Ivo Favotto: We would not be surprised if store and F&B openings in future months lag the return of passengers

AUSTRALIA/NEW ZEALAND. Ivo Favotto, a Sydney-based executive and company owner who has worked for all three stakeholders in the Trinity chain, presents his latest commentary and figures on the gradual re-emergence of airport commercial activities in Australia and New Zealand. Favotto owns and runs The Mercurius Group, a consultancy focused on industry research, consultancy and benchmarking studies, as well as operating his own destination merchandise supply business.

In this article, Favotto draws on inspiration from an unexpected source to find optimism amind the trading gloom in Australasia’s COVID-devastated travel retail community.

Oft, hope is born when all is forlorn – J.R.R. Tolkien

J.R.R. Tolkien’s epic Lord of The Rings tale of a Hobbit’s quest, his progress and setbacks and his enduring hope of saving Middle-Earth seems an appropriate analogy to describe the roller-coaster journey of the Australian and New Zealand travel retail sector in its attempted recovery from the ravages of COVID-19. After all, it was a New Zealand director, Peter Jackson, who created the trilogy of Lord of the Rings films – The Fellowship of the Ring, The Two Towers and The Return of the King.

Tolkien’s elfin character Legolas, blessed with the capacity to see further than others, found hope when other members of the Fellowship thought the battle lost and their friends gone forever.

October marks the seventh month of The Mercurius Group’s monthly reports on travel retail’s recovery from COVID-19 in Australia and New Zealand. The analysis records the reopening of travel retail stores across 27 airports with more than 0.5 million passengers.

In September, we reported the abundance of caution across the region by governments of all political persuasions, something that was hampering the recovery of the travel retail sector. External borders – and some internal ones – remained largely shut and air travel had been reduced to a shadow of its former self. And yet, from those depths, a cautious optimism has emerged. Just when all seemed forlorn, hope has emerged.

While not much changed between September and October in terms of the number of travel retail outlets reopened across both countries, October saw the gradual end of one of the world’s most draconian lockdowns in Melbourne, the partial re-opening of the internal borders in Queensland (Australia’s playground) and the announcements of internal border reopenings (or intended reopenings) across most other Australian states.

New South Wales (Australia’s most populous state) has announced that the borders to the State Victoria – once the COVID pariah of Australia – will be reopened by late November.

October saw a continuation of the slow increase in the number of travel retail outlets open, hitting 41% of 2019 levels, up from 38% in September. Pre-pandemic, these airports had a collective total of 781 duty free, specialty and F&B stores – this means that 460 outlets still remain closed across the two countries. The number of travel retail outlets now open is back to levels recorded in July, before the second COVID-19 wave hit Victoria.

While Europe and North America are now deep into their second or third wave of COVID-19, with lockdowns and associated travel restrictions reinstated, the situation across much of the Asia Pacific region – not just in Australia and New Zealand – seems more optimistic and more countries (notably Singapore and Hong Kong) are in dialogue to establish travel bubbles as Australia and New Zealand have done (at least partially).

The resumption of some international flights between Australia and New Zealand, together with on-going repatriation flights and the continuation of permit-based travel, has seen the reopening of more duty free and travel essentials stores in international terminals across both countries.

Before COVID-19 struck, airports in Australia and New Zealand had on average two F&B and two specialty sites per million pax. As at the end of August, this average was ten outlets per million pax for F&B (five times more than usual) and seven outlets per million pax for specialty (three and a half times more than usual). This puts into context the on-going pain retail operators are facing, even if they are trying to re-open stores.

In this circumstance, we would not be surprised if store and F&B openings in future months lag the return of passengers, at least for a while until the balance between the return of passengers and the reopening of stores is more normalised. That is not withstanding that the new normal may represent a very different environment. The reality is that not all outlets may reopen and it will take some time for the full array of international visitors to return.

However, the recovery remains subdued with a spate of openings and closings as operators experiment with various combinations of outlets to try and build sustainable businesses.

Domestically, all eyes remain on the holiday state of Queensland. A local election at the end of October raised the prospect of a more balanced approach to the management of both health and economy. However, a resounding win to the incumbent Labour Government suggests the population favours a continuation of an abundance of caution – at least for a while longer.

While 41% of outlets are open, in August total Australian passenger numbers were just short of 1 million, down from around 13 million in 2019. In other words, while 41% of outlets are open, they are competing for business from just 8% of the 2019 passengers.

Before COVID-19 struck, airports in Australia and New Zealand had on average two F&B and two specialty sites per million pax. As at the end of August, this average was ten outlets per million pax for F&B (five times more than usual) and seven outlets per million pax for specialty (three and a half times more than usual). This puts into context the on-going pain retail operators are facing, even if they are trying to re-open stores.

In this circumstance, we would not be surprised if store and F&B openings in future months lag the return of passengers, at least for a while until the balance between the return of passengers and the reopening of stores is more normalised. That is not withstanding that the new normal may represent a very different environment. The reality is that not all outlets may reopen and it will take some time for the full array of international visitors to return.

The reality of the length of store closures (7-8 months now) and the tough competition for consumer spend even once stores have re-opened means that we have already seen some operators choose to leave some locations – especially where concessions have expired. There have also been some COVID-19 induced economic causalities who have been forced out of business.

There is also the question of whether all multi-site operators will choose to stay in the region – if there are limited growth opportunities in the foreseeable future not all will choose to stay.  Notwithstanding the gloom, rays of sunshine have been sighted in Perth and Cairns airports where new outlets (developments underway before the crisis hit), have opened.

Those reopenings have generally been supported by Australian airports with many offering COVID-19 related relief from key contractual conditions – not just in terms of rent (even if retailers might prefer more) but also in terms of flexibility in opening hours and the development of online retail platforms.

An acknowledgement of the need to get retail operators sustainably to the other side of the COVID-19 crisis has driven decision making across most airports. A healthy travel retail sector with multiple of operators bidding on future concessions is in the interest of all airports which need to balance this long term objective with short term financial survival considerations.

The Australian Government has also been supportive, with wage subsidies now extended until March 2021, although the biggest support governments could give would be to fast track the introduction of safe travel – i.e. COVID-safe but quarantine-free travel via rapid testing and other control measures – so that internal and external borders can be reopened.

We anticipate a more upbeat travel retail mood (and more probably outlets reopening) in November as more internal borders are lifted, and as the trans-Tasman travel bubble continues to grow. And so, like Tolkien’s Legolas, the travel retail sector in Australia and New Zealand sees hope.

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Ivo Favotto contact: Tel: +61 423 564 057; E-mail: ifavotto@themercuriusgroup.com; Website: www.themercuriusgroup.com

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