Part 1 of this series had set the scene around inflight retail today and ended by asking some very fundamental questions, chief of which was whether inflight retail was going the way of bookshops, big-box retailers and even cinemas.
Part 2 started to answer this question by taking a deeper dive into consumer shopping behaviour – especially online – and examining whether travel retailers choosing to digitalise their shops was the answer to falling conversions and spend per passenger. Written during the week of TFWA APAC Exhibition 2019, it left me underwhelmed because as an industry, we still seem to be placing excessive faith on the process and the platform, the terminology and technology, without paying heed to the need for a much deeper transformation. Cue to this Part 3.
Let me say before I go on that there is so much to say (and do) about travel retail in general and inflight retail in particular, that one of my biggest challenges was keeping this series to only 3 parts. I’ve done a few different drafts of this last bit, and I’ve decided to publish this version that has a more prescriptive bent. I’m doing this for the sole reason that if you’re working within inflight retail today, you can take this as a strategy overview.
Brace for a slightly longer read today based on the following contents:
- We will begin by re-examining what we know is happening in travel (and inflight) retail today.
- Next we will explore global, macro trends impacting regular retail and consumers today, and their significance to travel and inflight retail in particular.
- Third, based on a simplified SWOT analysis of inflight retail, we will focus on key variables pointing to the transformation that needs to take place for the industry. We will do this by taking a deeper dive into today’s poster-boy for e-commerce and the company that all travel retailers seem to love to hate (and blame) – Amazon.
- Fourth, we will explore the true nature of the transformation needed. Hint: it really isn’t about the technology or about digital.
- Lastly, we will then explore potential means for enacting this transformation.
(Suggestion: get a cup of coffee now, before you begin the next section!)
1. Here’s what we know, that we know
- Nearly 30 airlines have stopped inflight duty free and retail sales: This means potentially up to 1 billion travellers are not being exposed to inflight retail anymore annually. Penetration and conversion rates are at historic lows and the shopping experience out of a 1960s trolley is less-than-inspiring to travellers.
- Sales revenues in travel retail have grown at an average of 8.6% CAGR globally: this is driven primarily by air passenger growth and yet, in many specific countries and regions, revenue growth lags behind passenger growth and overall spend per head has been steadily falling since peaking in 2013. The growth is also courtesy of new on-ground shops (such as in Hainan or in other parts of China), the growth in cruise retail, and in refurbished airports (such as in Turkey and across APAC). However, inflight retail growth relative to the entire pie is actually negative.
- The retail behaviour of customers – from search to sourcing, and order to consumption – has fundamentally changed. Web- and showrooming are 2 sides of the same retail coin, depending on whether shoppers want to behave as buyers (needing convenience and speed) or browsers (with a focus on experience and service). These behavioural tendencies remain true regardless whether consumers are on ground, or in airports and airlines as travellers. There has been a clear trend towards minimalism in retail displays, driven in part by consumers just knowing more about what they want (because they are finding it online), but also by the aforementioned web- and showrooming.
- These are confusing times for (travel) retailers; on one hand duty free price transparency is becoming a reality on mobile (see Jessica’s Secret) and on the other, even the likes of Amazon are opening physical retail shops. To paraphrase Shakespeare: To be, or not to be (digital), that is the question…
- Retail is not the primary reason for travellers heading to an airport or taking a flight. In other words, travellers do not go to airports to shop, nor are they on flights in order to buy stuff. (Well, Singapore Changi Airport’s new “Jewel” might beg to differ, but really it is an exception to many rules anyway). Some research shows pre-planning of shopping might be a “thing”, but recent admissions and frankly, travel retail metrics are suggesting otherwise. Compare this to the millions who visit e-commerce sites daily: they are there because they want or need to buy something; retail is the purpose of opening the app or visiting the retailer.
2. Macro Trends Underpinning the Need for Transformation
The following are 2 clear macro trends affecting retail in general:
1. The rapid development, evolution and application of technology is constantly setting new expectations in retail for customers. Virtual Reality, Augmented Reality, Mixed reality, facial recognition, the Internet of Things, voice and image driven search, Artificial Intelligence, Machine Learning, location-based marketing, etc. all of these are becoming part of daily consumer lexicon and, as they are increasingly commercialised in reality (just 3 examples: Nike, Sephora and Honestbee), they shape our expectations for what our engagement is going to be like with the brands we love that have a share of our attention.
2. Consequently, consumers expectations and their shopping behaviours are not just changing, but they are constantly evolving. Remember we are in the AA (After Amazon) era; one in which the FAANGs (Facebook, Amazon, Apple, Netflix and Google) and BATXs (Baidu, Alibaba, Tencent and Xiaomi) are leading the way in consumer experience and expectation. These are the global business behemoths that are at the forefront of development and testing of new technology, with the added capability – through their hardware and platforms – to target accurately down to individual consumers (also known as personalization), instead of just broader customer segments. Thanks to the depth and breadth of their products and services, they are getting an increasing share of our life, as long as you’re a mobile phone-using consumer. And most importantly, they are already proven experts in last-mile, on-demand fulfilment.
Significance of these macro trends in retail
The retail battle on the ground therefore is:
- 1st – for consumer attention (hardware/platform, recognition, prediction, personalization and acquisition);
- 2nd – for “sticky” customer engagement (experience, loyalty); and
- 3rd – to enable convenience (e-wallets, payments, fulfilment) of transaction.
The result of these battles is not just vertical integration but also horizontal integration, or what I call convergence. The evolution of business models that began in the 20th century (from industrialisation to distribution to information etc. see infographic below) allowed businesses to specialise in mass manufacturing followed by the distribution of products and services at scale. The onset of computing, the internet and mobility started the process of greater transparency of prices and information available to customers and hence, ushered in a new impetus and imperative for businesses to differentiate and compete.
In the current “Era of Data”, it is no longer about manufacture of goods and services, nor is it simply about distribution and presence. Successful companies are not the ones starting from products and services and then finding markets or distribution channels.
Successful companies start from problems and needs first, followed by a deep understanding of the affected market and its behaviours. Only then does the solution definition take place, fuelled not by manufacturing or distribution, but by technology and ability to personalise and ensure relevant fulfilment at scale. Companies that solve the biggest needs and problems succeed in getting the attention of consumers (think Amazon, Google, Uber, even Costco!) amidst all the noise online, thereby engaging them with relevant solutions (such as subscription models, loyalty programs etc.), and then making it as easy as possible for transactions to be processed (think WeChat pay, Apple Pay, Amazon Go etc.) particularly on-the-go.
This is a near-universal truth that has few (if any) exceptions. And take a look at how e-commerce is growing in 2019 (see infographics below).
3. Introducing The Real Digital Solution to Inflight Retail: Airlines’ 3rd Party Marketplace
What does all this have to do with travel and inflight retail? To answer this, let’s take a deeper look at Amazon, if only because it is synonymous with “e-commerce” which is what is blamed most often for the decline of inflight (and travel) retail.
Amazon started with books in 1994. It took them 14 years to generate a profit, and a further 9-10 years before analysts started taking note of its true potential. Today in 2019, in spite of $10bn in profit, its online sales business is still not profitable internationally. Clearly, simply being one of the world’s most visited sites is not enough to make them profitable.
But wait for it – here’s the most relevant part of Amazon’s business when it comes to inflight travel retail:
Instead of procuring goods at wholesale prices and selling at a markup (inflight retailers – does this sound vaguely familiar?), the 3rd party marketplace is where 3rd parties pay Amazon to sell their goods using its platform. Amazon takes 15-20% of sales, in addition to collecting fees for storage and shipping. Revenues are lower than selling its own products, but margins are a lot higher making it more profitable than the traditional model. Today more than half of all goods sold on Amazon come from 3rd party sellers, and this is growing. Sales of 3rd party products rose to over $42 billion in 2018 (the largest contributor to Amazon’s revenues, with AWS at $26bn and advertising at $10bn).
Take note though: the only reason why this works so very well for Amazon and for the 3rd party sellers is because of the traffic that visits Amazon daily in search of products and solutions. Note, I keep saying “Amazon” but this applies to every large, 3rd party e-commerce site in the world. Take a look again at the infographics above for an idea about e-commerce market size and growth. This is quite possibly the most important learning for travel and inflight retailers.
Let’s now ask: What is the one thing Airlines have (other than aircraft, staff, fuel and debt)? Yes – traffic.
So now, imagine if airlines implemented their own versions of such 3rd party marketplaces, AND made it available inflight?
4. A 3rd Party Marketplace requires a fundamental TRANSFORMATION
Take a minute to understand the following simplified SWOT analysis of inflight retail. There are many things to be said, but the key variables are as follows:
- Airlines (and inflight retailers) have a fragmented approach to almost every aspect of the business, from sales, to marketing to training and even data analysis. There are competing priorities even inflight (safety above all, service second, and retail a distant 4th or 5th if you’re lucky). People and systems frequently do not communicate across business units and have competing budget and revenue priorities. Data resides in multiple silos and there is a distinct lack of integration across the entire customer journey. Primary research also unfortunately, largely focuses on the question-answer survey methodology, as opposed to behavioural analysis of real customers and their buying/spending behaviours.
- Airlines (and inflight retailers) have a relatively poor handle on technology and systems – particularly inflight, where bandwidth is scarce and expensive and consequently it is more offline than online. The travel ecosystem as a whole is not powered by technology that drives retail: legacy technology infrastructure still largely supports ticket bookings and operational processes instead of retail. Where there is technology to support retail, it is largely bolted on and therefore not integrated with existing legacy stacks, and 3rd party provided.
- Inflight retail is largely driven by sales out of carts by relatively unmotivated and untrained “sales” personnel and unfair business models. Old hands in the inflight business will comment wryly about how little they can control what happens inflight once the doors close. Those in the business will tell you how 2% of the selling crew contribute 80% of the sales revenues, sometimes more! Cart space and ridiculously high guaranteed rent models along with sky-high advertising rates – instead of consumer preference – largely determine retail product assortments. Airlines almost always seek to transfer as much risk as possible onto inflight concessionaires.
On a more positive note though, airlines actually do possess customer information, spending and behavioural data – it’s just that it sits in silos in loyalty, revenue management, finance, customer service, departure control systems, etc. This information – if harnessed diligently – could actually help airlines engage their customers long before the day of travel and even post-journey.
Airlines are also relatively strong brands, particularly in home bases, and because of the relative length of time (particularly inflight) and sheer number of touchpoints with customers, have the opportunity for sustained engagement, particularly if they are enrolled in the frequent flyer or loyalty programs. This length and quality of engagement airlines have with their customers potentially enables a level of immediacy in fulfilment that other retailers can only dream of.
However, in order to overcome key weaknesses and leverage available opportunities, there is one key thing airlines need to do; a fundamental transformation of mindset.
Transformation Dynamics: Stop with the “Inside-out” thinking paradigm
The worst thing that airlines could continue to do is thinking inside-out.
This is “Inside out” thinking:
There’s actually nothing really wrong with this line of tactical thinking. In fact, it is likely to yield some happiness for some people – for the IT company executive$ executing thi$, for the tech architects of this baby when it is born, and for the Finance teams when they calculate projected IRRs and NPVs over an arbitrary time frame based on all the necessary assumptions. It is even likely to yield actual savings (every cent of which goes back to bottom line. There’s so benefit to be had I suppose.
Will it move the needle on sales though? Where is the focus on what your customers want and need? Will it endear your customers more, to you and to your core brand promise? Or does it basically allow you to finally use the phrase “omni-channel” without a sense of guilt?
Are you therefore playing a finite game, or an infinite one?
5. Start instead with “Outside-In” thinking; Play An Infinite Game
In one of my earlier articles on LinkedIn, I talked about Customer Excellence and how to focus on it in Travel Retail and Aviation. In a keynote for a Civil Aviation Service Summit in China (May 2019), I spoke about the Future of Customer Experience. Both of these contained elements of what I like to call “outside-in” thinking and playing an infinite game.
Let me try translating that practically into travel and inflight retailing terms.
Outside-in thinking would start not at the point which says “We need ancillary revenues, and so what can we sell to get it?” but by asking much more fundamental questions like:
- Who are we and what do we stand for? What is our USP (hint: it should not be price)?
- Who are our customers? Why do they come to us (and not the others)? Do we understand them enough to walk in their shoes?
- What do they need, want and expect from us? What are they complaining about? Are we really listening to what they are saying? Are we asking the right questions of them?
- How are they saying they’d like to interact with us?
- Are we digging deeper into the data that we have, to truly understand what they need, even if they are not telling us? Do we know what data we need but do not have?
- How can we add so much value to their travel journey – be it through retail, service or product – that a deep, illogical desire is created within them to dance every dance with us?
These might sound fluffy and emotional. But fluffy and emotional is exactly what customers are willing to pay premiums for. It’s what they connect with viscerally and emotionally. It’s what they crave and aspire to. It’s what prompts them to overcome logical reluctance to spend money, because spending it equates to being a member of your tribe. It fulfils a primordial human need to belong to, share values and beliefs with, and to proudly wear status symbols of. This isn’t fluff – it’s scientific.
This 3-part series covered a lot of ground! But here are the essential bits in summary:
- We know travel retail generally, and more specifically inflight retail is being challenged seriously in terms of relevance, footfall, conversions, spend per head etc.
- Simply putting your inventory online, without changing your thinking around Purpose, People, Processes and Technology really isn’t going to bring you significant benefit. This is playing a “finite game” at best.
- The real transformation that needs to happen is: realising that the retail war is now fought on 3 simultaneous fronts: (1) knowing your customers, getting their attention and acquiring them for your business; (2) engaging customers with relevant solutions that fulfil needs and wants; (3) enabling smooth or frictionless transactions to take place per customer convenience. And that it is -always- all about the Customer first.
- Airlines and inflight retailers do have access to a large, committed base of millions of customers, thereby having the potential ability to solve one of the biggest problems in business and retail today – customer acquisition. The issue however, is that this customer knowledge and data resides in multiple, disparate silos, and different stakeholders along the customer journey also often work at cross-purposes to each other; airports vs airlines are a classic example of this.
- We are in the age of data. Chances are, as an inflight retailer, you do not (yet) have the right data, or sufficient amounts of it, to truly understand the inflight business or to target your Customers. And airlines (or other traffic sources) are typically not willing to share such data with you. Consequently, you revert back to age-old practices and operations, or place blind faith in “digital transformation” solutions (a.k.a. apps or your shopping website) hoping for the best.
But what if there was a better way? What if ideal, interested and highly relevant (air passenger) traffic could be directed from Source to Merchant (travel retailer), and what if this was also done to a trusted 3rd party marketplace? “Trusted” because it is run by the airline. Now imagine if this was also made available in an offline inflight environment.
This is the future of inflight retail. And yes, it’s possible today.
An ex-airline and travel retail specialist, I am driven by Customer Excellence. I enable startups and established organisations within the travel domain to connect, grow and scale their business internally and externally, thereby delivering Customer Excellence. This is achieved through the strategic mix of social marketing, modern selling, operations and HR advisory consulting, mentorship and occasionally angel investing.
You can find my content on Linkedin & Twitter by following the hashtag #flyvrai.