Last week (30 April), the retailer reported an -18% like-for-like sales decrease in the first quarter of 2020, compared to the same period last year. More alarmingly, the retailer revealed a -54% revenue drop in March and predicted sales to decrease -90% year-on-year in April.
Speaking during a conference call for analysts discussing the Q1 results (which also took place on 30 April), Dag Rasmussen, Chairman and CEO, Lagardère Travel Retail (pictured below left) commented: “The re-start varies from region to region in China. In Yunnan, [where Lagardère runs stores at Kunming Changshui International Airport— Ed] we experienced a record week. Things, however, were slower in Shanghai and Beijing.”
Regarding the luxury part of the company’s Chinese business, Q1 sales were -20% to -30% below expectation. Rasmussen explained: “Half our revenue [from luxury products— Ed] is driven by Customer Relationship Management sales. This includes video streaming, Chinese social networking service TikTok, WeChat and Instagram.
“In-store sales account for maybe 40% of what we would have expected.”
Present in China since 2003 having first entered the country as a magazine distributor, the retailer recently re-opened 88 stores at Wuhan Tianhe International Airport (WUH) as first reported by TRBusiness. Lagardère, which runs the retail and foodservice concession at WUH is offering free food to airport staff working in the health sector.
SLOW START IN WUHAN
“Business in Wuhan has started slowly. The city was the epicentre of the virus. We are probably around -90% year-on-year in terms of revenue,” Rasmussen commented.
The general consensus is that Chinese domestic travel is gradually recovering, but this is happening slowly, according to Rasmussen. “Traffic is obviously a bit slow to come back. Even when it does return, people are unlikely to shop right away. They will kind of want to run directly to gates.”
While green shoots of recovery are being observed in China’s travel market, the same cannot be said for Chinese international air traffic.
According to travel analytics company ForwardKeys, Chinese domestic air travel leaped by 62.9% between 23-29 February week-on-week. But with heavy restrictions on international flights still in place, it will be sometime before the overall Chinese air traffic situation improves.
“We expect domestic traffic to resume first, followed by regional traffic, long-haul and intercontinental, which is almost dead for the time being”, Rasmussen remarked.
Throughout the crisis, retailers and airports have been negotiating rent relief packages, with minimum annual guarantees the focus of many discussions.
Rasmussen said: “In the case of Lagardère, discussions with landlords worldwide commenced at an early stage. “From day one, all our teams have been working on this. Discussions have taken place with each and every landlord.
“The idea is that minimum guarantees are there to protect landlords against bad operators. They are not supposed to act as a form of life insurance when something like this happens. Our position is that minimum annual guarantees cannot apply in situations like this.”
Most landlords have been understanding and reasonable, according to Rasmussen. “We are talking to airports on a regular basis and have had a good success rate. We are fairly optimistic.”
Discussions with landlords not only focus on rent relief and other possible support measures. The decision to open stores or keep them closed as the recovery ensues is also being discussed. “We are not the only decision maker as we are renting from the landlords.
“In some cases, landlords want us to open when it doesn’t make sense. In other instances, we have to remain closed when we believe it is financially viable to open.”
Business may have re-started for the retailer in China, but re-openings elsewhere will be a slow burner.
“In some cases, the difficult part will be the re-start. Shutting down was relatively easy, even though we had to do this in a hurry. We are now working very hard on the re-start with coordination and ‘plan-ahead’ teams. Both units are working extremely well.
“The re-start will be expensive as we will have full costs to contend with without the revenue.”
Looking ahead to a ‘progressive rebound’ Rasmussen said: “Traffic and spend per passenger will come back progressively. We are currently negotiating reduced percentage rents for some of our platforms and will optimise opening hours, look to open less stores and implement various other initiatives.”
As Lagardère Travel Retail continues mobilising for the recovery, it is assessing the impact of the pandemic on overall business. It is also trying to predict how things will pan out in the future.
In order to do this, the company is focusing on four levels of unknowns.
Rasmussen explained: “Firstly, there is the sanitary unknown, which relates to how long the disease will last and if there are second waves. These are huge unknowns. Forecasting will only be possible once these elements become clearer.”
The second unknown is the medical response, which significantly differs between countries. “Do we keep everybody confined or do we only confine people who are ill? International travel is point to point, so the medical response must be similar at both ends.”
Next is the macroeconomic response and how states will do to support the industry. In recent weeks, this publication has reported several instances of DF&TR and aviation industry associations requesting government support.
Until now, the results of many of these requests have been unclear, but one thing is certain. “If there is no state support, most airlines will go bankrupt,” Rasmussen remarked.
Finally, there is the microeconomic unknown. Rasmussen asked: “Will we have more unemployment, a fall in purchasing power, many people being scared to travel or something completely different?”
Taking all possibilities into account, he concluded: “We could progress from a gloomy post-war environment to a new 21st century roaring twenties scenario. The scope of possibilities is huge.”