The airport luxury boutique became a staple of the pre-pandemic travel boom. Now it may be heading for the departure gate.
In 2021, air passenger numbers globally totaled 4.6 billion, only half the 2019 level, according to data from the Airports Council International (ACL).
Airlines aren't the only ones feeling the pain. Switzerland-based Dufry, one of the world's biggest duty-free businesses, said in its latest quarterly results that sales are still down 44% compared with the same period of 2019.
Based on numbers for the first nine months, London's Heathrow Airport in 2021 was on track to make just one-quarter of the revenue from retail concessions it did two years earlier.
Before the pandemic, travel retail sales were growing around 8% a year, creating competition to rent space in airports. Luxury brands were particularly eager bidders and airport stores came to account for 6% of global luxury sales, according to Bain & Company data.
The likes of Louis Vuiton and Hermès paid top dollar to get exposure to wealthy shoppers as they passed through airports, particularly Chinese tourists.
In the busiest hubs, cosmetics and luxury companies could expect to hand over 40% to 50% of their sales as rent, according to Jack MacGowan, former chief executive of Aer Rianta, an Irish company that pioneered the concept of duty-free retail.
Effective rents for downtown stores are much lower, typically 10% to 30% of sales, says Mr. MacGowan.
Leasing out shop space helped airport operators become less reliant on aeronautical fees: Retail concessions generated on average 30% of airports' total revenue before the pandemic, according to the ACI.
Luxury brands were important tenants as they generated high sales per square foot, an important metric in airports, where space is tight.
Strip out food and drink sales and only around 20% of passengers make a purchase on their way to the boarding gate, according to Bain.
Despite this low number, airports were able to boost their retail revenues by filling terminals with the most expensive designer handbags and clothing.
Airports badly need retail sales to recover as they mend their finances.
By the end of 2022, the world's airports will have lost an estimated $310 billion related to the pandemic, according to the ACI.
In many markets, operators' ability to generate more aeronautical revenue is limited as regulations cap how much they can increase the landing fees they charge airlines.
For the moment, passengers are showing up at the wrong airports to drive a recovery in travel retail.
Domestic travel inside countries is bouncing back more quickly and reached 58.5% of pre-pandemic levels in 2021. International travel lagged at just 38.7% of 2019 levels.
Long-haul airports like Paris Charles de Gaulle and Dubai International that invested heavily in expensive retail fitouts to lure top brands are among the most empty.
Even when international passenger traffic does come back, it will be harder for airports to attract luxury brands as tenants.
The mix of travelers is expected to change.
By 2025, more than half of global passengers could be younger and have less money to spend, according to a Bain report.
The share of high spenders passing through airports -- particularly business travelers and Chinese tourists, who are both important buyers of luxury goods -- would fall by more than 5 percentage points in this scenario.
Airports will have to add less expensive brands and build e-commerce businesses to offset lower demand for luxury goods.
Chinese shoppers will probably never buy as much in overseas airports as they did before Covid-19.
China's government has encouraged consumers to spend at home by tripling their domestic duty-free allowances.
That benefits local players like China Tourism Group Duty Free, now the world's number one duty-free retailer by sales. Its stock has more than doubled since the start of 2020, while Dufry's has almost halved.
Luxury brands will prioritize opening stores in mainland China in response to this shift. They are also beefing up their e-commerce businesses.
Higher digital sales are proving lucrative for major brands.
LVMH Moët Hennessy Louis Vuitton, the world's biggest luxury company, recently reported record operating profit margins for 2021, partly because e-commerce has become a bigger part of its business. This channel now offers an alternative to paying sky-high airport rents.
Even with their airport boutiques deserted, most big luxury brands managed to grow their sales during the pandemic.
Travel retail clearly isn't as crucial to the business of selling expensive handbags and watches as it once seemed. Airport terminals that had begun to look like expensive shopping malls need a new plan.