World Duty Free sets out Spain recovery plan

By Kapila Ireland in Airports, Europe, Global, North America, Retail News October 5, 2014 Comments Off on World Duty Free sets out Spain recovery plan

World Duty Free Group has set out a number of new initiatives to offset the loss of profitability experienced in the travel retailer operations in Spanish airports, as part of a strategic review of its growth opportunities. The company stated it will move forward “fully recognising and addressing Spanish operating challenges with promising traffic trends in 2014 and onwards,” according to its update on the group’s organisation and management plans on October 2 2014.

WDFG outlined its plans for recovery in its Spanish operations, concentrated mainly in Madrid and Barcelona airports as well an announcing a contract extension at London Heathrow airport until 2026, and its search for a new CEO following the resignation of CEO José María Palencia announced last month. The company identified London Heathrow airport, a key global hub with a premium international base, as its “best asset”.

Recovering profitability in Spain WDFG airport sales were up 12.1% in 2014 YTD vs. a 4.5% increase in traffic for the same period, stated the company. However, the recovery of Spain has been uneven among airports and has not been recovering quickly enough to offset the traffic and sales shortfall experienced in 2012 and 2013.

The company’s operations in Spain are grouped into three lots, each of them with a different rent which is the higher of i) a variable percentage of sales and ii) a Minimum Annual Guarantee (MAG).

In lot one, which includes Madrid airport, the operations were impacted by a significant drop in traffic: Madrid alone accumulated a loss of nearly 10m passengers in 2012 and 2013.

In Lot two, which includes Barcelona, the spend per passenger figure was performing below expectations, driven by the negative impact of currencies (especially Russian) and passenger mix.

The rent offered by WDFG for the concessions were originally based on the long-term traffic forecasts issued by airport operator AENA at the time of the tender in 2012. WDFG stated that 19% of the MAG of lots one and two was paid as cash advance to AENA and is recovered on a monthly basis. MAGs included in the contract with AENA are growing amounts with a significant increase in year 2015. MAG amounts started at €100 m in year 2013 (where MAG applies only for 8 months since May 2013—the starting date of the contract ), €179.4m for 2014 and €248.4m in year 2015, representing an increase of 38.5% over the previous year.

The contract includes an increasing scheme that decreases MAG growth rates in the subsequent years : 11.7% in year 2016, 9.0% in 2017, 6.1% in 2018 and 6.3% in 2019.

To offset the losses experienced in Space, concentrated mainly in the Madrid and Barcelona airports, WDFG has outlined a number of initiatives:

1. Improving the attractiveness of the retail space, introducing best practices of category management to stimulate sales and optimising costs through improvement of opening hours or by maximising opportunities and logistics. These measures are expected to increase annual EBITDA in the range of ca. €15m over three years.

2. Identifying a number of actions and guidelines to benefit from synergies among its European operations. These include a streamlining of the UK and Spanish organisations, the integration of IT systems (retail, finance and supply chain platforms), the enhancement of supply chain and logistics and redesign of the warehousing network. The combined effect of these measures is expected to report cost savings of €25 – 30m over three years.

WDFG also identified opportunities for growth in the US market, where changes in the industry are opening new growth opportunities for WDFG. The group already has a strong presence through 236 locations in 29 airports in the US.

“In the short term, WDFG will concentrate on maximising opportunities in the convenience market (where WDFG is already present) while developing a long-term strategy towards growth in the American duty-free market , where WDFG currently doesn’t have a significant presence. At the same time, the group will continue working on the integration of the US retail business , including the completion of the IT systems integration programme that is now taking place. The integration will permit the group to achieve further synergies while building a solid foundation to sustain the growth of the US retail business,” stated the company.

The US travel-retail market will benefit from increased international traffic and a growing relevance of the speciality and duty-free market.

According to the estimates based on Verdict Americas travel-retail market growth figures, the US airport travel-retail market is set to increase from $3bn in 2014 to $3.7bn in 2017.