EAST MEETS WEST EAST MEETS WEST AT THE HONG KONG CROSSROADS. HONG KONG SPECIAL REPORT Airport Authority

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1 May 2004 HONG KONG SPECIAL REPORT Airport Authority EAST MEETS WEST EAST MEETS WEST AT THE HONG KONG CROSSROADS Something for everyone Walking Hong Kong International Airport s new East Hall with Hans Bakker and Eva Tsang, one can hardly fail to be impressed by the scale and variety of the food & beverage and retail offer. There s seemingly something for everyone, from a Giordano store featuring budget-priced casual wear to a glittering line-up of luxury boutiques from names such as Chanel, Prada, Omega, Coach, Ferragamo, Celine, Gucci, Hermès, Tiffany and Cartier. The luxury brands are doing well and making money, insists Bakker. We like to offer a big range and the latest models and fashions, he says. You have to remember that the price here is -25% cheaper than in mainland China. A spirits tasting bar outside the Sky Connection liquor & tobacco store lights up an unpromising location for the store (behind the escalator and against the traffic flow), helping to grab passengers attention as they make their way to the gates. Upstairs there is an amazingly varied food & beverage offer. From the Champion s American sports bar, travellers can enjoy a beer while watching the planes take off outside. Everywhere there is natural light and a feeling of space and anticipation of the travel experience. The food offer is acutely price-sensitive, offering a range of price points to appeal to all budgets. Working with leading concessionaires like Nuance- Watson (HK) and food & beverage specialist SSP allows the category risk to be spread across a range of outlets. Nuance, for example, not only runs the core general merchandise (The Atrium) and fragrance & cosmetics (Temptation) stores but a heady variety of specialist outlets such as the Peninsula Boutique and the quirky Amazing Grace (see Nuance-Watson interview, page 47). The Kew Wah bakery typifies the elegance of the local offer, offering beautiful packaging and shelving displays, in a minimalist and classic destination presentation. A stand-alone Shanghai Tang store is another highlight. Its predecessor was a cramped shop-in-shop, but now the retailer s renowned quality has room to breathe and the store is prospering as a result. Every evening the airport features live music to entertain night travellers. This is a market, says Bakker. You won t be bored at this airport. Airport Authority Hong Kong describes its new East Hall as the amazing transformation and the reality lives up to the hype, with the addition of some 6,800sq m of impressively varied retail and food & beverage facilities to the young airport s already extensive offer. In the first part of The Moodie Report s extended profile of Hong Kong International Airport, Martin Moodie talks to Airport Authority commercial director Hans Bakker and general manager retail and advertising Eva Tsang. ans Bakker dislikes the term airport authority. The Dutchman a former managing director of Schiphol International, the international subsidiary of the Schiphol Group may run the commercial operations of one of the world s biggest airports. but he prefers to describe his role as delivering customer services and satisfaction. Customer services are certainly what s on offer in the airport s stunning new East Hall, officially opened in March. The revamped area, part of the overall Hong Kong Sky- Mart, has added some 6,800sq m (73,200sq ft) of retail and food & beverage space, raising the total in the revamped location to some 15,500sq m (166,800sq ft). But the bare figures only suggest the scale of the operation. What they cannot begin to convey is the exciting mix of retail and catering that the new facility offers. It s a true blend of East meets West as Bakker puts it, captured on the one hand by elegant local stores such as the brilliantly colourful Wing Wah Chinese bakery and the understated Chinese gold jewellery shops Chow Tai Fook and Chow Sang Sang; and on the other by a line-up of the most powerful luxury brand boutiques in the world, such as Hermès, Prada, Gucci and Chanel. It s not perfect some of the customer flows are frustrating for the retailers and travellers but few would argue that what the authority describes as the amazing transformation has been just that. Certainly the food & beverage offer can have few peers in the industry. This was borne out in April when UK aviation consultancy Skytrax named Hong Kong International the world s best airport and also gave it the best dining ranking following a ten-month survey of consumers from over 85 travelling nationalities. Lars Croné, vice-president business development of food &beverage concessionaire SSP Global, says the secret of Hong Kong s success is the way it has married quality food concepts with strong brand image such as SSP s Café Deco. Such awards must be welcome to Bakker and general manager retail and advertising Eva Tsang especially after the trials of the past 12 months. The East Hall buzzes with excitement today, but a year ago it resembled, in the words of Baker Salleh, CEO of liquor & tobacco concessionaire Sky Connection, a ghost town. But Bakker, an ebullient character who one suspects would describe an empty glass as two-thirds full, has clearly moved on from those dark days. Yes, there have been some hurdles, he says, but every business is the same. And this business is long-term for our retailers and caterers as much as for the airport. If you look at the airport business, it s very much a growth business in the long term. But how consoling was that apparent truth when the nightmare of SARS struck with such devastation last year? It was tough but it was not a nightmare, Bakker replies firmly. And even if it had been, you know you always wake up from nightmares. That s the parallel. At some point you have to simply focus on the long term and not be too distracted by short-term issues. During the depth of the SARS outbreak Bakker and his colleagues at Airport Authority Hong Kong decided to create an advantage out of a disadvantage. The authority accelerated the construction work in the East Hall during the worst weeks of the crisis, managing because Hans Bakker: Hong Kong International Airport is becoming a destination in its own right 36 The Moodie Report The Moodie Report 37

2 The SkyMart philosophy: Creating a situation in which people feel comfortable in your airport and if they want to buy something then they can of the lack of passengers to avoid much of the usual temporary measures and disruptions. We also learned a lot, he recalls. And now the whole health process has been integrated in our processes. The same applies to security, which since 9/11 has been completely integrated in our activities. That s the way you manage this kind of thing. Here and now Bakker prefers to move the conversation on to the here and now. His driving influence, he says, is how to improve the quality perception of the airport. People think it s just about making money, but that s not our first objective, he observes. So what is? How to create a situation in which people feel comfortable in your airport, and if they want to buy something then they can buy it, he replies. That s why we do so many surveys of our passengers and what they want. We try to discover all the sections of the market and the needs of different nationalities. A key part of Bakker s vision was to create a true blend of international and local flavours. The airport had to truly stand up as both a Hong Kong location and an international Monitoring consumer spending and dwell time Hong Kong International Airport passengers are some of the most surveyed travellers in the world. In order to meet the needs and desires of those passengers, Airport Authority Hong Kong asks for regular feedback on their experience of the airport and its consumer services such as food & beverage and retail. And it adapts the offer accordingly. A major survey is conducted twice a year and the most recent one (October 2003) threw up some interesting year-on-year comparative findings. The total amount spent on products and services per person at the airport reached HK$741/US$95 for transit/transfer passengers (up from HK$694/U$89 a year earlier), HK$737/US$94.50 for international airside departing passengers(2002: HK$551/US$70) and HK$295/US$37.80 for Hong Kong departing passengers (2002: HK$293/US$37.57). For food & beverage alone, the numbers were HK$75/US$9.62 for transit/transfer passengers (up from HK$76/U$9.74 a year earlier), HK$75/US$9.62 for international airside departing passengers (2002: HK$73/US$9.36) and HK$47/US$6.03 for Hong Kong departing passengers (2002: HK$53/ US$6.80). As the market recovered in late 2003, so the incidence of dining or shopping at the airport rose. For Hong Kong departing passengers the percentage rose from 80% to 90% October to October. Only 63% of transit/transfer passengers dined or shopped in October 2002 but that ratio had climbed to 86% a year later. And the percentage of airside departing passengers paying for these services also rose from 81% to 88%. Dwell time a key driver for non-aeronautical revenues rose to an average 6.7 hours for transit/transfer passengers (up from 5.7 a year earlier). For Hong Kong departing passengers it was 2.2 hours (1.8) and other airside departing passengers had an average dwell time of 3.2 hours (down from 3.3). 38 The Moodie Report Serving people on the move...in over 100 airports in 35 countries on all continents Select Service Partner (SSP) is the world's leading supplier of food and beverage services to the travel sector, now operating in over 100 airports in 35 countries. Over the past 40 years we have built a reputation for providing our clients with tailor-made solutions to meet their unique foodservice needs. At every operation, we aim to exceed the expectations of the travelling consumer by providing excellent choice, product quality and customer service. To find out how SSP s globally recognised skills and experience can benefit your airport, contact: Lars Crone Vice President Business Development Select Service Partner Tel: +44 (0) Fax: +44 (0) lcrone@ssp-global.co.uk

3 Fact file: Changes in the East Hall Increase of catering outlets from two to 12 Increase of luxury fashion brand boutiques from eight to 25 Introduced two dedicated audio-visual shops Enlarged shops for the duty free liquor and tobacco, perfumes and cosmetics and general merchandise A wide range of specialty shops with famous brand names to suit passengers of different nationalities and with different budgets. Several are powerful local brands to complement the top international brands: Chinese herbal medicine (Eu Yang Sang) Chinese gold jewellery (Chow Sang Sang and Chow Tai Fook) Toys (Disney) Lingerie (Private Shop) Casual wear (Giordano) Chinese bakery (Wing Wah and Kee Wah) Convenience (Watson's) Health equipment (Osim) Souvenirs (Amazing Grace) Ties & Scarves (Tie Rack) Confectionery (Peninsula and Aji-ichiban) Bookshops (WH Smith) Source: Airport Authority Hong Kong; The Moodie Report hub, he says. Today we have eight or ten strong local brands, such as bakery shops and jewellery stores these are all based on the surveys we did when we asked our customers what they wanted at Hong Kong International Airport. One of the key things they asked for was more local brands. Hans Bakker: Hong Kong International is a contemporary crossroads And the emphasis was on brands as opposed to an overly generic offer, particularly in catering, where great efforts have been made to attract names that would be recognised by locals as well as international travellers. The results are stunning. In The Moodie Report s experience, few airports in the world match the strength of Hong Kong s destination offer. The Peninsula Boutique, for example, which offers hand-made chocolates displayed under glass among a wide range of beautifully presented items, is Hong Kong elegance epitomised. A Chinese herbal medicine outlet attracts with its classic simplicity, and the Wing Wah bakery is an explosion of colour and aromas with freshly-made samples on offer to draw customers into the store. Outlets such as Chow Tai Fook jewellery store a very powerful name with Chinese consumers, according to Eva Tsang are all about understated refinement, offering reassurance to Hong Kong and mainland Chinese consumers. When The Moodie Report visited the airport last month, that blend of cultures and brands was coming alive. Certainly the airport was a busy place and many of the shops crowded. After the tribulations of 2003 the concessionaires need every customer they can get. Airport Authority Hong Kong won wide plaudits at the time for the assistance it gave its business partners. This involved a HK$363m (US$47 million) relief package for retailers, airlines and other concession holders affected by SARS, including almost HK$100m (US$13 million) worth of reductions on some charges, with the remainder comprising interest-free deferred payments. At a time of crisis you also learn how to co-operate better with your business partners, says Bakker. That s what we tried to do. Everyone tried of course to minimise their risk and damage, but together with our retailers we found a modus operandi. That s why, he says, we re not an authority. We re an international airport. We are all seasoned to crisis if you don t have real belief in your business don t go into this kind of industry. Look for something else. Progressive improvement So how strong is the recovery? Certainly there has been a progressive improvement in recent months. Passenger traffic at the airport rose an encouraging +12.5% year-on-year in ZILLI Paris Duty Free : Paris, Moscow, New York JFK, Osaka, Bangkok, Dubai, Singapore, Baku, Beirut Contact : alexandra.schimel@zilli.fr Stand : L The Moodie Report

4 March to 2.8 million. But the key comparison is not with the depressed March 2003 figure but that of March 2002 (when it was 2.9 million). All being well, it looks as though 2002 passenger levels could be reached soon. But Bakker cautions about just looking at absolute numbers. The profile is still weaker than he would like. The overall numbers are good, but the US is slow in coming back and so is Japan. And Europe is not yet back to the same level. In fact the steady and, at periods like March to May 2003, drastic decline in Japanese traffic and spending has been a constant fact of Hong Kong life for several years. But there has been one major compensation: the spectacular emergence in recent years of the mainland Chinese as a vibrant consumer force. The Japanese are a key group for our commercial activities but they are more or less being substituted by the mainland Chinese, who are our fastest-growing market Visitor arrivals in Hong Kong: Cumulative summary by country/territory of residence Country/territory of residence Jan/Feb 2003 Jan/Feb 2004 % Total % Total % change The Americas 195, , US 142, , Canada 41, , South and Central America 11, , Europe, Africa & the Middle East 188, , UK 62, , Germany 22, , France 20, , Italy 10, , South Africa 4, , Others 68, , Australia, New Zealand & South Pacific 66, , Australia 57, , New Zealand 8, , Others North Asia 312, , Japan 222, , South Korea 89, , South & Southeast Asia 249, , Singapore 49, , Philippines 45, , Malaysia 38, , Thailand 35, , India 28, , Indonesia 26, , Others 25, , Taiwan 392, , Macau 84, , Mainland China* 1,464, ,939, Total 2,954, ,202, Note: The Chinese New Year holiday fell in January in 2004 but in February in Thus figures for the two months combined present a better indication of the year-on-year trend than a simple comparison of months. *Mainly land border traffic Source: Hong Kong Tourism Board 42 The Moodie Report Hope is in the air...

5 Fact file: Hong Kong International Airport Opened in 1998 Named world s best airport inclusive by SkyTrax Research Passenger capacity 45 million Passengers handled in 2002: 34 million Extended passenger capacity of 61 million by 2010 and 87 million by 2020 Passenger throughput projected to grow at +5% per annum over the next five years Served directly by 90 international destinations, and has access to 42 airports in mainland China SkyPlaza and SkyCity developments due for completion in 2005/06 Source: Airport Authority Hong Kong; The Moodie Report segment, says Bakker. It will be one of the most important markets of the future, that s for sure. That s why we are extending our [retail and catering] offer to the mainland consumer in different forms. Tsang says that discernible patterns are emerging among Chinese consumers. Certainly they are much more sophisticated now in terms of taste, she says. If they are looking for brands they are really looking for the top-tier brands, especially those consumers who are travelling through our airport as opposed to those entering Hong Kong by train. They are very sophisticated. The growth in Chinese consumers is one of the major reasons for the authority s confidence in the future despite intense competition, and increasingly so from the mainland airports aspiring to regional hub status. Nevertheless Airport Authority s confidence is underlined by a HK$600 million (US$77 million) expansion of Products bought or services used at HKIA Product category Oct Oct Packaged food 42% 35% Books/magazines/newspapers 26% 27% Duty free liquor and/or tobacco 24% 29% Perfumes & cosmetics 14% 14% Leather goods, fashion & fashion accessories 6% 6% Children s wear & toys 5% 5% Destination souvenirs 4% 4% Convenience store items 3% 5% Source: Hong Kong SkyMart Retail Survey an airport that is just six years old. I really respect my board they had the guts after just four years to make the decision to give us carte blanche to extend this whole thing, says Bakker. I am very confident of the future, he comments, but it s more a belief in our position and a desire to work hard to improve our facilities. We have a big advantage in that we have the critical mass of being an airport with 35 million passengers. That makes us very difficult to beat as an airport. You see the same at Heathrow. People may complain about it, but still everyone wants to be there and it s growing. Why? Because of the critical mass. With the East Hall complete, Bakker s attention is moving towards even more ambitious projects. Already under construction and due for completion by late 2005, SkyPlaza is being developed as an integrated business, retail and transportation centre. Sited in front of the existing terminal building, it will serve the vast numbers of local and international visitors to SkyCity, an important new facility combining an international exhibition centre, a nine-hole golf course, office towers and the SkyPlaza shopping centre. It s a development that recognises the fast-changing market environment surrounding Hong Kong and the mainland. When we built this airport we never thought we would be dealing with so many mainland Chinese, says Bakker. Today we have more that 100 tour buses a day bringing Chinese people to the airport, mainly from the Pearl River Delta. To serve that market a huge retail, catering and entertainment complex will be created, which will attract both departing and arriving passengers. The exhibition centre Introducing Eau de Parfum II 44 The Moodie Report

6 Fact file: Hong Kong SkyMart About 200 outlets 80% retail, 20% food & beverage Extends to over 39,000sq m (419,800sq ft) 30% landside, 70% airside Key overseas nationalities in 2002: PRC 19%; Taiwan 18%; Japan & South Korea 17% Firsts: Baccarat, Ralph Lauren, Shanghai Tang and Tiffany & Co have opened first-ever airport retail stores in SkyMart Food & beverage: East Hall features theme restaurants Wildfire, Café Deco, Ah Yee Leng Tong and Champion s Sports Bar. Fast food area offers six leading self-service fast food concepts Source: Airport Authority Hong Kong; The Moodie Report meanwhile will occupy 67,000sq m (721,000sq ft) in its first stage and will itself attract significant numbers of visitors. An integrated railway station linked to the existing airport express line will help in the management of large numbers of people. It s a grand plan. As Bakker puts it: Hong Kong International Airport is becoming a destination in its own right that s our philosophy. Another big plus is the opening, again in 2005, of Hong Kong Disneyland. The facility is expected to attract almost 5.4 million visitors in its first year, rising sharply thereafter. Roughly a third of that number will come from mainland China and a third from elsewhere in Asia. And, as Bakker says, They re not walking or swimming to Hong Kong. They re flying in. That spells opportunity. Impressive as the scale of these projects is, Bakker says the whole concept is nothing new. Drawing a parallel with history, he comments, It s the same as in the Middle Ages where was the business done? At the crossroads. And this is simply a contemporary cross-roads. We are adding a lot of modules, but the principle is the same. Adds Tsang: So if less people pass through the airport, we get less. On the other hand, if more people pass through the airport, we get more. Bakker s use of the term risk sharing is illuminating, and not exactly common parlance among his peers around the world. But he realises that no formula can completely satisfy all parties. We obviously don t want to put more risk on our plate so it s always a balancing act and no-one will be 100% happy at the end of the day. For example, if the profile of the passenger changes [as opposed to the absolute numbers], then it s at the risk of the retailer and they will have to change their assortment. In other words, the airport authority guarantees the number not the mix. Exactly, says Tsang. The concessionaires know how to make money out of different groups. After all that s their expertise. Bakker is bullish about what lies ahead. Much has changed since the airport was opened, he says. When this airport was built we anticipated 15% of its traffic would be transfer passengers, whereas it turned out to be 33%. Similarly the mainland Chinese [traveller] market was hardly heard of six years ago. It s already our biggest segment. And the spending power we never even thought about it! And Disney? Again, six years ago noone had contemplated it. Bakker sees his role in simple terms: Create the flows then have the offer to give them a memorable experience. Put your passenger first. We are in the business of making people happy. Twelve months on from Hong Kong International Airport s biggest crisis, Bakker seems happy. As long as you don t refer to him as an airport authority. A change of model Bakker is enthusiastic about the changes recently introduced to the tender model at HKIA. From last August the authority adopted a variable minimum guarantee scheme which is entirely pegged to passenger numbers. It s all about looking at this business and asking who can provide what, he explains. We are responsible for the number of passengers. And then the retailer is responsible for how it can work with that material. That s the basic principle for the risk sharing. Hong Kong International Airport has been a vital shop window for Prada s entry into mainland China 46 The Moodie Report