TRBusiness discussed Heathrow’s retailing economics and market headwinds and tailwinds in a context of rising passenger numbers.

In an exclusive three-part exchange filmed on location at Heathrow Airport Terminal 2: The Queen’s Terminal, Fraser Brown, Retail Director of Heathrow Airport sets out the push-and-pull factors influencing the London Hub’s fiercely competitive commercial environment spanning circa 350 retail and F&B units at its four terminals.

TRBusiness’s visit to Heathrow last month during the frenetic summer travel period offered the opportunity to take the trading temperature for brands and retailers and assess the role played by brick and mortar and digital fulfilment within a rapidly shifting environment for retailing.

The trio of interviews with Brown (click below to watch Part 1, Part 2 and Part 3) were conducted at high-footfall vantage points at Departures Level 4 and Level 5 post-security within the busy international departure lounge at Terminal 2.

Teeming with passengers, the terminal reflects what continues to be record month-on-month passenger traffic increases across the broader Heathrow estate as travel demand ratchets up during the peak summer season.

Fraser Brown, Retail Director, Heathrow Airport.

‘A ferocious pace of change’

Heathrow has enjoyed consecutive days of in excess of 260,000 travellers passing through its terminals.

This aligns positively to the uprated passenger traffic forecast of a little over 82 million passengers for full-year 2024 that was shared with the investment community at the time of the airport’s first quarter earnings earlier this year.

“In travel retail like domestic retail, it’s all about footfall […] and we are incredibly pleased with the passenger numbers,” Brown told TRBusiness. “On a rolling 12-month basis we have passed 2019 [80.9m].”

As reported, Heathrow has opened and refurbished a wave of new commercial units in recent months, including the likes of LVMH Moët Hennessy brand Loewe, Kering’s Saint Laurent and a Hugo Boss pop-up entering Terminal 3, in addition to Penhaligon’s and an extension of restaurant chain Giraffe in Terminal 5.

Meanwhile, Terminal 2 has welcomed The Vinery and Bottega Veneta and is set to open an expansive Louis Vuitton space, currently surrounded by construction hoardings, in the coming month(s).

The flagship Louis Vuitton store in Terminal 2 will accompany a Rabanne unit in Terminal 5, TRBusiness has learned.

Brown reiterates that 2023 marked Heathrow’s busiest year for openings – 50% up on the pre-pandemic level.

“The general amount of change is massive; we’re turning over retail units much more quickly and retailers and brands are looking for flexibility,” he said. “That’s a challenge for us in the airport travel retail space because traditionally we’ve been used to spending quite a bit of time thinking and planning, with the brands bringing in some beautiful executions, but those things cost a lot and take time.”

Tenant demand for shorter lease periods naturally puts a greater onus on Heathrow to extract best value from each square metre, an issue made more acute in view of the space constraints it continues to face.

This is compounded by intensified pressure on non-aeronautical revenues following regulatory intervention forcing Heathrow to reduce the level of passenger landing fees it charges its airline customers.

For passengers, the trade-off is – in theory – freshness in the retail aisles and the ability to peruse a greater variety of assortments.

“Whether it be food & beverage or some of the core categories in duty free, there is lots of change,” enthused brown. “To give you an example in duty free, across Terminal’s 2 and 5 we will see about 100 brand changes across the two terminals in just 12 months. It’s a ferocious rate of change.”

Balancing demand

The ‘Digital, Experience, Space, Offer’ axiom often used by Brown to describe Heathrow’s four strategic retailing pillars espouses a very real dilemma.

“We are incredibly space constrained here at Heathrow,” he explained to TRBusiness at the entrance to the Terminal 2 Reserve & Collect unit. “Record passenger numbers means that space challenge becomes that bit greater as for every new passenger we have no more square metres. Equally, for every brand and concessionaire that would like to be at Heathrow – and we would like them to be at Heathrow –  we don’t have that space. Getting the right offer in is really tricky and creating the right experience for passengers therefore becomes tricky.”

However, Heathrow has proven itself adept at evolving its digital services in recent times. That is no better evidenced than through the evolution of its reserve & collect platform.

Passengers can avail of the complimentary service by browsing a catalogue of products and brands, pre-ordering the goods before collecting and paying for them on arrival at the airport.

In addition to this service – which continues to engage new brands in the programme – Heathrow is trialling physical reserve & collect stores at Terminal’s 2 and 5.

This allows would-be customers to reserve items online and visit a reserve & collect store for thw chance to touch and feel the merchandise before payment is made.

“It is very small at the moment in terms of the number of brands we are working with, but we expect to grow,” commented Brown.

By the end of the summer, the plan is to have reserve & collect physical store collection points across each of Heathrow’s four terminals and Heathrow is hoping to take the convenience factor to the next level with the introduction of click and collect, offering customers the ability to shop from a number of brands, pay for their purchases online and collect on arrival.

“Initiaitives like these are really important on a number of fronts,” explained Brown. “It allows me and the team to welcome concessionaires that we otherwise wouldn’t be able to as we don’t have the physical space for a store and to offer brands that are maybe at slightly lower price points than I could otherwise offer.

“For brands that are smaller and want to break into travel retail, there is quite a high cost of entry if you want to build, open and operate a store. What we think click and collect can do is offer that entry pathway for a brand, allow them to trade in an airport and try things. What it gives travelling consumers is extra brands and choice.”

According to the latest July figures released by Heathrow this week, the airport processed nearly eight million passengers for the month – the third week in a row that the record has been achieved, having never surpassed 1.8m over a seven-day period before July. Heathrow’s aim is to serve eight million passengers in a single month.

The airport revised its passenger traffic forecast to 82.4 million passengers for full-year 2024.

On the other hand, while routes and passenger numbers are up the airport says it has shed 90,000 transfer passengers on routes operating to and from the seven countries included under the Electronic Travel Authorisation (ETA) scheme.

Introduced in 2023, it currently applies to passport holders from Qatar, Kuwait, UAE, Oman, Bahrain, Jordan and Saudi Arabia.

In a statement, Heathrow urges the government to ‘review the inclusion of airside transit passengers,’ to drive competitive growth.

Such growth is expected to come from aeronautical and non-aeronautical forms of income, but the cessation of airside tax free sales (excluding liquor & tobacco) following the UK’s withdrawal from the European Union continues to put pressure on retail income.

While the volume of new and upcoming shop openings at Heathrow of late speak to the intent of brands willing to invest across the terminals, the material impact being felt in the luxury quarter, coupled with the dent in high-end beauty revenue remains a “major problem”, updates Brown.

Tax free: changing the political dial

With it being early days in the new government’s tenure after the Labour Party swooped to power in a landslide election victory last month, it remains to be seen whether the new administration will be prepared to give any ground on the issue, and Brown makes clear that conversations with ministerial departments won’t be rushed and would take place “in good time”.

“Luxury is still important for the UK and for Heathrow, and Heathrow is still important for luxury brands,” he stated unequivocally.

Brown was speaking to TRBusiness against the backdrop of a recently installed Burberry fitout at Terminal 2, a smaller footprint reflecting the lower sales reality linked to the tax free policy decision.

Duty free and travel retail stakeholders remain hopeful that a full independent assessment of the impact of the tax free shopping decision will materialise.

TRBusiness approached the Treasury to clarify the new government’s position on the current tax free shopping policy, whether it will commit to reversing the decision or undertake the aforementioned review, and what role the new ‘Growth Delivery Unit’ could play in reassessing the decision in light of authoritative data provided by the likes of the Association of International Retail.

A Treasury spokesperson pointed to the ‘vital role’ played by the tax system in supporting sustainable growth, with plans in store to reform business rates and publish a business tax roadmap in due course.

Chancellor Rachel Reeves will deliver her first budget in October and the industry will be watching with interest for any indications of a softening in position on a much-maligned decision that has seen the UK lose out to airports in Milan, Paris, Madrid and elsewhere.

Earlier this year, government spending watchdog the Office for Budget Responsibility (OBR) conducted a review of the original 2020 costings set out by the previous government regarding the impact of removing tax free shopping for tourists.

The conclusion at the time, delivered alongside the former Chancellor’s Spring Budget, was that the 2020 methodology ‘still appears reasonable’.

“The review of the original 2020 costing of the abolition of the VAT retail export scheme (VAT RES) that we published alongside the Spring 2024 Budget remains our latest assessment,” a spokesperson from the OBR confirmed to TRBusiness, adding that it does not comment on working level discussions with Treasury officials.

Brown says when the opportunity presents, the Heathrow team will present amalgamated data from brands at Heathrow to illustrate the detrimental effect on luxury sales.

Elsewhere, Heathrow’s Retail Director offers a timely performance appraisal across non-beauty and luxury segments such as high street fashion and the core liquor & tobacco business, which has been boosted by the restoration of UK-EU duty free sales.

To watch the conversations with Fraser Brown in full, click the above videos.