Long-Term Sustainable and Profitable Growth
Dufry’s strategy focusses on long-term sustainable and profitable growth by building both on organic growth and acquisitions – as documented by the remarkable track-record of the company’s rapid expansion in the past 15 years. Implementation of the strategy follows an approach of diversification by, among others, geography, channel and customs-regime. This allows to best capitalize on the resilient growth opportunities of the travel retail industry – despite the short-term impact of the COVID-19 pandemic – and to mitigate business related risks (see Risks & Opportunities in the Sustainability Report 2021 Annex). In 2019, under normal market conditions, Dufry had a market share of 11 % in travel retail overall, and close to 20% in airport travel retail, which accounted for 84% of our business.
Creating value for all our stakeholders
Dufry clearly focusses its activities on travel retail and aims at best serving the captive customer audience, which is typical for the industry. Travel retail is the melting pot of three very important industries: retail, travel and leisure locations, and represents one of the most important market places for consumer goods brands. Dufry’s expertise and services align the different expectations of our stakeholders and aim at generating value for all our stakeholders.
For customers, we create unrivalled shopping experiences; for suppliers, we build the marketplace to personally engage with travelers and sell their products to affluent and fast-growing customer groups; for landlords, we provide commercial know-how to best capitalize on their travel or leisure locations; for shareholders, we create long-term value through generating cash and profits, and for employees and local communities, we offer job opportunities to support wealth creation.
Our customers enjoy memorable shopping experiences, which we constantly improve by developing best-in-class retail formats and shops, as well as by implementing innovative cross-channel marketing initiatives and extending our online services, allowing us to increase customer engagement. Our sales representatives receive travelers with a friendly smile, introduce them to the world of travel retail and provide them with detailed product information – increasingly supported by digital technology.
Listening to customers to evolve shopping experiences.
Demographics play a big role in our business and changes in customer profiles and preferences can occur rapidly. For this reason, Dufry sets high priority on consumer intelligence, extrapolated from internal operational information, regular customer field surveys and external research. This permanent listening to customers is the base to continuously fine-tune our offering, not only matching but exceeding expectations of our clients. In 2021, Dufry has considerably increased its customer dialogue with dedicated surveys and as one of the results has introduced the sustainable product identification initiative, which helps customers to find the most sustainable offers in our broad assortments. You can find more information relating to this here.
Besides offering customers great promotions, novelties and exclusive products they are always looking for, an unparalleled sense of place is, for Dufry, a key element of an attractive customer shopping experience. This includes local product offerings, as customers love to complete their travel experience by bringing home memories, as well as internationally recognized brands that are well known and much liked. Our shops combine the famous assortments of global brands and high-quality products with a special local touch, which differentiates our shops worldwide and wherever they may be – at airports, seaports, ships, railway stations as well as in downtown or border locations – and irrespective of whether they are duty-free or duty-paid. For an overview of our main retail concepts please refer to this section.
For suppliers we offer access to the largest footprint in the resiliently attractive travel retail channel, through more than 2,300 of our shops in over 420 locations in 66 countries, further supported by our growing number of digital platforms. Our shops offer suppliers an unrivalled worldwide opportunity to promote their brands and products, reaching an affluent consumer segment and allowing them to purchase their products at our various locations and travel retail online channels.
In recent years, we have seen an increasing importance in novelties, exclusive products and limited editions to attract customers to our shops. In 2021, this long-term trend was complemented by the interest in sustainable products and was reconfirmed despite some short-term category shifts towards convenience products during the recovery phase, which saw faster acceleration within domestic and intra-regional travel. Dufry traditionally works closely with brands to offer customers a unique product selection and brand experiences, which make the channel even more attractive.
Novelties, sustainable products and exclusivities.
Landlords are interested in generating the highest productivity and maximizing their revenues from their retail spaces. To this purpose, Dufry offers them a full range of retail concepts adapted and customized to any specific location, complemented by the most comprehensive portfolio of global and local brands. Landlords are thus enabled to offer their travelers attractive commercial spaces and online services, resulting in increased revenues from non-aeronautical sources and further optimizing their overall business performance.
For shareholders, Dufry offers an attractive investment opportunity to participate in an ever-growing industry and a company focused on profitable growth and strong cash generation. Despite the current challenging business environment, travel retail is a structurally resilient industry with a proven track-record of growth.
Creating value for landlords and shareholders.
Diversification maximizes opportunities and mitigates risks
Diversification has always been a fundamental element of our strategy as it considerably minimizes risks and offers consistent growth opportunities. In our understanding, diversification includes aspects such as geographies, market sectors and channels as well as, ever increasingly, also digitalization and online platforms.
Geographic diversification is the best way to benefit from the ever-growing number of travelers worldwide, as we can leverage the captive audiences in our locations. Our global presence allows us to evaluate thoroughly the opportunities of new projects in any location by capitalizing on the expertise of our local teams. Their understanding of the local market characteristics forms the foundation for a close collaboration with landlords and other local business partners, to effectively develop new businesses.
Our wide geographic footprint in 66 countries and the fine-meshed network of locations and shops is also a unique marketing asset we can offer our brand partners. It allows them to engage directly with a growing number of customers and access to any given mature or emerging market. Today, Dufry is not only the global market leader in travel retail, but also by far the most diversified player in the industry.
Furthermore, geographic diversification considerably mitigates risks generated by external impacts in single markets or regions. This has been widely proven in 2021, when we could accelerate the recovery benefitting from the early opening of domestic and intraregional regional travelling e.g. with flights in the US or within the EU. Furthermore, Dufry has also limited exposure to single contracts, as illustrated by the share of individual concessions in the Group. With the largest concession accounting for less than 4% of our business, and with the ten biggest representing less than 22 % of 2021 sales.
Diversification by channel and sector widens the scope of the company providing access to all kinds of customer groups and their specific behaviors. In this context, being present in train stations, border shops and downtown locations such as hotels, casinos, leisure resorts and shopping plazas or malls as well as in the cruise and ferry businesses represents further potential and growth opportunities.
Within the duty-free sector, the airport channel is expected to continue to be the largest and fastest growing part of our business. In a more normalized travel environment, the cruise ship and ferry businesses continue to offer opportunities as well, and first operators are already resuming cruises. Cruise lines offer an attractive channel to engage with customers during a longer time period and ferries have been quite resilient even throughout the current crisis. We also have a positive view on the potential of duty-free border shops – currently mostly in South America – and downtown duty-free shopping in selected markets, mainly in Asia, where this type of operation is particularly popular, due to specific local regulations. The most recent example here is our participation in the Global Duty Free Plaza of Haikou’s Mova Mall in Hainan.
Diversification is key: by geography, by channel, by sector – and digitally.
The duty-paid sector also has considerable development potential in airports, since the expected growth of domestic passengers – including intra-EU travel – is similar to that for international travelers. All along 2021, this sector has temporarily gained over-proportional importance as domestic travel and flying – due to less travel restrictions – has picked up faster in the recovery phase than international travel. What makes this sector also interesting is the even higher fragmentation than duty-free, thus offering attractive new expansion opportunities.
Following the opening of the ANECDOTE concept store at The Circle of Zurich Airport in late 2020, the newest retail format launched by Dufry Group in 2021 is Hudson Evolve . Evolve blends the specialty brand experience with the accessibility of travel essentials and convenience products to create an immersive, customer- centric shopping destination featuring a selection of national and global brands. The first Evolve store is located at the Nashville International Airport. Dufry also continues to expand its successful dutypaid retail concepts, Hudson and Dufry Shopping which are already implemented in several markets and have potential for further deployment (see also section Retail Concepts).
Worth mentioning with respect to channel diversification is the ongoing expansion of our airport food & beverage business in our North American operation. The most recent development of this strategy already pursued over the past few years is the opening of the first ever full-service restaurant and bar, Plum Market at Dallas Fort Worth International Airport. The 220 m2 restaurant features over 80 seats and offers an open concourse dining experience that includes a designated area for table service, a grab and go marketplace with self-checkout capabilities, and a fullservice bar.
CO2 emission reduction targets defined.
Increased ESG engagement
In 2021, Dufry has considerably increased its ESG engagement with several initiatives, which are fully aligned and integrated in the company’s strategy. Above all, Dufry has defined SBTi-based (Science Based Targets initiative) CO2 reduction targets allowing the company to reach climate neutrality for scopes 1+2 emissions by 2025 and to considerably reduce scope 3 emissions by 2027 and 2030 respectively with dedicated initiatives. Moreover, the company has executed the re-certification process of the Dufry Supplier Code of Conduct further extending the reach and covering a larger share of its procurement volume and strengthened its diversity & inclusion program with several initiatives. For more information on all of this, see our ESG Report 2021).
Evolution of customer-facing and process-oriented digitalization
For Dufry, digitalization remains a key strategic focus area to diversify and extend customer engagement, to accelerate online sales, but also to simplify and increase efficiency of internal processes and procedures. From an organizational perspective, digitalization paves the way for implementing new working methods and shorten time-to-market and decision making processes. Equally, it opens new opportunities from a customer facing standpoint allowing to considerably increase customer contact-points cross-channel, cross-geographies and cross-sector by interacting with customers from when they plan their trip to the moment when they return home. The collaboration with Alibaba, among other partners, announced in early 2021 will further accelerate our digital initiatives and shows how these types of partnerships will shape the future of travel retail.
Growing digitalization opportunities.
Dufry is convinced about the possibilities and opportunities these new technologies offer and has continued evolving and deploying its digital platforms, to engage more frequently with customers and to provide them with additional services, with the ultimate goal of driving sales. Testimony to this evolution is among others the launch of the new Hudson Nonstop stores, which combine the signature Hudson shopping experience with Amazon’s Just Walk Out technology. The first two Hudson Nonstop shops, opened at the Dallas Love Field Airport and at the Chicago Midway International Airport, allow travelers to enter the store by just inserting or tapping a credit card, to pick up their products and quickly exit avoiding checkout lines.
Normally customers come to our stores while they are waiting to board their plane or train, or while they enjoy their stay on a ferry, a cruise liner, in a casino or a hotel. They like strolling through the attractive retail spaces and take away memorable shopping experiences. While sales often are generated by impulse decisions and/or immediate needs, which protect travel retail from the direct competition of online platforms, we want to attract more customers to our stores and provide a superior customer experience to create additional value through a more efficient business. Thus, the use of digital and online technology is changing our business in three major areas: how we engage with our customers, how we sell products, and how we organize our processes internally and in the value chain.
Specifically, this means that we will be further increasing personalized digital communication with customers at home, along their whole journey and, particularly, when they are at the airports close to our shops. We are also digitalizing the shops to increase conversion rates and to simplify in-store processes, focusing on areas such as product consultations, payments, locations-specific promotions etc. Finally, we will further improve customer service and individualize product offers for specific customer profiles, based on advanced research and data analytics facilitated by digital tools. In this regard, in 2021, we have both simplified our Customer Service online-platform and introduced new services, such as the sustainable product identification initiative. See here for more information on both of these.
Financial discipline focusing on returns
Dufry has always fostered a disciplined financial approach to all its projects, be they organic or acquisitions. We carefully analyze every project or significant investment with detailed projections and with a focus on minimum return requirements. This includes a careful assessment of the initial investment needed to build and set up the stores as well as the cost structure, profitability and cash flow generation of the business once it is operational and over time. This culture of giving importance to returns and cost control has allowed us to grow our business profitably and capture opportunities in many different markets and in our recent history contributed to safeguard the resilience of the company.
As part of our financial risk management, we minimize business risks by implementing a highly variable cost structure. These defensive characteristics help to protect the business in case of downturns, which under normal conditions tend to be local and temporary, thus providing a solid and resilient profile. The outbreak and spread of the COVID-19 pandemic during the past two years and the company’s ability to react fast with the adaptation of the company and cost structure to the new market challenges, is an impactful example and impressively confirms the highly variable degree of our cost structure.
Confirmed cash flow generation capability.
Dufry’s typically strong cash generation capacity is a combination of the company’s usually solid profitability and the low capital intensity of our business. Prepandemic and based on the 2019 business performance, Dufry would expect to further improve its cash generation capacity in line with top-line growth. Post full recovery and going forward, we are confident that our cash generation capability will continue to be one of the key drivers of our strategy implementation, and will even accelerate based on the structural measures taken. Recent proof of this is the level of Equity Free Cash Flow generated in the third quarter 2021 – which is traditionally the most important quarter and which reached higher levels than in the pre-pandemic years 2017 and 2018 and got very close to the record level of 2019. EFCF for the second half 2021 came in as well at similar levels as in 2019 despite a significantly lower sales level.
Organic growth complemented by acquisitions
Dufry’s fundamental growth strategy continues to be characterized by a combination of organic growth as well as M&A opportunities. Although, the current COVID-19 pandemic might slightly delay some expansion projects from a landlords’ perspective in the short term, travel retail remains a resilient industry on a mid- to long-term horizon, and we expect to see further growth and partnership opportunities materializing in line with the acceleration of the recovery.
Unique advantage of captive audience.
With respect to organic growth, the travel retail industry has the unique advantage of benefitting from a secular increase of travelers around the world and offers the great opportunity to directly engaging with them. This characteristic clearly differentiates travel retail from any other retail channel and will remain valid also post recovery. Therefore, organic growth will continue to be an important driver of Dufry’s development.
We will focus on driving sales through implementing best-in-class shop concepts in duty-free and dutypaid, by further deploying our digital strategy and by evolving the proven marketing and promotional activities we have used and fine-tuned over the years. Besides benefitting from additional passengers, we plan to further increase our retail space – be it through expansion in existing locations or by winning new contracts in airports and alternative channels and with a specific focus on growth acceleration in Asia. The opening of the Global Duty Free Plaza at the Mova Mall in Hainan’s capital city Haikou and the concession renewal in Cambodia covering three important international airports underpin this strategy. Specific to the US market, the scope of alternative channels also includes Food & Beverage shops, as this segment is of great importance for North America and represents a synergy potential for our existing travel retail footprint. At Dufry, we traditionally maintain a sizeable project pipeline, allowing us to grow our retail space in different channels, regions and sectors.
Dufry currently generates about 48 % of its revenues in duty-free and 52% in duty-paid operations, with both sectors continuing to offer further, substantial growth opportunities. The current split is influenced by a slightly over proportional weight of duty-paid due to the faster recovery and acceleration of domestic and intra-regional passengers. A return to the traditional higher share of duty-free is to be expected in line with the recovery of transcontinental and international traffic.
Long-term passenger growth remains a key driver in travel retail.
Travel retail remains a relatively fragmented industry, with the top 10 players controlling just over half of the market and the remaining market consisting of small and medium-sized operators, despite the consolidation seen in travel retail over the last years. Along with the recovery of the business, we expect to be able to continue capitalizing on M&A, with a focus on Asia and on F&B or by complementing our presence in other existing markets.
The organizational adaptations made at the beginning of 2021 mainly by consolidating the former Northern and Southern American regions into the new region The Americas has well contributed to further simplifying our organization and generated the expected efficiencies. Detailed information about The Americas is available here.
Strong long-term industry fundamentals despite short-term challenges
All along 2021 and across nationalities, passenger behaviors have been reassuring and have confirmed the long-term propensity and willingness to travel as soon as governmental restrictions were lifted. This is an encouraging and important indication that the fundamental resilience of travel retail is unchallenged and that the industry maintains its attractiveness as a growing retail channel featuring its own growth dynamics, which are not comparable with high street retail.
Whilst visibility on the travel pattern recovery remains low, there is currently a clear trend of recovery across all channels with the expectation of a return to 2019 passenger levels by the end of 2023 or at the beginning of 2024. This expectation is based on latest estimates from ACI, IATA, ICAO and Air4Cast. Pre-pandemic, external industry specialists such as Air4Cast estimated global passenger numbers to grow by around 4 % per annum, which translates to a potential of over 300 million new customers for the industry every year. Growth expectations are different per region as is normal in the industry, and Dufry expects to see growth in relation to its respective geographical exposure and passenger mix. This underlying growth potential and the related sales impacts can be further increased by developing innovative commercial concepts with landlords and brands, as well as through Dufry’s own acceleration of its digitalization initiatives, driving change in the way travel retail evolves. We believe that being the global market leader also means being at the forefront of this development.
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