AIRPORT PROFILE Moscow Domodedovo October/November Touchdown time

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1 AIRPORT PROFILE Moscow Domodedovo October/November 2005 Touchdown time at Domodedovo for Runway Duty Free Domodedovo Airport is not just a gateway to Moscow, it s a mirror of the city s incredible economic renaissance. The Russian capital is one of Europe s hottest cities, resurgent economically, forward thinking yet rightly determined to showcase the best of its past. It s a beguiling mix, helping to explain Mosow s growing popularity as a tourist destination. Domodedovo captures that spirit, and so does Runway Duty Free, one of its two main commercial operators. General Manager John Moriarty took The Moodie Report on a guided tour of an offer that is changing almost as fast as the city itself. By Martin Moodie Forget any preconceptions about Russian airports when you visit Moscow Domodedovo. The old clichés evaporate as soon as you enter the sparkling new terminal, connected directly to the city centre by a high-speed (40 minutes) rail system that brings passengers right to the terminal door. Many will have already checked in, via the downtown Pavelyetsky rail passenger terminal, allowing them to proceed directly to airside. Everywhere the signage is clear, the staff friendly and the ambience relaxed. And both landside and airside the commercial offer is varied and well presented. Domodedovo, run by the dynamic East Line Group, is Russia s fastest-growing airport. In the first nine months of 2005 the airport handled some 10.7 million passengers, a +13.5% increase over the same period last year. International passenger numbers rose even more sharply, up +21.4% to 5.2 million. In August alone international traffic climbed +18.1% over the same month last year. Make no mistake, Domodedovo is one of the world s hottest airports. And in the commercial battle of Moscow s airports, it s currently winning hands down. In 2000 it handled just 16% of the total traffic at Moscow s John Moriarty: I came to Moscow for four days and ended up staying twelve and a half years three airports the others, Vnukovo and Sheremetyevo, handled 20% and 64% respectively. By 2003 the balance of power had tilted significantly (Sheremetyevo 48%, Domodedovo 40%, Vnukovo 12%). And the shift is continuing. This year it will surpass mighty rival Sheremetyevo for the first time to become Moscow s busiest airport, with an anticipated 13.3 million passengers. It s a stunning transformation, and East Line is far from finished. Next year it is projecting 14.7 million passengers; by 2020 it expects 33.2 million. To handle that capacity the main terminal was extended in 2004 and a new terminal four will add another 6 7 million passengers, bringing capacity to million. The next big development is the new international Terminal 2, due to open around Commercial facilities are expected to be tendered there in That s the supremely promising backdrop that attracted Aer Rianta International (ARI) to the airport. In September 2003 the Irish company, in Moscow since the late 1980s at Sheremetyevo, won a tender to operate new retail space at Domodedovo in competition with incumbent Dufry. It created a partnership with established Domodedovo and downtown retailer Art Alliance and since then progress has been non-stop. Heading the expansion as General Manager Runway Duty Free Domodedovo is John Moriarty, an Irishman who by his own admission came to Moscow for four days and ended up staying twelve and a half years. 218 The Moodie Report

2 October/November 2005 AIRPORT PROFILE Moscow Domodedovo He could be here a whole lot longer. Now fluent in Russian Moriarty, a Limerick man, has done a remarkable job in difficult circumstances to establish Runway Duty Free as a credible retail and F&B concessionaire at Domodedovo since coming here in November And how they shop. Surrounded by the gleaming modernity of Domodedovo it s easy to forget how far this city and country has come since the collapse of communism less than two decades ago. Consumerism is rampant, the market is far from mature and Russians are anything but Through 2004 the company opened a series of outlets, anchored by a big new 106sq m generic store called Runway Duty Free, offering an extensive range of traditional duty free items. The retailer also introduced a string of small specialist stores from the open plan Runway Sunglasses and Runway Music to a highlysuccesful Swarovski boutique. On 27 December 2004 Runway Beauty was opened, followed in June 2005 by an extension to that outlet under the same name an elegant store including a perfumery as well as dedicated skincare and make-up areas from the leading beauty brands. High penetration rates Currently passengers exiting passport control and security are greeted immediately by rival Dufry s stores a main shop and a destination outlet. They get the first bite of the cherry, Moriarty admits, but it s not turned out to be a big disadvantage. A very strong characteristic of Russians is that they will go through passport control and security and then go and find their gate. Then they will go shopping. So we re very happy with what we ve got. By virtue of our three small specialist shop locations early on in the area, the staff there play a major role in persuading passengers to go further down to shop. An Irish success story It s a typical pub scene. In the background an Irish reel is playing over the sound system. The walls are adorned with Irish memorabilia and there s a steady trade being done at the bar. The bar is called Shannon s and could be just about anywhere in Ireland s County Clare. But it s not: it s in Moscow Domodedovo airport. Aer Rianta International (ARI) may be best known as a retailer. But in Moscow it has historically displayed a rare affinity with the F&B sector as well. And Runway Duty Free is maintaining that tradition. In June the company opened its first F&B outlet, Shannon s Irish Bar, a 105sq m outlet which was hand crafted in Dublin. Shannon s is based on the traditional pub-shop concept that was and still can be found in certain parts of Ireland where the bar was a place that also sold produce such as soap, flour, tobacco, and even custard, notes General Manager John Moriarty. There s not much custard on offer but Shannon s offers a wide range of beers on draught as well as an extensive bar menu. The bar plays a dual purpose, generating revenue in its own right within the international terminal expansion but also helping to pull passengers towards Runway s main retail area. If you go back 17 years to the opening of Sheremetyevo, which was the first real duty free in Russia, we put in an Irish bar it was a great draw for passengers and it s still going strong. It s now in a lot of locations that ARI has gone into, Moriarty says. So we decided to put one in at Domodedovo as well. It s not a core business for ARI but pubs are a big thing for the Irish people; it s all about creating that relaxed informal atmosphere. So when we won the tender the bar was part of it. Nearby stands Runway Fresh, a small outlet offering 15 different types of fresh juices, smoothies, fruit cocktails, and a small range of snacks. The idea came to Moriarty a year earlier when he noticed that Russians were increasingly requesting fresh juices in cafes and restaurants rather than ordering packet juices even though fresh juices were more than double the price. The airport was very supportive, he says. It s a new and unusual outlet, it s bright and attractive, and we knew it would be appreciated by passengers. Runway Duty Free is tapping further into that appreciation with its new seafood bar (led by vodka and caviar), a 65sq m outlet in the second-floor development opening soon. Moriarty and his team are convinced they will have another success on their hands in the best possible taste of course. The Moodie Report 219

3 AIRPORT PROFILE Moscow Domodedovo October/November 2005 tired of the duty free concept. In fact a lot of them are still discovering it. Many Russians are still not regular flyers, Moriarty points out. So we are quite successful in terms of penetration. The timing of the openings has been very tight, Moriarty says. This inevitably meant some compromises, particularly for the main store. But that outlet will be revamped by the New Year and all units are trading successfully. In November the retailer will open Runway Duty Free VIP, a small retail unit in the airport s VIP lounge that will sell top-end lines such as XO Cognac and premium fragrances. A stand-alone Runway Fashion store will open in the main gallery area. When The Moodie Report visited the airport in late September the new beauty store was particularly busy. This is a lovely outlet which uses its limited and quite shallow space to fine effect and enjoys an imposing setting high above the catering outlets directly below. It represents a breakthrough for the category in Russian duty free, Moriarty claims. We put in personalised furniture for ten brands Chanel, Christian Dior, Givenchy, Lancôme, Guerlain, Estée Lauder, Clinique and Clarins, as well as introducing both Shiseido and La Prairie to the airport [Kenzo Ke is the latest addition]. We also carry many other brands on generic gondolas in the shop. We gave all the houses a standard size. So there was no arguing from the very beginning, and they all had to prove themselves. Before we opened we conducted detailed market research with Domodedovo passengers as to what brands they wished to see. On the basis of these Runway Duty Free s sales mix January July 2005* Perfumes & cosmetics: 38% Liquor: 25% Swarovski (stand-alone store): 8% Travel items (mainly sunglasses) and toys: 8% Bars: 7% Tobacco: 6% Confectionery: 4% Music and video: 4% *Figures precede opening of fashion shop results, we compiled our brand listings hence Shiseido was one and Clarins another. And there s more in store a lot more. In April Runway Duty Free was awarded two of the three retail lots tendered by East Line Group for the next phase of the airport s development, covering the retail area on the second floor extension. Runway was awarded exclusive contracts for fashions and accessories and perfumes and cosmetics, as well as concessions for jewellery, a vodka & caviar bar, a Russian souvenir store and a toy store with a children s play area. Dufry won the other contract for an elite Cognac and wines store, a watches shop, a Body Shop and a fashion store. Based on the lessons to date, Moriarty is confident of delivering a stunning offer. It s been a huge challenge, but Moriarty says he has enjoyed every minute of it. Before joining ARI he had extensive experience in the Russian downtown retail market, including a period with Allied Domecq s food business as well as a homeware retail chain. A lot of what I had done here in Russia was business development or start-up related, he recalls. So from an ARI point of view my skills and experience were very suited to a clean-slate start-up, From Runway s offices in the eastern suburbs of Moscow, Moriarty runs a 22-person office with a further 120 people at the airport. He needs every one of them as Domodedovo s remarkable growth accelerates. Domodedovo is expecting 13.3 million passengers this year the first year that it will be bigger than Sheremeteyevo, he enthuses. And it s not just the absolute numbers the passenger profile is increasingly attractive from a retail perspective. The big development was when British Airways moved here in July 2003, Moriarty recalls. They were followed by Swiss, Emirates (Dubai is a big destination for Russians), Qatar Airways a year ago, Vietnam at the beginning of this year ( they re great buyers of the 4.5 litre spirits ), Iberia this summer and El Al came across at the start of the year which was a big thing. Thai Airways comes in from November. Germania Express also operates three flights each day to Dusseldorf, Cologne and Munich for just 220 return, bringing in a healthy injection of German traffic. Russian airlines too are developing fast. Siberian Airlines (now 220 The Moodie Report

4 The World Rovers How the Irish shaped the global travel retail industry A major study from The Moodie Report into a unique industry phenomenon THE PIONEERS Shannon Airport in 1947 THE KEY INFLUENCES Brendan O Regan, Colm McLoughlin; Liam Skelly; John Sutcliffe and many more THE GLOBAL SUCCESS STORIES Dubai Duty Free; Aer Rianta International- Middle East; Moscow Duty Free and other pioneers A FAMILY TREE how the Irish influence has spread through the travel retail world THE GREAT IRISH BRANDS From Baileys to Bushmills Written by Martin Moodie. Publishing late % of sales to Mankind Must Manage a World Without War, the humanitarian peace-driving cause championed by the founder of the airport duty free industry, Dr Brendan O Regan For details contact Martin Moodie at martin@moodie-international.com

5 AIRPORT PROFILE Moscow Domodedovo October/November 2005 A young dynamic force Domodedovo Airport is no ordinary airport and East Line Group is no ordinary airport authority. The group employs around 9,000 people with a personnel that ranks among the youngest in any Russian industry with an average age of 37. Formed in 1993, East Line is headed by its founder Chairman Dmitry Kamenshchik, who has driven Domodedovo s metamorphis from an old-style Soviet facility into the most hi-tech airport in Russia. That forward thinking approach is mirrored in East Line s attitudes to retail and other commercial revenues. Head of Marketing and Sales Development Leonard Blinov notes: There s been a decrease in the margin from aeronautical activities so the only way to develop airports is through nonaviation revenues. So it s a core business for us. The airport company works very closely with its commercial partners and is as concerned with quality and image as it is with the financials, he says. It s not just the best money that wins a tender it s the combination of money, concept, reputation and quality that counts. East Line also believes in internal competition which explains the dual presence of Dufry and Runway Duty Free. It s very important for us to provide a full range of products for our customers. We like competition, which is good not just in revenue terms but also with regards to concepts. Each retailer has different experience and we are looking for synergy. Having chosen its partners, East Line is not a passive landlord. We try to work with operators very closely, notes Blinov. We have a special quality department at the airport to provide measurements. For example we have mystery shoppers and we share this information with our operators to allow corrective measures. Every three months a competition is held to judge the best general shop, food & beverage outlet and duty free store. The winners receive a discount on their rent a guaranteed quality incentive. Looking forward Blinov acknowledges that competition among Moscow s airports will intensify, especially with Vnukuvo so resurgent. But he s confident Domodedovo will maintain its ascendancy. The competition will be harder, But our aim is to be several steps ahead of our competitors in every field of our activities and also non-aviation activities, he says. rebranded as S7), Transaero, Siberia and KrasAir are growing tremendously Moriarty says. Transaero, for example, has just bought five 747 planes from Virgin. The next stage of the airport s development will double the size of the main terminal. This ambitious project will also include a huge landside retail complex called Domodedovo Plaza as well as underground parking, a cinema complex, a food court and a hotel. Following this expansion a new fourth terminal will add capacity for 6 7 million more international travellers (and more domestic passengers). I d say it will be ready for 2009 or 2010, says Moriarty. Incredibly, there s even talk of a fifth terminal. Or maybe not so incredibly. Consider these numbers: if GDP is maintained at its anticipated +5.1% annual growth, passenger throughput in Moscow s airports will grow from 26.3 million passengers in 2004 to 73.8 million by And Domodedovo is projecting a 45 47% share. That s growth on a grand scale, involving a constant evolution of the airport s commercial offer. But Moriarty says the pace of change has been manageable, thanks to an excellent relationship with the airport company. Initially we were going to be running just three shops and a bar; now we run seven shops, a bar and Runway Fresh [a juice bar], he says. This all comes from being able to discuss the relationship with the airport. East Line is always ready and willing to listen to new ideas. They want to be the number-one airport in Russia from a product offering and customer service point of view. They re also very focused on commercial revenues. They have serious plans, and frankly the investment has to come from somewhere. It s a commercially-driven airport and it has become the main airport for Russian travellers. That s good; it keeps us on our toes. There s no room for complacency. He also pays tribute to ARI s partners, Art Alliance: We re very lucky here with our partners. They knew the airport and were strong retailers too. ARI is delighted with the success of the Runway Duty Free brand. It s a concept that was born out of the Irish retailer s joint venture with Sardana at New York JFK Airport T4. That was called Runway Retail because it was landside, explains Moriarty. So we took the concept further with Runway Sunglasses, Runway Fresh, Runway Duty Free and now Runway Beauty. 222 The Moodie Report

6 October/November 2005 AIRPORT PROFILE Moscow Domodedovo We re very happy with it, even in terms of store design. Runway is going into Vnukovo, Montréal and anywhere where we can use it and expand it. That s not surprising. It s a winning formula, and if anything the already high Russian penetration and average spend rates are going to climb higher. Moriarty notes: When Russians travel they ve made the decision that having paid for their charter flights, they re going on holiday and they re going to enjoy themselves. They re not going to hold back at all. So they have a very high average spend. That initial four-day sojourn in Moscow must seem a distant memory for John Moriarty, who maintains Aer Rianta International s proud pedigree of top retail talent in the city. It has been an unforgettable journey, and the ride is far from over. What s hot on the Runway RUNWAY SUNGLASSES: This is a 6m back wall stand-alone unit. It s been an amazing success for us. We opened on 15 October 2004, delayed from the beginning of the summer, so we were very worried because we had mainly summer stock. We needn t have worried: we were soon looking for more stock. Niclas is our biggest supplier they have been a great success. SWAROVSKI: We have a stand-alone unit of 22sq m. The team at Swarovksi, particularly [Vice-President Travel Retail Worldwide] Peter Zottl, have been great and supported us a lot. It s a great brand with great products, and is a big hit for us with the Russians. RUNWAY MUSIC: Another 6m linear store divided 50:50 between dvds and cds. We sell Russian as well as western items. Interestingly there s a big interest in Soviet films as well as the modern day Russian productions. The beauty of these 6m open plan stores is that they require only low staff levels. RUNWAY BEAUTY: The big thing for us at Domodedovo is our beauty store. Beauty has always been about a third of our revenue in Russia so I knew when we came here it would play a big role. The predominant reason is that there are a few major chains downtown with huge stores and they are doing phenomenal business. But over the years there has been a lot of unofficial product in the markets. Russians are convinced that when they go abroad the product is legitimate. We reflect that by carrying a huge range. Personalisation adds to the fact that it is genuine and people know what they are getting Russians love brands. All sectors are doing well. Skincare and make-up are growing very strongly. Make-up is about 32% of the mix, skincare around 17%; the rest is fragrances. The right-hand side of the shop opened in June with the additions of Lauder, Clinique, Clarins and La Prairie. That really lifted our skincare business. For La Prairie it was the first time in the airport [in Moscow] some people might have thought it was a risk but watching what was going on downtown with La Prairie we were confident it would succeed. I watch what happens in the market downtown all the time. Russians love whatever is the latest. Chanel is our top-selling brand, and newer lines like Clarins and la Prairie are doing very well. The Moodie Report 223