Duty free, prices are taking off

What a golden opportunity! That special gift you forgot to get? Here it is. Within reach. That purse you spotted on that TV ad there... Same thing. Perfume, Champagne, snacks, jewelry, apparel, watches, cigarettes or cosmetics, there's plenty to load your Duty Free bags with. "The saleswoman says it's 20% cheaper than in town!" Whew! If the saleswoman says so, we're lucky then? Stop here. Before you go on a shopping spree, we'll do the legwork for you.  

What is Duty Free ?

Literally meaning "tax free", Duty Free, Travel Retail or the Sixth Continent are all the names given which describe these goods sold in high-traffic border areas (boats, airports, airplanes...). Their benefit? These zones are international, and therefore no need of applying the fiscal regulation of a particular country. As you can see, we say "Goodbye" to the French VAT! Usually taxed at 20% in France, goods sold in Duty Free are not charged with this additional fee... Without any surprise, airports hold the purse of the Duty free market since air transport remains the most popular method of travel for tourists.  

How does Duty Free work ?

What legal right do Duty Free stores have to be exempted from paying taxes to the State? In reality, taxes are not applied to products intended for exportation, so as not to disfavor them over imported products.

Finally, there are two types of export sales: 

• Either the goods are tax-free and are stored until exported (Duty Free)

• Or the tax can be refunded at the time of export (Duty Free)

In principle, merchandise is subject to tax depending on the destination country's rules upon arrival. But Duty Free stores bypass this system by directly selling the items in the departure areas and onboard, thus reducing the income of the States...

Differences between tax removal and Duty Free

The most indoorsy (or honest) of you may not have heard about the mechanisms to bypass the VAT. So, a short summary of the tax free system will be discussed here, because even if the principle itself remains the same (dodging VAT), the operating mode of the tax free system is quite distinct from the Duty Free system. So, then you won't freak out when someone hands you a sales draft during your next shopping expedition in Oslow...

What is tax free ?

Tax free is the possibility for a foreigner in the European Union (E.U.) to be refunded a percentage of the amount of his purchase in the E.U. with a draft slip delivered by the stores. 

Who can be qualify for tax free ?

To benefit from the tax free allowance, you should: 

• Be a non-European resident, 

• Be over 16 years old,

• Be in France for a maximum of 6 months,

• Have made purchases of more than €175 including tax at the same store.
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In short, the finality is the same: to avoid VAT as much as possible. As much as possible, because luxury brands usually only refund between 10% for a cash refund and 12% for a credit card refund. Make sure to have a credit card when shopping and not a debit card to ensure the tax refund.

Tiny guide on how to get tax free

At the airport tax-free office, you can immediately claim your cash, or wait 4-6 weeks after stamping your tax-free bill and mailing it to the tax-free mailbox.

The origins of Duty Free

Year 1946. France was moving to the Fourth Republic, the Indochina war was declared, the DGAC (Direction Générale de l'Aviation Civile) was created, and the civil air transport which accompanied it was getting more popular. The Irish businessman Brendan O'ReganSon (1917-2008) foresaw the opportunity of a new market and developed the concept of travel retail through the "Convention on International Civil Aviation".   

Brendan O'ReganSon at the opening of the first Duty Free in Ireland

The first Duty Free Zone was opened in Shannon, Ireland, and also contributed to the economic development of the area. The success was immediate and naturally came from transatlantic flight users who could afford alcohol and tobacco (the traditional core of Duty Free) for a modest sum.These collections are much more limited than the current ones, which tend to become more and more diverse.

The sacrifices implied to sell in Duty Free

Getting a slot in Duty Free is definitely not for everyone, and brands that dare to do so must consider the challenges...

Two choices apply to brands that intend to set up shop in the Parisian airport: 

• Paying nearly €20,000 per square meter in monthly rent 

• Leave the Paris Airport employees to run the stores and pay the airport between 10% and 40% of its turnover.



Either way, the price is high, but it doesn't deter them from setting up shop near an international clientele, made up of people with much higher purchasing power. When it comes to low-cost flights, the gap between the few tobacco and perfume stores and the luxurious departure lounges of more prestigious airlines is striking.

Is Duty Free really cheaper ?

Is Duty Free really cheaper ? It's time to lift the veil on the biggest question ticking over everyone's mind. Duty Free products cheaper than in the city, myth or reality? Let's go back to the fundamentals. The cost of a classic item can be roughly subdivided into : 

Product cost + Reseller's mark-up + VAT

As Duty Free does not charge VAT, the goods are expected to be significantly cheaper. Jean Claude Lambert, former President of Royal Quartz, however, raises an hot topic: 

"Our turnover is three times higher here than in the city center, but the return on investment is lower because of the high fees and restrictions."

Since Duty Free outlets are free to fix their prices, they do not hesitate to increase their mark-up to offset the exorbitant fees they owe to the airport, but also to maximize their net margin. As a matter of fact, a study carried out by Skyscanner shows that the prices applied by stores on the sixth continent are much more competitive than one might think.

After analyzing alcohol, tobacco, perfume and confectionery prices in supermarkets (Monoprix, Carrefour, Leclerc, Intermarché), perfumeries (Sephora and Nocibé), tobacco shops, and airports, Skyscanner concludes that only the perfume segment would be more advantageous every time in Duty Free. Tobacco and alcohol prices differ from one airport to another, while confectionery is systematically more expensive than in supermarkets. So beware of the munchies! The best strategy is to stick to perfumes, as long as the selection in the store and the customer support are up to par!

The figures for sales of Duty Free products prove that customers are not easily fooled, since the majority of purchases are made on perfumes and cosmetics, wines and spirits, and tobacco (see chart above). There has also been a clear decline in tobacco consumption between 2005 and 2018 in favor of beauty products. 

Duty Free items: reasons for the success?

But then, in a pressured, impersonal and ultra-marketed environment, who can buy items in Duty Free? Businessmen, in a hurry, who don't have time to shop in the city but wait for their plane for several hours; Chinese tourists who make quick visits of Paris in 48 hours without having time to stop and buy souvenirs; rich tourists who are bored before taking their flight... Few are the ones simply looking for a good deal!

"These are impulse buys, involving very little advice, centred on a smaller range and smaller products" - Stéphane Tsassis, former Director of the Asia Pacific Region - International Prestige Beauty at SHISEIDO.

All is done to optimize the long airport hallways and create an attractive experience for travelers. Specialists in airport behavior are in charge of this: the partitions between the airport corridors and the stores are removed, a corridor of brands is set up on both sides of the path leading from the hall to the boarding gate, and tasting or product-testing stands are installed in the middle of the walkway. The result: no traveler can escape the sight of the dozens of brands. Everything is good to draw attention. Pink, glitter, marble, gold, giant models... Nothing is too fancy to captivate the eyes of passers-by. The bigger the better!

Duty Free booth in the airport

The demise of Duty Free, the birth of excess

In "L'ENFER", a short story by French philosopher Gaspard Koenig published on January 6, a university professor dies and discovers that hell is spending eternity hanging out in airport Duty Free stores. Torture for some, happiness for others, travel retail has evolved since its creation to become a world of its own.  

From tax-free products to exclusive products

Boosting turnover being the priority of our airport retail stores, the slow disuse of these goods caused by the progressive hygienism of society is not helping their business. Consequently, considering the growing number of affluent travelers who visit airports, travel retail tends to diversify with exclusive and luxurious products: the exponential growth in turnover is done in two shakes of a lamb's tail. Such is the case, notably with this Chivas Regal bottle, priced at €200,000 each, released in only 23 copies and festooned with 413 diamonds set by the Queen of England's jeweler. Unsaleable? A Chinese whisky lover on a layover in Singapore used his free time to buy two of them. . 

And while this anecdote - far from being an isolated case - may either infuriate you or make you smirk, it is no less typical of the real sociology of travel retail. 

The case of Dubai International Airport

If you were looking for the pinnacle of excess and shopping sprees, the Dubai International Airport would be the place to go. Home to new airport marketing experiences, over-consumption and head-scratching promotions, it concentrates the greatest eccentricities of this industry, reflecting the wealth of the Emirate of which it is the showcase.

Dubai and its artificial islands

Until the 1960's, oysters were quite prolific in the region and Dubai primarily sustained itself through its mother-of-pearl trade, which was as dangerous as it was tough to harvest. When the hunt for oil began in 1960, Dubai was not a major player in the region due to limited oil reserves. But the region's developing economy has allowed Dubai's citizens to capitalize on the export of oil and its benefits to expand and allow the Emirate to build a sustainable economic core, even in a future post-oil era. They massively invest thanks to the black gold in new technologies, trade, and especially in luxury tourism, implying the setting up of infrastructures such as man-made ports, international airports, or hotels, which not only encourage tourists to stay and consume locally, but also facilitate human traffic. Indeed, Sheikh Mohammed bin Rashid Al Maktoum, governor of Dubai, wishes to ease the access to his Emirate, and has the ambition to make it the " Middle East Singapore ". 

One must admit that Dubai's location is very strategically advantageous: 25% of the world's population is located less than 4 hours away by flight, and 75% of the world's population less than 8 hours away by flight.

This behemoth traffic generated ranks Dubai as the seventh most visited city in the world and, unlike what one might think, welcomes more foreign tourists seeking change of scenery than businessmen who have come on a business trip. "In 2017, 59% of foreign visitors came for leisure versus 21% for business" - according to the Institute for Research and Higher Studies in Tourism (IREST). Still according to IREST, Dubai tourism would achieve today 25% of the GDP of the Emirate and 10% of the GDP of the U.A.E. (United Arab Emirates). 

Besides the absence of taxes and the excellent accessibility of its destinations, the "bling-bling Emirate" has a fearsome tourism strategy, which relies, among other things, on its airport. At the head of this money-making factory, we find Colm McLoughlin, a renowned businessman who has already proven himself in Shannon, Ireland, in the first Duty Free airport mentioned above. He was hired in 1983 by the Emiratis to make the desert airport the largest Duty Free in the world. 

Colm McLoughlin, at the opening of the Dubai Duty Free

Its turnover is now close to 2 billion euros, twice as much as Paris airport. Its sustainability is ensured by the sale of gold, something that was all the rage from the very first day. Even then, Dubai was known worldwide for its gold, sold at a lower price than elsewhere, and Colm saw this as an opportunity:

"When we opened the duty free, I showed up with my pockets full of gold: I had bought everything in the city souks, I had everything out and everything was put on sale right on the counter."

A strategy that pays off since the sale of gold at the airport's shopping center represents nearly 8% of its turnover. Moreover, once there, you can have the opportunity to purchase 1 kilogram of gold in the form of an ingot, for the modest sum of 37 000€. A golden deal...

The airport shopping area keeps on growing. Note that the airport was the first to launch the iris scanner a few days ago, making your passport outdated and reducing contacts in times of pandemic. Between marketing and technological innovations, Dubai International Airport is not ready to close its doors, especially since the "Manhattan of the Middle East" has been selected to host the next post-pandemic World Expo, whose theme will be "Connecting Minds, Building the Future", and which is expected to welcome 25 million visitors.

Although the various economic crises do not seem to have any impact on these international crossing points (see graph above), the pandemic has brought traffic from the sixth continent to a violent halt. A wrench in the gear that should weaken the sector for some time...

This is particularly the case for Dufry, the leader in airport shopping with 20% of the market share, which operates nearly 2,300 airport shops. In 2020, the group lost 2.5 billion Swiss francs, representing a 71.1% drop in turnover compared to 2019, according to cerclefinance.com. 

"2020 was the most difficult year in the entire history of the business, of travel retail and of the tourism industry in general" - Juan Carlos Torres Carreterot, President of Dufry.

A real disaster for the industry, which may have to tighten its belt and pursue its efforts in view of the alarming sanitary statistics.

Thus, if Duty Free was born from a real will to distribute cheaper products, it has turned into a race to find the biggest and richest consumer who will be able to buy luxury and increase the turnover of their overpriced stores. The moral of the story is not to fall for the sales techniques of travel retail, because even if the good deals are still there, the scams are also waiting for you around the corner. A strategy that can be easily explained, but which sometimes becomes excessive. Excess that is felt throughout the world of Duty Free, and whose pattern of extravagance is effortlessly maintained. The question is whether the pandemic will not disrupt the market too violently for it to recover...