed income for my business, on which I have to build my long term financial planning.
It is focused on exceeding my customers’ expectations and establishing my airport as a must visit destination to shop.
It allows real value offers for my customers and, as importantly, creates a financial infra-structure whereby my retailers can plan long term investment in developing the business and in turn our suppliers can focus on investing in driving volume sales.
Let’s say that this structure generates 50% penetration with 50% conversion.
Based on a like for like average spend per head per pax, my turnover will increase from US$75 million to US$125 million. If we gain an increase of US$ in spend per head, my revenue increases to US$150 million – i.e. double my existing business.
The greater the focus we place on penetration, conversion and increase in spend, the greater the return for all of us.
Not all parties will agree with my comments. The solution is not a “˜one size fits all’ scenario. There is no right or wrong answer to this question.
I believe that unless we are prepared to undertake a fundamental change in our mindset and place our focus on exceeding both our customers’ and our own expectations, that in turn may mean making radical changes to our modus operandi, we will continue to see an increase in pax numbers globally and a decline in the global travel retail market – from what is now talked about as the glory days of US$21.5 billion at consumer value.
The ideas I have tabled are, I hope, to be used as triggers and provoke us all to think outside of the box.
If we can all use the basis of the tender as a fundamental tool to address what are real live issues within our business, then there is hope for us all.
The alternatives are that we will loose some premium international brands that we currently offer; there will be minimum competition from retailers to provide the very best retail offer as companies withdraw from the channel of distribution. And our penetration and conversion rates will continue to decrease, and even some of us who have jobs now may not in the future!
Remember those words: “Change is not a crisis”¦ it is an opportunity.”
If ever we have an opportunity to change the way we do business it is now.
I challenge each and every one us attending today to grasp the opportunity, to be 1000% more flexible in our mindset to conducting business and start to focus on how we get the 85,000 customers out of every 100,000 who do not purchase to start spending money, rather than focusing on the 15, 000 who do, to spend more.
Biography: Dan Cappell worked for Nestlé for 22 years, establishing Nestlé international travel retail in the late 1990s and becoming one of the driving forces behind the confectionery category’s impressive growth in duty free in recent years. In 2002 he fulfilled an ambition to enter retailing, when he joined Abu Dhabi and Al Ain Duty Free & Catering as deputy managing director to Mohamed Mounib. In his new post he is also responsible for all commercial activities at Abu Dhabi and Al Ain airports.
