UK. Welcome to the latest in our video interview series, in which we walk and talk travel retail and dining at Heathrow, one of the world’s great airports.
We tour Terminal 2 in the company of Heathrow Retail Director Fraser Brown, and discuss the trading climate, passenger traffic, productivity of space, consumer trends and some of the headwinds that the business is facing today.
We also address the key retail projects that Heathrow is undertaking in 2024 – with big luxury openings led by the latest Louis Vuitton concept coming to T2 soon alongside new food & beverage developments.
Click on the video for the full Heathrow T2 tour with Retail Director Fraser Brown and The Moodie Davitt Report President Dermot Davitt, filmed earlier this month. Below, we feature shorter excerpts from the film.
2024 is expected to be Heathrow’s busiest year ever, with a projected 81.4 million passengers using the terminals, after the airport reached 98% of 2019 levels last year.
Brown says: “In a traffic sense we’re very happy. The terminals are vibrant, buzzy and the team have done a great job.”
He highlights the importance of growth in Indian and Chinese travellers and routes in travel retail terms. But he also notes that those Chinese travellers who were strong shoppers in luxury and beauty previously are not spending as they once did, due to the removal of tax free shopping for overseas visitors in the UK.
“There are some headwinds and we need to be careful about how we navigate the business,” says Brown. “The fact that the UK government requires us to charge VAT to all overseas passengers on many categories – when every other country does not – is an act of economic vandalism, a tourist tax, and that continues to be significant.
“We work with the retailers and brands to do what we can but the economic activity is smaller and much of it has been exported. We see it in the numbers. On 6 March the government has another opportunity to bring back VAT-free shopping at airports and ports and start a true digital VAT refund scheme when the Chancellor makes his budget.”
Brown adds that Heathrow Airport is working alongside retailers and food & beverage concessionaires to ensure competitive pricing compared to the High Street, but added that “it is difficult to communicate a nuanced message on price to passengers across luxury, F&B and duty free.”
Alongside the VAT issue, Brown highlights the wider challenge of space. “We are pleased to welcome more passengers, but we’re having to squeeze them into our existing capacity. A key question is how do we make sure we are as productive as we can be? We are not only dealing with traveller growth but we are losing space on the margins as our security programme moves to a new regime where you don’t have to take your liquids or laptop out of your bag. It is great in service terms but that development is also space-hungry.”
On the positive side, Brown notes “ferocious activity” in upgrades and new brand additions across Heathrow.
“In 2019 we did 23 refits in the year; last year we did 36 and the plan this year at this point is around 30-35. For me that is very positive in an environment where there is less money to be made due to the VAT rules.”
Among new developments in T2 in 2024 are the introduction of a Jones The Grocer outlet by The Restaurant Group on the mezzanine level , plus a new wine bar called The Vinery (SSP) on the ground level.
The single biggest site under construction in T2 is a Louis Vuitton boutique, set for opening in Q2 this year. “It’s a new concept for them and we thank them for their confidence in us, particularly against the backdrop of the challenge of VAT,” says Brown.
“These luxury brands are prepared to come at the moment and it’s a tribute to them that they are willing to invest. London is a great global city and Heathrow is the UK’s hub airport, and we’ve still created a fantastic environment for the brands. But sales are not where they should be and we cannot guarantee that these brands won’t think differently about the opportunity in future.”
Other T2 luxury highlights include a first Dior boutique plus a recently opened Tiffany & Co store with eye-catching digital frontage.
At the other terminals, in T3 Heathrow has taken some space from long-time partner Harrods – “less productive than they or we would want under the VAT rules” – and created two new boutique spaces, which will come on stream later in 2024.
In T4, further change to commercial will be driven by security upgrades and demands on space.
On the evolving mix, Brown says that “food & beverage space will grow a little more, which recognises that demand is strong. On the back of recovery, we have seen an increase in dwell time of +10-12% and people who are here that bit longer need to eat. The other driver is reason for travel, which has changed slightly, with more people visiting friends and family compared to business travel, and those people are not usually entering the lounge. So that could be another reason behind increased F&B activity.”
On the duty free offer, mix and pricing, Brown says that communicating value is critical. “We work with Avolta and the brands closely to offer value, but many consumers assume that they are paying High Street prices. We are having to convince them that we offer some great deals, hence our -20% off messaging on beauty. Perfume is doing a little better but it’s not easy.
“One big positive is alcohol, a category which has a duty and tax advantage. We offer real value here, as the point-of-sale messages show across Champagne, whiskies or other categories. It’s great to see the alcohol brands, given the right policy framework, investing in the business. It doesn’t make up for lost sales in luxury or beauty though.”
Elaborating on value messaging, he says: “We must show the value in duty & tax free shopping as consumer can be sceptical. The government has taken away the value on some categories through the VAT rule; it is important that we demonstrate that we are passing on the savings. What has happened in the UK is a great lesson for other markets.”
Brown also addresses the ecommerce opportunity, highlighting Heathrow’s new Reserve & Collect programme. “This digital element and collection point is a relatively early pilot. We can take stock from brands, fulfil the orders on-site, even allow travellers to try on, so it’s a blend of physical retail with the breadth of digital retail. It is one version of the future where you can have multiple brands with a small shop front and a digital footprint for the passenger.
“What we see is that consumers engage more with airports and airlines in a digital sense but we are seeing them, especially post-pandemic, engage more with retail online. We need to put the right offer in front of them there and monetise that ‘digital dwell’.”
Offering some key messages from Heathrow Airport about priorities for the year ahead, Brown says: “One message is very UK-specific, to go back to a competitive VAT-free scheme at ports and airports.
“More generally, we are positive on traffic, which is a great starting point. But what we then have to be careful about is how we present ourselves to passengers via product, price, promotion and place. We do that via our pillars of digital, space, experience and offer.
“We want the industry to continue to engage with us through that lens. We need our partners to be even more efficient than before. With constrained space we need the best ranges, the best colleagues in-store offering the best service to ensure the best economic outcomes for the retailers, for the brands and for the airport.” ✈
Excerpts from the Heathrow T2 tour
Below we feature segments from the full-length video, taking in our introduction and walk-through of the mezzanine level (Part 1 below), ground floor departures (Part 2), duty free (Part 3) and a conversation about the digital agenda plus conclusion (Part 4).
