Indian marathon begins in Cochin

Gavin Lipsith

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Delegates to the first India Duty Free Workshop in Cochin last month were under no illusions about the enormity of the task they face in bringing the country's industry up to international standards. But their pragmatism was tempered with a big dose of optimism.

For passengers who have survived airport experiences in Delhi and Mumbai, arriving at Cochin is a blessed mercy. And few are more familiar with Indian airports than the 150 delegates who arrived at Cochin last month to participate in the first India Duty Free Workshop, organised by Alpha Asia at the home of its Indian operation. The venue could not be more appropriate. With stores at Cochin International airport recording average transaction values of almost double those achieved at bigger Indian airports, the location is an example of how the local industry can improve standards even while it is dogged by problematic regulations.

Anyone with the slightest interest in the market will be aware of India's potential as a travel-retail destination, and almost every speaker at the workshop reeled off indicators of growth—six new Indian airlines will be launched in 2006, Indian carriers ordered 400 aircraft at the Paris Air Show, more than any other country, passenger traffic is expected to grow by 20% annually for the next five years, India's middle class has reached more than 300m, and the government has ordered upgrades at 36 airports with international airports to be built at Bangalore and Hyderabad.

The workshop also dealt with the many challenges that plague the country's duty-free stores. The reasons for inconsistent supply were examined in detail, as was the question of whether the government would finally adopt regulations specific to duty-free retail, and when luxury goods suppliers would be willing to commit to the market. As Alpha Asia managing director said in his opening address: "I hope this workshop acts as a wake-up call to the industry. What we discuss over the next two days could contribute to the travel-retail roadmap for India, although I have to warn you it will be a marathon—not a sprint."

India's "Awesome Threesome"—comprising retailers Alpha Asia, India Tourism Development Corp (ITDC) and Flemingo International—provided the background to much of the discussion with an insight into the challenges they have encountered in building their businesses and their strategies for growth. As the biggest three companies in Indian travel-retail, their experiences provided good case studies for others hoping to enter the market.

Leading the charge

The most established operator in the country, ITDC, has managed to double its sales in the past three years, said vice president NK Piplani, and aims to double them again by the end of 2006. "ITDC has been in duty-free for 39 years and has risen from humble beginnings in a small departures shop at Delhi airport to become the country's biggest duty-free retailer," said Piplani of the state-controlled company. "Throughout that time we have made a concerted effort to remain among the leading travel retailers."

While those who passed through ITDC's shops many years ago may refuse to believe his statement, the results of recent years bear testament to greater professionalism in the organisation. Piplani pointed to the fragrances and cosmetics store that opened at Mumbai airport two years ago as an example of the retailer's efforts to meet international standards. He also detailed the "Incredible India, Incredible Shopping" marketing campaign that has helped boost turnover at the company's 37 stores to more than $34m. The company promoted its offer to 100,000 potential customers using newspaper pullouts, a television campaign and advertising in national print media.

Rationalisation of manpower and a focus on improving visual merchandising have also boosted ITDC's business, said Piplani. The company has identified several areas of opportunity. The first is finding space at India's new airports, although the retail possibilities there will be sought after by many operators. More immediately Piplani said that improving the company's fashion and accessories offer represents a key opportunity for growth, while developing its assortment of Indian arts and crafts products and electronics would also take priority.

If Piplani's presentation left potential investors in the market with a rosy picture of business in India, Flemingo director Atul Ahuja's comments brought them back to harsh reality. The company entered the market three years ago after winning tenders for space alongside ITDC at several airports, and has since opened as the sole operator at a number of airports and ports. Ahuja said Flemingo recorded 100% quarter on quarter growth, with turnover of $25m in 2005, but added: "Growth has been great but there are a lot of challenges to fight day after day." Ahuja split the challenges into state-related—pertaining to excise duties and sales tax for example—and government matters including Customs and regulatory problems.

Regulatory matters on every level

State problems include a lack of consistency regarding liquor licensing, and Ahuja cited Rajasthan and Kerala as examples. "In Kerala we were made to run from pillar to post," he said. "Elsewhere we were refused a licence—we were told it could not be issued to a foreign company. We went to the high court and the process took nine months,during which time we were paying rent. In some locations we still can't sell liquor in our arrivals stores."

In some states the sales tax on liquor also makes business problematic, said Ahuja. In Kerala the local government places a 102% levy on imported liquor, which is only applicable to private operators. Ahuja said Flemingo had taken the matter to the high court but it remains difficult to sell liquor at a competitive price.

Moving on to government matters, Ahuja argued that the lack of a dedicated section on duty-free shops in the country's Customs manual had caused many problems, with state authorities having no guidelines on the business and resorting to rules for bonded warehouses. This made bond-to-bond transfer difficult, he explained, as the company needs to issue a bond to the airport along with insurance on the stock and an expensive bank guarantee which is valid for one year and means the company must pay a year's fee to its bank.

Ahuja concluded: "Regulations need to be changed at state and government levels, and all operators should be prepared to appeal to the government to make the duty-free business prosperous."

Alpha Asia managing director Paul Topping explained the results of the company's work at Cochin, where it operates duty-free retail under a 10-year management and stock supply contract with Cochin International Airport Ltd (CIAL). Four years into the agreement Topping reported that sales have grown by 75% annually, penetration has reached 14% and average sales are higher than the national average of $4. He explained that with Indian citizens returning from working abroad accounting for 96% of Cochin's customers, the airport offers a unique environment in which it is easy to identify consumer profiles.

"Our passengers are well-informed—they do their own market research," Topping told delegates. "That makes special offers and promotions essential. If you are out of stock of core lines, the news travels fast. Gifting is also a big part of the business. We have a 6,000sq ft [560sq m] departures shop but about 80% of our sales are made in the arrivals outlet." Alpha plans to relocate its departures store later this year, doubling the space available, and Topping said that the company aims to develop its product assortment in the electronics, toys, food, souvenirs, sunglasses and fashion categories. Liquor is the strongest category at present, accounting for 68% of the mix, with supermarket items accounting for 15% and confectionery 9%. Topping reported that the tobacco and electronics sectors are underperforming at Cochin.

Reclaiming lost sales

Topping argued that India is losing duty-free sales to the Middle East because of poor perception among Indian passengers. Alpha is running a key campaign in the region to persuade passengers that prices are cheaper in India and that travellers should shop on arrival rather than when departing from Middle Eastern airports.

Cochin Special Economic Zone development commissioner and former senior Keralan Customs official CJ Matthew pulled no punches from the start, telling his audience: "There is no such thing as duty-free—this is a phrase of convenience we have adopted. It may be duty-free at the wholesale level but at the retail level it is duty-paid."

Matthew explained that as the duty-free business is relatively small in India, the laws of the country are not geared towards duty-free issues. "As the numbers grow, the government is bound to reevaluate its regulations, particularly on duty-free retail and inflight catering."

The present customs regulations are a result of the "sensitive nature" of duty-free goods, said Matthew, with items such as imported liquor and confectionery representing tremendous revenue potential for state and central governments. The system of physical control, whereby goods remain under custody until duty is paid and cleared, is also problematic. But Matthew said the situation is not as bleak as it may appear. "Duty is being lowered in an attempt to harmonise taxes, and it may be possible to do away with physical bonding, as has already been done in some other industries. This could be achieved by retailers agreeing to make up any shortfall that may occur in revenue collection."

Matthew referred to some positive signs that restrictions on the trade will be reduced in the future, including a change of attitude among Customs officials and improving methods of risk management. He recommended that the trade should lobby the tourism ministry rather than the department of commerce, which he described as "burdened with a heavy revenue-collection bias." Asked about the possibility of a border duty-free trade, Matthew was less optimistic, arguing that geopolitical factors make such a development unlikely in the near future.

Examining the Indian consumer

While some presentations focused on workings of the duty-free industry in India, others examined the Indian consumer in detail. A clear picture emerged of the country's travelling population and its motivations, and with it the ability to highlight opportunities that many retailers may have missed until now. Masterfoods International Travel Retail consultant Stuart Bull reminisced about the times when Indian consumers travelling abroad went armed with "the list"—several items that either could not be purchased in India or were more cheaply and readily available in other markets. "There was business to be had by providing those items", said Bull. "Duty-free stores on the subcontinent missed their opportunity. They remained shrines to Johnnie [Walker] and the business went to airports in the Gulf and Europe."

Bull claimed that confectionery represents just 2% of duty-free sales on the subcontinent, with the exception of Colombo in Sri Lanka where it represents about 15% in Alpha's airport stores. In the Gulf, duty-free confectionery is a $75m business, compared to $5m on the subcontinent, and Bull commented: "If travellers had only known that they could buy the right product in the right condition and at the right price."

In the same session Cadbury International Travel Retail general manager Steve Brock shared the highlights of the supplier's research on the Indian consumer, which Brock said would be shown in more detail later this year. He said clear groups are emerging, that distinguish elitist, traditional and aspirational shoppers. Brock focused on the elitist and aspirational as potentially crucial groups.

"The elitists are the duty-free shoppers of today," said Brock. "They are middle-class, aged between 24 and 35, and perceive chocolate as a sophisticated gift in its own right. Aspirational travellers have a lower but growing income, and are looking for packs with a clear quality that they hope will impress the recipient. They are the duty-free shoppers of tomorrow and should be catered for today to grow the market."

Brock said that the differing profiles in Indian airports makes it easy for retailers to identify what will work at their stores, and said the question was "not how to sell, but how to sell better. Customers are there, they want to buy, and they will buy".

India's duty-free market remains dominated by the liquor category, and while many delegates argued that this was not necessarily a good thing, liquor suppliers presented an upbeat picture of the market's development. Diageo India national sales director Sudeep Kumar has been credited as a driving force behind Johnnie Walker's popularity in India, and he painted a comprehensive portrait of the potential of the country's liquor market. India has an affluent population of more than 188m, who spend more than ever on lifestyle products, including travel, fashion goods and alcohol. The domestic liquor market grows by 10% annually and will reach an estimated 300m cases by 2015—equivalent to a yearly consumption of 2.1l per person.

"Consumers are upgrading," he said. "India has a very big, young and vibrant population, and these factors make it one of the world's most exciting emerging markets."

William Grant business development manager for the Indian subcontinent Ankur Sachdev confirmed the trend, focusing on the growth of malt whisky. "Travel-retail accounts for 13% of all malt sales," he told delegates, "and India is the tenth fastest-growing market. Indians are becoming malt connoisseurs and there are great opportunities for higher age variants and bespoke bottles." However, Sachdev pointed to several difficulties affecting the market, including import quotas, high tariffs and a fragmented market—William Grant serves 17 key accounts in the South Asian Free Trade Area alone.

One of the biggest opportunities for Indian duty-free operators lies in the growth of the luxury sector, although at present most delegates agreed that this development remains some years away. King Power Group (Hong Kong) managing director duty-free and travel-retail Sunil Tuli shed light on the nature of India's luxury consumers. "India is no stranger to luxury," he said. "The maharaja of Hyderabad was claimed to be one of the richest men in the world. However, India's idea of luxury is sometimes unusual—for example the government tried to classify shampoo as a luxury good and subjected it to a tariff of 110%."

Accounting for just 1% of global luxury spend, India is a virgin market for luxury goods suppliers, argued Tuli. But several factors point to strong opportunities in the future. "Factors that affect the mindset of the Indian luxury consumer are growing income, optimism about the future, a big affluent class creating new reference groups, a successful non-resident population and media promotion of indulgence and lifestyle products."

As a final statement of faith in the market, Tunil told the workshop that King Power intends to seek business in the Indian market, through duty-free and domestic channels.

Hugo Boss area manager for The Nuance Group and Asia/Pacific Nicole Daniells presented the supplier's view of the India's luxury development. The domestic retail sector is forecast to grow by 8% each year until 2008, she said, and within four years up to six Indian cities would be among the top cities in the world for luxury spend. Young people in the country are looking to western style to determine their dress sense and the affluent class expects authenticity—consumers are prepared to pay for genuine articles. However, Daniells argued that the mode of distribution is important for Boss. At the moment the only opportunity to present our brand image correctly lies in luxury hotels catering to tourists, although Daniells said more opportunities are "just around the corner". In duty-free, airports and retailers must recognise the importance of supplying sufficient space in the ideal environment to reflect the image of the brand. She concluded that a strong luxury market in Indian duty-free is "not just a dream, but a real opportunity".

Alongside key suppliers and established operators in the market, the workshop hosted presentations from some of the newer, more progressive companies operating in the market. With Indian aviation at a pivotal point in its development, attention turned to those serving the aviation and airport industries.

Air Deccan chief revenue officer John Kuruvilla explained how the low-cost carrier has "faced every challenge to change the face of Indian aviation". The airline's route network connects several previously unserved regional airports, and Kuruvilla detailed the problems that the group had to overcome in its aim to "make air travel impulsive". The airline is funded by innovative advertising, he said. "We sell every space—on headrests, luggage compartments and plane exteriors, which can fetch Rs0.5m ($11,000). We are now negotiating with Harpic to advertise in the toilets."

Retail Management Solutions managing partner Paul Marks spoke for Hyderabad International Airport (HIAL), the consortium charged with opening one of India's private greenfield airports in 2008. In the initial phase the airport will be capable of handling 7m passengers, with 2,350sq m (25,300sq ft) of retail space in departures and a further 1,410sq m (15,180sq ft) in arrivals. "We want to offer potential retailers a blank slate, but with lots of information to help with shop plans and proposed business models," said Marks.

India Duty Free Services CEO Deepack Talwar urged India's operators to steer clear of their traditional reliance on liquor and tobacco to encourage growth in other categories. The inflight retailer began its concession with Jet Air a year ago and Talwar said that liquor and tobacco products represent just 10% of its sales with the airline. "We like it that way," he said. "I believe an overemphasis on certain categories is what drives the Indian customer away—it is not fair on the consumer, who aspires to more than liquor and tobacco."

The workshop ended with an interactive session that brought forth many good suggestions about how to move forward despite the problems addressed during the two days. In particular, support was expressed for the formation of an India duty-free working group to tackle some of the regulatory problems mentioned, and many delegates agreed that enlisting the help of the Asia Pacific Travel Retail Association would be a good way forward.

Several other speakers contributed to the mood of optimism that characterised the event, while acknowledging the many challenges of the market. In particular Dilmah Tea marketing director Dilhan Fernando spoke with passion about the supplier's innovative approach to promoting its product and social responsibility, Albert Bichot export director and chief wine maker Ariff Jamal explained the company's efforts to establish a French wine market in India and Cochin International airport deputy general manager (civil) AM Shabeer told delegates of the airport's plans to build on its successful non-aeronautical revenue programme with the aim of abolishing landing fees by 2012.

How much will be achieved as a result of the conference will depend on the commitment of delegates and organisers in following up the points raised, and already Alpha and its partners are deciding whether a second workshop would be useful. But as delegates departed from Cochin airport it was clear that most had gained a more thorough awareness of the challenges and the opportunities facing one of travel-retail's most exciting emerging markets.