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Egypt duty free enters new competitive era
Source: BI-ME; Gulf Africa Duty Free , Author: Trevor Lloyd-Jones
Posted: Tue October 31, 2006 12:00 am

EGYPT. With the tender for Cairo airport’s T3 duty free retail contract now open and the award of Sharm El-Sheik to Dufry and Egyptair Tax Free in two parts, duty free retailing in Egypt is entering a new ambitious phase. What’s more, the signs for tourism and investment in transportation have never been as positive for the country as they are now.

At the time of the award of the concessions for Sharm El-Sheikh duty free in March, the talk in the industry was about the much modernized approach of the Egyptian Airports Company (EAC) in its approach to rentals, the allocation of airport spaces and commercial revenues generally – all of which add up to a much better future for retailers and for traveling consumers.  The hot competition, with incumbent Egyptair Tax Free (and its consultant Aer Rianta International-Middle East) going up against global players like Dufry, Aldeasa, Lebanon’s Phoenicia Trading, and Cairo Airport Duty Free/Chalhoub Group, showed that Egypt has arrived with big growth forecasts and many operating improvements in the pipeline that are not available in many other parts in the world.

Sharm El-Sheikh was considered the big prize, and it is interesting that EAC had accepted separate offers for the existing (Dufry) and the new terminal (Egyptair), even though all retailers had bid aggressively for both parts together.

New approach to airports

Even as the dust settled on the tender results, one of the losing bidders MAC/Cairo Airport Duty Free was turning its attention to its latest new operation at El Alamein Airport. Egypt's second Build-Operate-Transfer (BOT) airport, which became operational last year, has been receiving a growing number of tourist flights from the UK and Italy, with visitors interested in the site of one of world war two’s famous battles. Traveller Duty Free, the concept of MAC and Cairo Airport Duty Free has hopes for growing the business there since winning the duty free concession.

“The Ministry of Aviation is doing a good job and with the other developments in Borg El Arab and other airports we expect a lot of developments in this area,” says Nadia Rashad, MAC/Cairo Airport Duty Free Managing Director.

“El Alamein is small but there are big development plans for the North Coast. We are waiting for other developments, but for now the airport is busy mainly in the Summer with Egyptian visitors.”

More and more charter flights are being added in El Alamein, raising hopes that the airport will stimulate tourism on the undeveloped North Coast, a key area in the government’s tourism strategy.

The new airport is owned and managed by the International Company for Airports (ICA), a subsidiary of KATO Group, which won the contract of Al Alamein Airport project with a 50-year BOT concession, which could be extended to 99 years. The US$140 million airport project will be implemented in three phases. The first phase, which has already been completed, includes the construction of a passenger terminal and a runway allowing for the landing of all classes of aircraft, including the giant new Airbus 380-800. A phase-two upgrade will increase passenger handling to 1,200 pax/hour in 2015, with phase three reaching 2,000 pax/hour in 2028.

Under the contract, ICA was awarded a total area of 64 square kilometres for the project. Since the airport is sitting on 14 square kilometres, a number of projects are currently being studied for implementation within the airport perimeters. Among these projects are a FAA-certified flying school, a tax free zone, an industrial park and an agricultural area for organic products.

The German carrier Lufthansa has expressed its interest in Al Alamein Airport as well. It recently revealed plans to invest in the cargo village project with a cold storage facility. Lufthansa is planning to allocate an estimated US$40 million for the project, which would greatly enhance the airport's operations.

Borg El Arab Airport in Alexandria is receiving a US$55 million upgrade to serve half a million passengers every year, while Sharm El Sheikh Airport is being upgraded with its own US$60 million second terminal that will add capacity of 4.5 million passengers.

Traveller Duty Free believes that Libya and Sudan – two markets with an oil boom in waiting - will grow to be good markets for international brands in five years time. For now cooperative shops, mainly for the army, and the budding Gebr Heinemann backed operation Sabratha Duty Free in Libya are the main outlets for luxury products.

At the same time in the Egyptian market, we can observe a domestic retail sector that is completely opened up over the past four years, which combined with a strong economy and the government’s liberalization agenda, is growing the spending and awareness of Egyptian consumers As a result, Egyptians are becoming much more important as a target for duty free retailers, even whilst foreign tourist numbers are continuing to rise.

Downtown raises the bar

The soft opening of the ARI/Egyptair-managed downtown duty free store in Cairo’s latest mega-mall CityStars last August was a visually stunning addition to the market, but it was suffering from some administrative obstacles at the time we visited. Off-airport operators have to provide a bank guarantee equivalent to full amount of the duty levied on the products held in stock (including any broken bottles or products lost through shrinkage). Diplomats and arriving passengers can bring their families to shop up to 48 hours after their arrival, compared to one month three or four years ago. Expats can make their bulk shopping four times per year, and the arrivals allowance for Egyptians (and visitors) is available twice per year.

These factors combine to make downtown duty free quite a different environment to airports, shown in the fact there were some temporary gaps in stock at opening time, but with a big emphasis on branded luggage, a very large perfumes area and multi-packs such as three litre beverages, three-carton packs of cigarettes, and eight bottles of wine sets. Working with hotels and travel companies, such as Egyptair’s own subsidiary Karnak, is important. CityStars itelf is Cairo’s most successful and only true international-quality mall with wide appeal.

According to ARI-ME, a lot of Egyptian customers come to browse in advance of their purchase or their trip. Shop-in-shops include the well-known regional jeweler Damas and Hugo Boss, recently opened, both in prime position.

ARI-ME’s lead consultant in Egypt Seamus Clune comments: “Luggage, and in particular brands like Delsey and the local brand Villager, has exceeded all our expectations and hence we moved it to the entrance. Confectionery was another surprise and we stock all types, especially family confectionery rather than the high end, and brands not available in the local market.” He adds that with 40% import tax on confectionery it is possible to offer good price savings. And ARI and Egyptair say they are constantly seeking new ways to encourage passengers to spend in arrivals and raise the average spend.

Wines - with big French brands such as Mommessin and Calvet - and fashion are the other important categories downtown. “We are trying to bring in more collections, although the Egyptians like more spirits and arrivals here is predominantly a whisky market,” explains Clune. The store also has its own customs desk and the only Casa del Habano cigar store and walk-in humidor in Cairo. Whilst the trend is to personalize more of the brand areas in the period since the store opened (especially in confectionery and luggage), Egyptair says it is pleased with the concept and with the ARI-ME consultancy relationship.

Until the domestic retail opens up more in Egypt, with lower tariffs on imported goods (and the first monobrand stores like MAC, Chanel or Ralph Lauren), that are on the way, there is still an obvious role for downtown duty free. Standards are rising in all aspects of life in Egypt - cars, mobile phones and clothes – and the population is very young (60% under the age of 30). The population by 2010 is forecast to be 100 million people. Tourism from China and India is rising and the government has a target to increase visitors by a figure of one million every year.

For now, arrivals business  is mainly Egyptians and some tourists from the Gulf area, especially the 2 million Saudis that visit every year.

Egyptair growing by leaps and bounds

At the time we visited the company, Egyptair Tax Free had just opened its latest store in hall three-terminal one, according to the new design guidelines conceived with assistance from ARI-ME.  Turnover has been rising steadily at 10% per year, and this growth increased to 20% in 2005.

To give an another example of this strong growth, Egyptair’s main terminal one departures store in Cairo had sales of US$5 million in 2004, which doubled to US$10 million in 2005, even though the new Cairo Airport Duty Free opened there in 2005, taking another US$10 million slice of sales. Tawfik Assy, Chairman of Egyptair Tourism & Duty Free, took over at the end of 2005 with an agenda to modernize and improve relations with the airports company and the two foreign consultants working in the sector, Fraport Airports Worldwide (for Cairo) and Aeroports de Paris (regional airports).

Assy says that Egyptair has store renovations “everywhere” during 2006, including Cairo T2 and Alexandria International Airport. It also has a major recruitment programme underway. In short, after many years, the company is suddenly getting the resources it needs to go forward.

“Egypt is tough for some suppliers,” explains Assy, referring to the ups and downs of previous years and some of the remaining elements of bureaucracy and licensing required to import goods into Egypt. “But now we are getting more supplier support and they are helping to build the whole concept of duty free in Egypt. We will extend our website, but I would say that we do need more IT support from our suppliers.”

The company opened in one of the new resorts El Gouna on 1 April and in Luxor it is already working to extend in the concourse, itself only recently opened, with help from ARI-ME.

Assy explains that the influence of foreign consultants like AdP and Fraport has been beneficial to all parties, but it has dramatically increased the rental demands, from what were previously very low rentals in international terms. “These companies are working as a consultancy and not a management agreement, so in the final analysis they are a cost and they have to make a return in revenues from shops and aviation,” explains Assy. Meanwhile – now that aviation is no longer one government body with different sectors - average spend per passenger across the Egyptair Tax Free network is increasing dramatically from the US$1 per international passenger, and 50 cents per domestic passenger that was the norm.

Everybody has had to change, including Egyptair and the two airports holding companies that were formed when the Ministry of Civil Aviation was re-established in 2002.

“Egyptair Duty Free was established in 1963 as the first in the Middle East, and all these years nothing has been done, until the last three years,” says Assy. “We have started to develop and change both the image and the structure of Egyptair.” He adds that the business atmosphere has also seen a dramatic lurch toward competitiveness. Whereas a one square metre space in an airside area could be rented for EGP0.5 prior to 2002, that same space now costs EGP50.

Corporate changes on the horizon

Egyptair is preparing to bid aggressively for the Cairo new terminal three that will be crucial to the future of the company. The company meanwhile holds the five-year concession for all of Cairo airports terminals one and two up to 2009, with a heavy Minimum Annual Guarantee of EGP44.5 million (US$8-9 million). “This puts a lot pf pressure on our company compared to our previous revenues,” explains Assy. “Terminal three will be a new challenge for us, but we believe we can help Cairo International Airport now and with the changes to its image in the future.”

On the corporate side, Egyptair Duty Free has been a standalone company, owned by the parent airline, since July 2005. Judging by the government’s active privatisation programme, and by the 40% sale of Egyptair Catering to Gate Gourmet, there will be further challenges and possible new partnerships and joint ventures ahead. Assy explains that the store concept and the sheer quality of the CityStars store is what he is looking for, although no new downtown stores in Egypt are being planned. Other downtown operators such as Egypt Free Shops Co (EFSCO) are most likely to take advantage of the off-airport retailing in resorts such as El Gouna or Sharm El-Sheik, as well as domestic market monobrand boutiques that are being eyed by MAC/Cairo Airport Duty Free.

To give some idea of the tourist infrastructure in the pipeline for Egypt’s new resorts, some 25,000 hotel rooms have been announced as under construction at El Gouna. Another 30,000 rooms are underway in Hurghada and 25,000 in Sharm El-Sheik with another 25,000 that are planned for later phases. This compares with the 30,000 rooms that are in the pipeline for Dubai.

For now Egyptair still faces a lot of problems with the trading environment in Cairo airport. Some of the plans for T3 are already becoming clear, for example it will connect to T2 by a pedestrian bridge, which has some implications for passenger flow and future planning.

“Fraport now want to help us and it is for their sake also,” says Assy, adding that the airport authorities are now coming forward with a lot more information to assist in marketing and planning.

Egyptair is currently ahead of its 2006 forecast and attempting to reach US$100 million revenues this year, which is a major leap from the US$35 million achieved in 2003. Some of this is being driven by the big changes at Luxor airport, but with all points of sale contributing to the growth, over and above the growth rate of traffic.

After spending 35 years as a pilot, Tawfik Assy is now flying straight and true, and he wants to take advantage of the current and future shopping boom in a successful relationship with ARI-ME.

About the circumstances surrounding the appointment of ARI-ME to drive the company forward, Egyptair says it held talks with several international companies including Gebr Heinemann and others.

“They asked to take the purchasing, stock and supply only. But this was not the main point for us,” explains Assy. “ARI accepted to be a consultant and in this respect there were also political issues for my staff. We said to them you give us the know-how and we will help you with the Egyptian culture and regulations….We are extremely satisfied with the relationship and ARI will help us with anything we ask.”

“My philosophy is do whatever the others do, and don’t try to create special procedures,” he says. “Our business is international and in line with this we are updating all our procedures, merchandising policies, staffing, purchasing and IT systems. Previously nothing followed the international system.”

 Egyptair Duty Free sales growth 2003-2006

2003 US$35 million
2004 US$47 million
2005 US$63 million
2006 US$73 million forecast

Egyptair Duty Free Free store openings 2005-2006

• 2,000 square metre facility in Stars Centre, City Stars Heliopolis, Cairo
• 170 square metre shop in hall 3, terminal one, Cairo International Airport
• Five individual duty free shops in Luxor of approximately 440 square metres catering for self service (alcohol/tobacco), perfumes, Egyptian souvenirs and fashion in international departures, and an Egyptian souvenir shop in domestic departures
• 225 square metre shop at the Marina in El Gouna
• A 22 square metre shop in Borg El Arab arrivals hall, Alexandria International Airport
• 10 square metre shop in terminal two, Cairo International Airport

Egyptair Duty Free sales growth by location (first half fiscal year 2005-2006)

Cairo +15%
Luxor +44%
Hurghada +11%
Alexandria +37%
Taba +6%

 

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