Sky Connection is launching a major upgrade programme on its railway station duty free border shops at both Lo Wu and Lok Ma Chau, after beating off serious competition to win the five-year concession from Hong Kong’s MTR Corporation last May. David Hayes reports exclusively to Sky CEO Baker Salleh.

 

[From left: Rémy Cointreau Global Travel Retail Peter Sant; Airport Authority Hong Kong Michael Yuen and Sky Connection CEO Baker Salleh unveil the Louis XIII display at HKIA in 2010.]

 

Sky Connection has long operated the furiously busy duty free land border shop at the Lo Wu New Territories frontier railway crossing with China and the separate Lok Ma Chau station concession operation, with Lo Wu alone handling a staggering total of 93m passengers in both directions between Hong Kong and Mainland China.

 

This operation was already worth some $262m in gross revenue to the MTR Corporation in 2010 and includes the Hung Hom station and onboard Hong Kong-Guangzhou duty free shops – as written in black and white in MTR’s most recent tender contract documents.

 

[Left: Sky Connection CEO Baker Salleh]

 

As of January next year when the new concession period formally begins, Sky will also open a new duty free shop at the Hung Hom terminus station in Kowloon, from where non-stop train services depart to Guangzhou in neighbouring Guangdong Province which will also be serviced through a duty free offer onboard.

 

LOK MA CHAU RAILWAY

Sky Connection’s plan to upgrade its shops at Lo Wu and also Lok Ma Chau also follows the company’s earlier retention of its separate Lok Ma Chau railway station border shop concession which was awarded in March and also runs for five years.

 

Having said this, the Lo Wu station duty free shop is the main attraction in the Lo Wu/Hung Hom station and Hong Kong-Guangzhou through train concession package, accounting for more than 90% of the combined US$262m-equivalent gross revenue total recorded in 2010, according to tender documents issued by MTR Corporation.

 

Unknown tp many, Lo Wu is simply one of the busiest duty free outlets in the world considering its modest sales floor area. In 2011 some 130,000 outbound travellers from Hong Kong passed through Lo Wu station every day with a total of 93m passengers travelling in both directions last year.

 

[Most outbound passengers crossing the border at Lo Wu are travelling to Shenzhen station to take domestic trains connecting to the rest of China-Ed].

 

“Our shop covers 400 square metres. It has a supermarket layout and it is congested the whole day. Most customers go for liquor and tobacco because of the big price savings,” said Sky Connection CEO, Baker Salleh in this exclusive interview with TRBusiness.com.

 

[Above: Selection of food at Sky Connection store in Lo Wu]

 

LO WU SHOP EXPANSION

“We recently expanded our Lo Wu shop into what was warehouse and support space which gave us an extra 50 to 60 square metres. We have also played around with splitting the cigarette display into two separate areas carrying different ranges to break up the customer traffic. It’s worked very well and the passenger flow is a lot better. There is a single line zigzag queue to the first available cash desk.”

 

Unlike most airport duty free customers, travellers passing through Lo Wu often have a small duty free budget. Speeding up these transactions is therefore important to ensure a fast customer flow and as many transactions as possible.

 

“We accept the Hong Kong Octopus electronic purse card in our shop. It’s less than 5% of our revenue, but these customers spend less than HK$100 ($12.89) per purchase,” said Salleh.

 

Sky Connection’s plans now involve further fine tuning to facilitate the large number of customers using the store each day, while reducing transaction times as much as possible for individual customers. Sky’s extra efforts are also now all the more focused following the recent loss of its liquor and tobacco license at Hong Kong International Airport (HKIA).

 

“Had we won at the airport we would be spending our time at HKIA; so now what we have said is what we are going to do at the border shop locations is to make them more duty free than supermarket,” said Salleh. “We have set the challenge of putting in airport-class shops at our border shop locations. They will look more luxurious. There will be better brand identification and better lighting.”

 

OPTIMISING OPERATIONAL EFFICIENCY

For the uninitiated, space is literally at a premium at Lo Wu station, which was never designed with duty free shopping in mind and where the location constraints prevent any major expansion in retail space. Customs, Immigration and Quarantine officials all have operational requirements at Lo Wu, where the main priority is moving passengers through border control procedures.

 

[Left: Artist’s impression of Tobacco category at Lo Wu station, Sky Connection store]

 

Given these tight space constraints, optimising operational efficiency is the main way in which Sky Connection aims to improve services at its busy border shop location.

 

“The Customs Department allows us only two deliveries a day, but we think we can be more efficient,” said Salleh. “The only extra space is storage, so we will move the final 40 square metres of storage out, probably next year as Phase 2 of our Lo Wu refit programme,” he said.

 

“We are looking at efficiency with our Lo Wu shop renovation, not just aesthetics – how to serve 130,000-plus people going to China daily passing through that space.”

 

Plans also include changing the passenger flow in the Lo Wu shop while retaining the check-out system and the positioning of different cigarette brands at the entry and rear of the shop.

 

IMPORTED TOBACCO

Salleh said: “The reason for this is we have customers who buy imported tobacco only and then go, so we put imported cigarettes at the front of the shop so these customers get served quickly and do not clog up the rest of the shop.

 

“We have spirits in the middle of the shop in a bigger space and then Chinese cigarettes at the rear. Perfume and cosmetics are positioned across the aisle from spirits; then there are packaged foods, including confectionery.

 

“Imported chocolates are a big part of this, then candies and biscuits are the most popular foodstuffs.”

 

In terms of space allocation, liquor will take up 30% of the floor space in the new Lo Wu shop, while cigarettes will occupy 15%. Foodstuffs will account for a further 30%, while perfume and cosmetics will take up 10% of the total retail area.

 

“Chinese spirits will take up 4% of the floor area and will be located next to Chinese cigarette brands,” said Salleh. “There will be no fashion goods or watches, but we plan to have these in our Lok Ma Chau railway station border shops.

 

HKIA TENDER ‘BIG DISAPPOINTMENT’

“With the extra 40 square metres shop floor space we plan to gain next year we will move Chinese cigarettes further back in the shop and then expand the spirits and packaged foods sales areas.”

 

[Right: Gucci boutique at Hong Kong International Airport]

 

Although losing the company’s liquor and tobacco concession at Hong Kong Airport was obviously a big disappointment to Sky Connection’s management team and its hardworking staff, Salleh points out that total liquor and tobacco sales under the Lo Wu/Hung Hom stations concession are actually larger than the company’s HKIA liquor and tobacco business.

 

“Liquor is around 30% of our Lo Wu sales. It’s mostly Cognac, but what we want to do because Cognac is on allocation… because of this shortage we will try to sell premium Scotch. We want to educate a new generation of Chinese consumers. Taiwan is a malt whisky market, Hong Kong is still Cognac, but it is changing.

 

“We are working with Chivas, Johnnie Walker, Ballantine’s and Macallan to educate a new generation. We will do some tastings with special layouts and trained staff. There will also be brand recognition. We will do this after the extension. That’s why we want more space to go to spirits.”

 

He said this now involves drawing up a calendar of whisky promotions to allow individual brands to be highlighted.

 

ICONIC PRODUCTS

“We are going to focus on a few iconic products, for example, Royal Salute, Johnnie Walker Blue Label and Macallan,” he explained. “We will not do all at the same time; we will organise a tasting promotion calendar with special promotions lasting eight weeks each to give some commitment to brands.

 

“The better promotions are gift with purchase – especially small miniatures of the same spirit with each purchase.”

 

Meanwhile, Sky Connection has also drawn up plans for a major upgrade of its larger Lok Ma Chau border station duty free shopping facilities, where greater available space will allow a more ambitious retail development programme to be carried out.

 

Although smaller than sales at Lo Wu station, duty free sales revenue at Lok Ma Chau still exceeds a very respectable $100m annually and is expected to continue growing in future.

 

“Sales in 2011 were up on the previous year. For Lok Ma Chau our sales were up about 35% because more passengers are crossing there. We have increased the sale penetration rate and increased the per head spend, so we have had a triple effect,” Salleh said.

 

PASSENGER PROFILE

“Most passengers at Lok Ma Chau buy multiple items. Liquor, cigarettes and chocolates are the main items. It’s mostly men. Over 50% are buying – usually it’s two items. The rest is ladies buying liquor and perfume and cosmetics; liquor as a gift and perfume and cosmetics for themselves.

 

[Above: P&C at Sky Connection store in Lo Wu]

 

“Perfume and cosmetics sales at Lok Ma Chau are going to skin care items and not colour cosmetics. These are young to middle aged women who are buying.”

 

Currently around 110,000 passengers cross the border at Lok Ma Chau each day, with 55,000 travelling in each direction.

 

Outbound passengers using Lok Ma Chau station are more likely to be travelling to local destinations around Shenzhen and in Guangdong Province. Travellers cross the border into China at Lok Ma Chau to use the local MTR station that connects with Shenzhen’s MTR rail network and to reach Dongguan station to connect to the rest of China.

 

“Lok Ma Chau is a new railway line and not directly connected to China’s national railway network,” Salleh said. “More Mainland Chinese long distance travellers use the Lo Wu station crossing, while there are more Shenzhen residents and local commuters using Lok Ma Chau.

 

LOCAL RESIDENTS

“Local residents have been to Hong Kong shopping or they work in Hong Kong. There are also other Guangzhou and Guangdong residents travelling who have multiple visas for Hong Kong.”

 

Sky Connection operates four shops at Lok Ma Chau station with a total floor area more than five times that of Lu Wu station shop. Two of the shops serve departing passengers, while the two other shops serve arriving travellers.

 

Sky’s two departure shops both sell a mixed assortment of duty free goods and are positioned either side of a concourse that departing passengers enter after passing through Hong Kong Immigration counters.

 

The two Lok Ma Chau arrival shops are arranged differently, with one stocking spirits and wine, though Salleh pointed out that all liquor under 30 degrees is non-dutiable in Hong Kong.

 

The other arrival shop sells general merchandise, including packaged foods and confectionery.

 

LOK MA CHAU RENNOVATION

Sky Connection will begin the Lok Ma Chau renovation scheme as soon as plans are approved by MTR and relevant authorities. Refurbishment is expected to take three months to complete, with work being carried out overnight when the railway border crossing is closed from 10.30pm each evening to 6.30am the following morning.

 

[Right: Artist impression of P&C category at Sky Connection store in Lo Wu]

 

Both departure shops cover 700sq m each and currently sell a mixed category of goods. Following renovation, one shop will become a liquor and tobacco store while the other will sell perfume and cosmetics and general merchandise.

 

“We will have a big liquor and tobacco shop at Lok Ma Chau. We want this to be the best duty free liquor shop in Hong Kong and rivalling Hong Kong Airport,” Salleh said. “We are doing this liquor and tobacco shop to make a statement that this is one of the best liquor and tobacco shops in Hong Kong. It will look as good as our HKIA airport shops now.”

 

The demographic profile of passengers using the Lok Ma Chau railway crossing is different to passengers at Hong Kong Airport and Sky Connection will consequently tailor its upgraded duty free border shopping offer to cater to railway travellers’ different needs.

 

“We would like to make this a “Wow” experience. We allocate the right amount of space for an impactful presentation at the shop front and for product promotion,” Salleh said. “These are different customers at Lok Ma Chau to Hong Kong Airport. These are middle class consumers. Their knowledge and tastes are different to airport passengers.

 

SCOTCH

“We will to try and bring products in front of them to educate a new generation of consumers about single malts and aged Scotches. There should be no problem to get the quantity we want, as we have the shelf and floor space at Lok Ma Chau.”

 

[Left: Liquor category at Sky Connection store at Lo Wu]

 

Meanwhile, planning is continuing for the new spirits promotion programme at Lo Wu and Lok Ma Chau. The calendar will be organised to tie in with suppliers’ own marketing and promotion efforts in the mainland spirits market.

 

“Our liquor promotion plans will be the same at Lok Ma Chau as Lo Wu, but we will have more space at Lok Ma Chau,” said Salleh. “We probably will have the same brand promotions at both Lo Wu and Lok Ma Chau. We are still working on the idea with suppliers, so it could be a different promotion in each location.

 

“We can work with brands in line with their China domestic sales and marketing programme. We will increase brand exposure, but dovetail with what they do in China for marketing with promotions at our border shops. Almost 250,000 passengers go through these two railway stations daily that will be exposed to these whisky brands and tastings.”

 

With liquor and tobacco displayed in one shop, the other departure shop will be used to sell the remaining duty free categories.

 

Perfume and cosmetics, watches and jewellery will be displayed at the front of the shop, while packed food and confectionery will be situated in the centre. The remaining area will be used to display leathergoods and other items.