Dufry: Consolidating Profitably in Travel Retail
Dufry operates retail shops within airports. The business is effectively a high-end consumables business that enjoys monopolistic rights to retail certain categories within airports.
COMPANY SUMMARY
Dufry AG is the world’s largest travel retail operator, with 24% market share (3x the size of its nearest competitor) in the airport channel following its recent acquisition of competitor World Duty Free (WDF). Together with WDF, Dufry operates 2,197 retail shops in 400 locations in 63 countries. Dufry sells duty free items (64% of revenue) and duty paid items (36% of revenue) under several different retail flags. Dufry bids for multi-year concession rights from airport operators, and typically has exclusive rights to retail a particular category – said differently, Dufry operates a monopoly in each of its categories in a particular airport terminal. Key category exposure includes: perfumes/cosmetics (32% of sales), wine/spirits (16%), confectionary/food (15%), and tobacco (10%).
BUSINESS AND OPERATING MODELS
Dufry is effectively a high end consumables business that markets premium products to international tourists. The business and operating models are highly aligned because Dufry does an excellent job of marketing its products to travelers with specific needs. For example, a Chinese tourist visiting London will buy Estee Lauder skin cream from Heathrow’s World Duty Free store because i) it is significantly less expensive than the local price, and ii) she knows it is legitimate and has not been sold beyond its shelf life. The store operations team knows exactly when planes from Beijing land in London, and changes store displays dynamically to market to that customer.
Since travel retail is generally an airport’s largest source of revenue (aside from airline landing fees) and since concession fees (i.e. rents paid to the airport) tend to be variable with revenue, the airport operator is incentivized to award the concession to the retailer who will maximize revenue for the airport. Accordingly, the airport works closer with the travel retailer to ensure customer traffic in stores. For example, airport operators will work with retailers to design airport floorpans so that passengers quite literally have to walk through shops in order to get to their gates.
Importantly, Dufry has numerous exclusive arrangements with key brands, preventing smaller peers from presenting a competitive retail offering. Such arrangements are so relevant to customers that Dufry not infrequently sells to passengers who fly in solely to buy exclusive items (special edition whiskey, for example). Brands are becoming more cognizant of the relevance travel retail channel, and are shifting employees on their payroll to work in Dufry-operated stores to serve as experts and product curators for passengers.
The key risks to the business model are weak passenger traffic and increased competition for concessions. However, the average age of a Dufry concession is six years, mitigating the risk of worsening contract terms or losing a key location (for example, Heathrow, the largest concession, represents ~10% of revenue of pro forma revenue yet does not expire until November 2026). The variable nature of concession economics further mitigates the impact of economic / geopolitical issues that impede passenger flows and passenger spending. Further, Dufry to be one of only a few travel retail providers who have the ability to pay for a concession, for the lower margin players have a much more limited ability to meet airport operator rent requirements.
WHY DUFRY IS WINNING
Dufry’s stated goal is to generate 12-15% IRRs on concessions and acquisitions. The company has been quite consistent in meeting this threshold, and in integrating complicated acquisitions. Since Dufry has been a consolidator in the space, it is fundamentally changing the tenor of its negotiating power with airports
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This is very interesting, thanks for elucidating something I usually just walk past without thinking. Given the nature of the goods and the travel involved, I’m wondering how they think about inventory. Do they target highly local goods so that each Dufry is unique to the market of the airport it’s sitting in? Or do they optimize for global goods that can be stocked anywhere? I imagine one has an impact on the business model, and the other, the operating model.
This is a great business. The great thing about airports is that they are local monopolies and the great thing about the retail part of the business is that it’s an unregulated monopoly. The industry is ripe for consolidation and as you note there are negotiating power gains to be had for the largest player with both the airports and the brands. In selecting acquisition targets and organic growth options, I imagine that Dufry is targeted in the airports it wants to enter, looking for areas where international flights are an increasing portion of the travel traffic. Is Dufry involved in the downtown duty-free outlet business where a store could have a larger, but less captive, audience? Does, or would, this have a huge impact on the greater operating model?
The point about shifting displays to suit the international flight arrivals is an interesting one. It makes a lot of sense, as do the types of items they sell, non-perishable, non-commodity goods with global brands that are often taxed at punitive levels outside of the duty free retail channel. Is there any room for them to expand their category mix to include some of the other luxury goods one could buy in Heathrow for example (leather goods, jewelry, other accessories)? Or are the current categories proven as the most economical offerings?
Thanks for the input. Re: your questions, I would note the following:
– Dufry’s revenue is 89% airports / 10% other (cruise ships, rail stations, downtown shops). Dufry is adding off-airport space in markets where it wants to compete but airport operators demand economics that are too onerous for a financially disciplined operator like Dufry (i.e. in Asia).
– Dufry’s focus is largely on growing the beauty category (perfumes and cosmetics). They could mix into other luxury goods like leather, but it’s somewhat difficult because i) major luxury brands have opened monobrand stores in airports (though they are loss-making), ii) major brands are right-sizing distribution and getting out of the wholesale channel, and iii) the inventory turns and ROI is much better on a small bottle but expensive bottle of perfume vs. an expensive handbag
Hi Jeff, great article. Honestly I was thinking a lot about airport design in terms of efficiency and minimising time between flights, but I never thought of the fact that airports might create designs that increase sales and that they have the same incentive as the stores that operate within them. You definitely make me look at airports differently from now on:)
I’ve never spent any time looking at in-airport retailers before, so found this very interesting. I’m actually torn on whether or not I think it’s a good business model. I love the fact that it’s a market leader and can use economies of scale to negotiate the most favorable pricing with suppliers (Marlboro, Estee Lauder, etc.). It’s also incredibly unique to have a customer who is confined to the airport while waiting for the flight and potentially has nothing else to do besides browse the shop. However, it seems to me that most of these duty-free stores are relatively stale and they all offer the same products. I also feel that Dufry is dependent upon a cost-conscious customer who is willing to hassle carrying the purchase from the airport to the destination along with all of the other stuff he or she is traveling with, and as a consumer I never feel that the pricing is particularly compelling even when factoring in the lack of taxes… However, if the results have been compelling thus far, I don’t see any disruptive factors that would cause that to change going forward!