New Delhi: India may have to wait longer to catch up with the rest of the world in airport retail, judging from the response to last month’s call for bids to run duty-free concessions at six small international airports.
Four out of the six have received no response, according to the Airports Authority of India, or AAI. That reflects retailers’ scepticism about their revenue earning potential amid an economic downturn and impatience over bureaucratic red tape.
There were no takers for duty-free retail space at Jaipur, Lucknow, Amritsar and Thiruvananthapuram. Coimbatore airport received two bids—from Dubai-based airport retailer Flemingo International Ltd and state-owned India Tourism Development Corp., or ITDC— and Pune airport got one from Flemingo.
Cumbersome work: Pantaloon Retail managing director Kishore Biyani says one has to deal with too many agencies in duty-free retailing. Hemant Mishra/Mint
The poor response—the results of the bidding were declared in the second week of January—was a setback to efforts to promote airport retail and upgrade existing airports. Passenger traffic is declining as the US and Europe struggle with recession and Indian economic growth slows.
Airport retail had been seen as a potentially attractive opportunity in India. In a September study, real estate consultant Cushman and Wakefield said about 78 million sq. ft of retail, commercial and hospitality space would come up by 2015 with 40 airports being upgraded and seven new ones built.
Globally, non-aeronautical revenue comprises 70% of airport revenue. In India, the proportion was 35% in 2007. The study by Cushman and Wakefield said that by 2015, the share of non-aeronautical revenues would likely grow to 54%. And by then, retailing would constitute a healthy 27% of non-aeronautical revenues, it said.
But such projections have failed to enthuse retailers. In November, the country’s largest listed retailer, Pantaloon Retail (India) Ltd, exited a 50:50 joint venture with international airport retailer Alpha Group Plc. and sold its stake to the foreign partner. Alpha Future, the joint venture set up by the two partners, had in 2006 won a bid to operate duty-free stores at New Delhi’s international airport for about Rs500 crore for three years.
“We are completely out of this (duty-free retailing at airports). It doesn’t suit our style of business,” said Pantaloon Retail managing director Kishore Biyani.
Most operators and industry experts say revenue projections for duty-free retailing are unrealistic.
“In India, everybody suffers from overestimation… After bidding, you realize that the revenue targets were unrealistic,” said Kapil Kaul, who heads the India office of Centre for Asia Pacific Aviation, an aviation consultancy.
In 2007, Mumbai International Airport Ltd (Mial) terminated a previously awarded contract for duty-free retailing to a joint venture between Spanish airport duty-free retailer Aldeasa and state-run ITDC after they sought renegotiations.
The Aldeasa-ITDC joint venture had guaranteed a revenue of Rs571 crore to Mial for three years, but realized the projection was unrealistic. Mial, instead of renegotiating the deal, handed it to Hong Kong-based luxury retailing firm DFS Group Ltd. This time, the contract was awarded for a lower revenue guarantee amount of Rs260 crore.
A top executive at a foreign duty-free operator, who did not want to be named, said his company did not bid for the six airports in December because operating stores at Indian airports was an expensive proposition.
“There is a mismatch between the number of passengers expected to travel in these airports and the kind of money AAI is asking for. We thought it wouldn’t be commercially viable for us,” the executive said.
According to retail industry estimates, a passenger spends less than $3 (Rs147 now) on average on shopping at Indian airports, compared with a global average of $15.
Some retailers also find the process of bidding for concessions and operating at Indian airports too bureaucratic and cumbersome. Biyani blames high operational costs as well as the bureaucracy for his decision to pull out of duty-free retailing. “There are so many agencies you have to deal with. It makes the whole process too cumbersome,” Biyani said.
Industry observers say that non-metro airports will take some time before they become attractive from the retailing point of view.
Kaul, however, expects duty-free retailing at the New Delhi and Mumbai airports to get a boost once the first phase of their modernization is over by 2010. By then, a substantial amount of retail space in standard global formats would have come up.
New Delhi airport will develop 5%, or 250 acres, of the roughly 5,000 acres of airport land for commercial activities such as malls and hotels, according to its developers, Delhi International Airport Ltd.
The first phase of the development is expected to come up before New Delhi hosts the Commonwealth Games in October 2010. “Real retailing will start only after that,” says Kaul.