Job losses in black & white and blurring lines in grey

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Martin Moodie
Martin Moodie is the Founder & Chairman of The Moodie Report.

“I didn’t just burn the candle at both ends, I was also finding new ends to light.” – Jerry Jeff Walker, RIP (1942-2020)

After 9 months and 23 days I finally had a day off in 2020 yesterday. No, I promise I am not starting to slacken off: a chronic bout of food poisoning did for me and in the wee small hours before daybreak here in Kowloon I am just starting to get my land legs – and typing fingers – back.

Perversely, this round of non-serious (albeit non-pleasant) illness may have been good for me, allowing me to focus on matters other than work for a day and reflect on life, family and of course health.

Those of us who retain work and (usually) good health must count ourselves doubly lucky. Everywhere, and I mean everywhere, around the world many are less fortunate on one or both scores.

Soon to be among them are thousands of Cathay Pacific workers, following this week’s announcement that the airline is to slash its workforce by 6,000 globally and axe the previously successful sister airline Cathay Dragon. Among them already are countless individuals from the aviation, tourism and wider travel retail sectors, their prospects and those of their employers laid bare by the relentless march of this damned pandemic.

By now, we all know those who have been more directly touched by COVID-19 – those who have passed, lost family members, or battled the disease. The case and death tolls in much of the world continue to surge, offering little hope for real respite until proven treatments and vaccines are found, especially in the face of much government mismanagement and widespread civic irresponsibility.

Here in Hong Kong the health, though not economic, prognosis is more promising. Similarly so, though more modestly, for the tourism and travel retail sectors. The Special Administrative Zone reported just five new infections yesterday, only one of them a locally transmitted case. Continued encouraging numbers from Mainland China – only 13 locally transmitted cases this month – and improved ones from Singapore (just eight local infections over the past week), show what a combination of strong government and collective social responsibility can achieve.

Singapore is now poised to extend its ‘air travel bubble’ scheme further, having on 15 October jointly announced with Hong Kong its imminent implementation between the two locations. The agreement permits all types of travel, including leisure, in contrast to Singapore’s previous six ‘green lanes’, which allowed only essential business travel. According to the Singapore Tourism Board, 417,000 Hong Kong citizens arrived through Changi Airport last year so the numbers are not insignificant.

All this tells me that we should stop talking about when travel retail as an industry or sector will recover but break it out country by country, or more accurately country to country. The combination of China’s impressive control of the disease and the value of Chinese trade and tourism to other nations means that its citizens will play a key role in refuelling some Asia Pacific travel markets over coming months.

Grey market flood

However, the propensity of those travellers to buy in duty free might be compromised by the flood (or tidal wave to quite legitimately stretch the analogy) of parallel product now finding its way onto Chinese shores and wreaking havoc on local market pricing structures.

“With the whole world closed, China has become the magnet for a lot of merchandise worldwide,” one leading brand company executive told me this week. “There was always daigou and there was always a lot of product coming from Korea especially. But nothing like this.

“Today the only market that continues more or less functioning from a demand perspective is China. So if you go to any of the Taobaos or JD.coms of this world, you can buy products much cheaper than the net billing price at which company affiliates sell to their [Chinese domestic market] retailers.”

The parallel or grey market has always been a fact of life in the domestic market and duty free channels and many of its constituent product categories, most notably liquor and beauty products. But now, both it, and the intrinsically related daigou sector, are swelling in importance as the tourism industry remains moribund in most parts of the world.

If you can’t sell stock through your traditional direct-to-consumer channel you need to find alternative means and that irresistible logic has driven an outpouring of product into China, both from duty free retailers and others.

“The problem is that there is so much stock from all brands floating in the marketplace right now,” one leading beauty house executive told me this week. “It’s quite easy to buy anything you want. The industry is suffering a lot – and its reputation is at stake for a lot of reasons. There is a lot of wholesale in the market, there is discounting all over the world.”

Even in unexpected places. On Friday we published a story about a Changi Airport Group-controlled website called Getit by ChangiRecommends, which has generated booming sales in recent months of heavily discounted alcohol, cosmetics, fragrances and a wide range of other items.

“If you go on the website now, nearly every single one of the market-leading alcohol brands are on -35% discount,” commented one senior source in the drinks business. “They would be losing money from alcohol without any question.”

And where’s much of that product coming from? You guessed it, the parallel market. Getit by ChangiRecommends, a 100%-Changi Airport Group operation, is buying cheap and selling cheap (sometimes cheaper), in the process gobbling up market share over rival Singaporean e-tailers such as the Falic Group-backed Paneco. Google Paneco Singapore and you will first see an ad for Getit.ChangiRecommends, underlining the latter’s promotional acumen and pricing aggression.

The message is pretty clear. But what does it spell for Changi Airport Group’s own duty free business, either in-store with Lotte Duty Free and The Shilla Duty Free or online with them and other partners at iShopChangi.com? The latter, an attractive platform selling conventionally sourced product, has done a good job of pivoting since April into selling to non-travellers (by definition almost the entire population of Singapore) with an online procurement, home-delivery model.

But if its sister business undercuts both its buying and selling prices through adroit deployment of the parallel market (even selling ‘travel retail exclusive’ product from the likes of Estée Lauder – not, for the record, sourced from Shilla) then what?

What happens to the duty free ecosystem? To consumer perception of duty free value? To the arrivals business (which historically has accounted for at least 60% of Changi sales for some liquor brands)? What does it mean for Changi retailers, Lotte and Shilla in particular? Paying high rents but competing with their own landlord? What are the repercussions for local market retailers undercut by a government institution? And what if, as is possible with uncoded product, counterfeit (and therefore potentially unsafe) product gets into the mix (a prospect firmly rejected by Changi Airport Group, see statement below)?

“Why would you run a parallel site undercutting everyone?” one liquor supplier asked me. “It doesn’t make any sense. What you’ll end up doing is completely killing travel retail. The domestic retailers will then respond, and prices will drop. Why would you bother buying anything duty free at the airport [on arrival] if you now don’t have to carry it and you can just get it delivered at home?

“Everyone is trying to get a piece of the pie during the crisis. But at the end of the day, no-one’s thinking through that you’re going to kill the goose if you’re not careful.”

“CAG and its subsidiaries do not deal in fake goods. We take the greatest care in how we source for our products and will deal only with legitimate distributors, whether through their travel retail or domestic arms. For those unable to supply us with products that our customers want, we will speak to reputable and established parallel importers. Sourcing from these suppliers is common and legal in Singapore.” – Changi Airport Group

To be fair to Changi Airport Group, the government-backed business faces ferocious financial pressures. These were outlined in graphic detail by Singapore’s Transport Minister Ong Ye Kung in a searing and memorable address to parliament on 6 October when he unveiled the government’s plans to negotiate Air Travel Bubbles with countries or regions deemed safe.

“Compared to pre-COVID-19, Changi Airport is serving 1.5% of our usual passenger volume and 6% of the usual number of passenger flights,” Ong said. “The numbers are stark because Singapore has no domestic travel.

Singapore Transport Minister Ong Ye Kung: Changi has fallen from seventh-busiest international airport to 58th since the COVID-19 crisis began

“We now have direct flights to 49 cities in the world compared to pre-COVID-19 160. We were the seventh-busiest airport in the world for international passenger traffic. Today we have dropped to 58th place. Two key companies in the aviation sector are facing a deep crisis. They are Singapore Airlines (SIA) and Changi Airport Group (CAG). SIA recorded its largest-ever quarterly loss on record in the first quarter of fiscal year 2020.

“Changi Airport Group, too, has lost its revenue streams. With low passenger volumes and flights, the amount of service charges it is collecting from airlines and from passengers is miniscule. Shops and restaurants at the airport are seeing far fewer customers and many shops have closed. CAG is also dipping into its reserves while preserving cash and retaining its core capabilities.”

It was an outstanding speech, a clarion call of sound logic that cut through the fog of so much political claptrap of recent months like a laser beam. But isn’t being a great travel retail location one of Changi Airport Group’s ‘core capabilities’? Is GetIt by ChangiRecommends undermining that capability?

Not so, insists Changi Airport Group. A spokesman told me that iShopChangi and GetIt by Changi Recommends are two distinct platforms to meet the needs of different customer segments. A spokesperson told me: “The brands that we have talked to agree that the ecommerce market is increasingly dynamic and they themselves are rethinking the traditional differentiation between travel and non-travel retail.” (For full Changi Airport Group statement click here).

Parallel yes, fake no, the spokesperson said in a robust defence of Getit by Changi Recommends’ procurement and pricing policies. “CAG and its subsidiaries do not deal in fake goods. We take the greatest care in how we source for our products and will deal only with legitimate distributors, whether through their travel retail or domestic arms.

“For those unable to supply us with products that our customers want, we will speak to reputable and established parallel importers. Sourcing from these suppliers is common and legal in Singapore. For some high-demand product categories, they offer highly competitive prices benchmarked against other e-commerce platforms as a way to also adapt to the new business environment and customer needs.

“Regarding pricing, we do not have a strategy to price dump, but sometimes our prices may be below the recommended retail price if this is what the rest of the market is offering. We have to be price competitive, otherwise our business cannot succeed.”

And there you have the conundrum writ large. Take away the lifeblood of travel retail, i.e. the traditional passenger density, and diversification of revenue streams becomes imperative. How that diversification plays out and how the new world of ecommerce takes shape will have a profound influence on the travel retail landscape of the future. The fate of that goose is looking increasingly uncertain.

Daybreak in the Moodie Davitt Report Interim Hong Kong Bureau. Is it also a new dawn for the duty free sector as the lines blur between channels?

 

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  • Perhaps all the official sources should stop supplying CAG if they are not being fair to their operators in approaching the market place?