The growth of linear space and the fashion category in travel retail
The strong presence of fashion and luxury in travel retail, and the growth in linear retail space that we see in most major airports today, was triggered in part by the diversification of the air passenger retail category offering after the abolition of intra-EU duty free sales in 1999.
The addition of new, prominent airport retail categories such as fashion was driven by traditional duty free categories such as tobacco, alcohol and perfumes being given the maximum amount of retail space to the point where additional similar space would not contribute an acceptable per sq metre revenue.
The prevailing tender process has often seen a requirement from the airport for the bidder to include a fashion offer in conjunction with the main tax free stores to help fill other available retail units.
That requirement to provide a diverse category offer to the customer remains. However, it will be heavily compromised in the short to medium terms by the extremely tough retail conditions ushered in by the COVID-19 crisis.
Stock – the current risk for 2020 and planning for 2021
In normal trading conditions, the risk in seasonal stock comes from the percentage of airport fashion store stock that the retailer has remaining at the end of each seasonal collection. In a good trading period, the remaining stock from a seasonal collection can be as little as 15% of the collection, which in part will be offset by what has been generated at full price sales (at best, usually a maximum of 65% of the collection is sold at the full price). These numbers, of course, are currently totally out of the window.
So, depending on what action the retailer was able to take to liquidate the remaining terminal stock from the outgoing Autumn/Winter 2019 collection, you then also have the current seasonal stock from Spring/Summer 2020 to attend to.
And then the retailer also has in the pipeline the Autumn/Winter 2020 order to decide upon and, furthermore, with the tightening of the cash flow and the nature of the delivery windows, the retailer additionally needs to pay for the stock invoices during the low season – a further complication to deal with.
The layer cake of stock on hand that is going to be incurred during 2020 is then further compounded by the seasonal OTB planning for 2021, starting with the Spring/Summer 2021 collection. Is this the perfect storm?
Questions will then need to be raised as to what sales plan the retailer actually uses to understand the demand for 2021. Will the retailer be tempted to carry over the Spring/Summer 2020 seasonal collections to de-risk the OTB for 2021? This is a calculation easy to do on a spreadsheet, but harder to put into practice when the same merchandise may have been earlier sold at knockdown prices online. Digitally-savvy customers will know.
Going forward, fashion retailers will have to be pragmatic and, for obvious reasons, may look to switch to cross-seasonal collections, for example.
Survival mode – a radical change to the airport fashion retail financial model
In the COVID-19 environment, there are many immediate challenges for airport fashion retail. These range from the likely need to adapt to new store layouts to accommodate new social distancing measures, to managing new product safety guidelines and the human issues of, say, trying garments on in changing rooms with the restrictions that will undoubtedly be in place. Given these, will passengers still walk in or just walk by?
Whatever comes to pass, costs are likely to rise significantly and revenues are going to be much lower for fashion retailers for a long time, even as passenger numbers start to return to a higher level.
The concession model and fee (MAG) and variable rate for the fashion stores, once reopened, has to be taken into consideration in this period of uncertainty. There is a strong argument that a profit share model between airport and retailer should be used. Without compromise, we may see a lot of empty fashion retail units in airport for quite some time to come.
