Airport retail: Leverage from international visitors

Airport retail companies are witnessing their gross profit margin to almost revert to the pre-pandemic level in 1H22. 

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Airport retail is a business model with superb profitability thanks to its low price sensitivity in consumer behavior of tourists, leading to the airport retailer’s ability to set a much higher price of goods for a high GPM without reducing its purchasing power. Operating expenses mainly include cost of goods sold, costs of sales staff and space rental cost, all of which are relatively stable and easy to control. Goods sold are paid in cash with relatively fast turnover, resulting in low receivables, low inventories and low working capital requirements.

However, airport retail industry has a high barrier to entry, especially at key airports due to limit ed airport space. Besides, most airport store leasing contracts allow the lessee to extend the leasing period when the term ends, making it difficult for new competitors to enter, or even existing enterprises to expand their store chain.

Therefore, there was not much room for airport retailers to expand its airport retail segments before FY19. However, the arrival of the Covid-19 pandemic has caused severe difficulties for the aviation industry, but also brought opportunities for enterprises with financial strength to stand firm and expand its retail chain amid the pandemic.

Airport retail companies are witnessing their gross profit margin to almost revert to the pre-pandemic level in 1H22. However, as the airport retail businesses have a high correlation with international passengers, current airport retail revenue is still low.

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Giving the international air traffic recovery expectation from 4Q22, Mr. Nguyen Dzung, senior analyst at VNDirect, believes airport retail companies’ performance results may recover with positive earnings in 2022F and earnings may increase sharply from 2023F when international arrivals recover strongly. Of the airport retailers, he highly appreciates AST as it has turned challenges into opportunities to expand its business in the context of the entire aviation industry that was hit hard by the Covid-19 pandemic. AST is also the most profitable business among its peers in the pre-pandemic period.

Notably, duty free retailing is the most potential business of airport retail segment in the coming years, in Mr. Nguyen Dzung’s view. According to Adroit Market Research, the global duty-free retailing market is expected to be worth USD112.75bn by 2025F, implying a CAGR of 6.5% in FY22-25F. Increasing number of low-cost airlines is leading to an increase in the number of tourists which is further driving the sales of several goods at duty free retail stores at diverse areas including airports. Increasing foreign tourism in Vietnam is the key aspect driving the growth of the duty-free retailing market.

According to Statista, Vietnam’s revenue of luxury goods in FY16-19 grew at a CAGR of 14.6% and may grow at a CAGR of 7.6% in FY22-25F from a high base in FY21. This is a strong support for the prospect of Vietnam duty free retailing in the coming years.