One on One with Peter Brain, FDFA President
The Canadian land border duty free business is being bombarded with serious challenges that threaten sales all along the northern side of the U.S./Canada border, says Frontier Duty Free Association (FDFA) President Peter Brain.
“The land border industry is struggling to maintain healthy land border duty free savings levels in the face of several factors: free trade agreements; aggressive price-based competition in the U.S.; massive distribution and availability of products through internet and specialty discount retailers; plus mergers, acquisitions and reorganizations within the liquor and cosmetics segments. Our consumer research completed by Deloitte in recent years solidly reconfirmed what we already knew; that savings is the number one reason for shopping duty free,” he tells TMI.
“As niche retailers with a limited product breadth relative to mass-market discounters and internet retailers, we have to ensure our duty free offering continues to provide trusted and compelling value. Otherwise, it will become more and more easy for consumers to transfer purchases away from duty free to other sellers.”
Partnerships key
Brain says Canadian duty free opera- tors need to work more closely with their partners to give consumers the best shopping experience in their stores, reiterating how important low pricing is to generating sales on the border.
“We must convince our suppliers that we are first-rate partners who can showcase and retail their products exceedingly well in accordance with agreed plans, so that they will continue to invest and support our place in the overall retail landscape. With many changes in personnel and organization within major suppliers, we have to ensure new staff are fully educated on the needs and expectations of our customers.
“In liquor we have seen massive changes through mergers and acquisitions, reorganizations, and changes in personnel serving our industry. Some large suppliers are attempting to implement consistent world pricing models that ignore unique local market characteristics. This does not work well at the U.S. land border due to its dynamic and highly price competitive nature. Some new supplier sales staff are not well- versed in land border duty free versus airport and domestic markets, and what makes land border succeed. As with cosmetics, we must be able to offer compelling savings to prevent a migration of sales to our larger domestic competitors.
“We are trying to partner better with key suppliers who understand our market and are willing to support our business model, since it is a great showcase for leading brands and stable channel when the pricing is set right. We need to demonstrate, like larger airport operators, that we are aggressive and capable of consistently executing solid retail sales and marketing plans that will grow our businesses.”
The growing sophistication of retailing is another development that is making it critical for all the land border shops to work together, argues Brain.
“What was our greatest strength when our sector started up in the 1980s – that we were small-medium sized businesses each run by aggressive entrepreneurs – is now be- coming a weakness. Today with competitors using big data, economies of scale in marketing and market coverage, immense purchasing power to drive down costs, and other sophisticated strategies we will have to work better together to keep up. Otherwise we cannot achieve economies of scale or complexity when it comes to such things as branding, marketing, assortment planning, staff training and buying. Failure to work together could weaken our industry over time.”
Changing Tobacco
The land border stores need to find new products to replace the sales of tobacco, which was once the cornerstone of Canadian duty free, but is now around 25% of the land border business.
“Given the slow erosion of tobacco in our sector, and competition in the cosmetics segment, we have to improve our assortment planning and buying in non-core product areas also,” he says.
“Emerging tobacco laws and taxation levels also present a challenge. As tobacco taxes raise per carton retail prices, consumers are smoking less and in most cases they are purchasing by the pack and not the carton. Also, illicit tobacco remains a challenge, particularly in Ontario and Quebec where illegal smoke shacks often sell off-brands well below even duty free prices. The industry has to better educate lawmakers that duty free is perhaps the most responsible tobacco sales channel, since the sites are not accessible by unaccompanied minors, we sell only by the carton, customers visit infrequently mostly during periodic cross border holidays, and we follow the letter of the law without exception in terms of not selling to minors. We are not a market that potential new smokers even consider due to these policies and locational realities.”
“These are all tough challenges. Whether we can rise to them is largely dependent upon how much land border operators have matured in 30 years, in terms of being able to recognize that we are not competing with one another, but rather are mostly competing for the consumer against sophisticated U.S. domestic non-duty free retailers. Only by accepting this can we bind together and raise our retail sophistication and marketing impact to the level needed to compete effectively in today’s market. Only by demonstrating consistent high quality retailing will our suppliers continue to view us as a first-rate retail partner worthy of support and investment to advance their brand ambitions.”
