Duty-free loss proves to be a taxing problem

August 11, 2000, 12:57

Journal: TWUK	Section:
Title:	Issue Date: 10/07/00
Author:	Page Number: 8
Copyright: Other

New approach: BAA has been forced to introduce new retail initiatives since the loss of duty-free sales

Duty-free loss proves to be a taxing problem

Tanya Jefferies charts the problems faced by UK operators in the first year since the abolition of duty-free

WHEN the duty and tax-free system was abolished a year ago, the travel industry was horror-struck at its demise.

It predicted huge price rises, thousands of job losses and mayhem in airport and ferry shops as operators struggled to implement new tax rules.

In retrospect, the so-called chaos theory may seem exaggerated. But there is no doubt that the ferry operators, airports and airlines which relied heavily on duty and tax-free revenue have had an extremely difficult year.

Ironically, the first crisis they faced following abolition was one they had failed to foresee.

Customers were so confused about what they were now allowed to buy that many of them stopped buying anything at all when they travelled.

Most people thought all duty and tax-free sales had come to an end, whereas in fact they could still get all the usual deals when travelling outside the European Union.

The confusion was partly due to the failure of regulators across the EU to negotiate a replacement tax regime until a few weeks before abolition.

This left no time to explain the new rules to travellers.

But the confusion was also down to an abrupt change in tack by operators who, right up until abolition, had been wringing their hands about what an unmitigated disaster it would be.

Virtually overnight, they began telling the public that nothing was really going to change and many prices would remain as low as before.

As a result, companies have had to shell out huge sums on re-educating travellers.

BAA retail director for UK airports Colin Hargrave admitted the company had spent £5m on advertising what holidaymakers are now entitled to.

“Losses have been bigger than we thought. It’s been at the top end of the scale, mainly because people were so confused,” he said. “We have spent 12 months ensuring customers’ confusion is cleared up.”

BAA has also been promoting a raft of new retailing initiatives to try to claw back lost revenue. These include opening shops at arrivals and introducing a collection service that lets customers buy goods on departure and collect them on return.

Meanwhile, ferry companies are in a slightly better position, having worked out a last-minute deal with Customs and Excise that allows them to sell unlimited amounts of alcohol and tobacco at the cheap mainland Europe prices on board their ships.

But they can only do this in foreign waters, meaning they have to close their shops mid-way across the channel.

Hoverspeed, in particular, has been keen to try innovative retailing concepts to boost revenue, such as wine shops in mainland European ports and a home delivery service.

But despite Hoverspeed’s best efforts, the loss of duty-free has forced it to announce the withdrawal from service of its two hovercraft this autumn, to be replaced by a Seacat instead.

Managing director Geoffrey Ede said: “The abolition of duty-free has had a significant impact on cross-Channel services during the winter months.

“Before, operators could depend on profits from duty-free sales in winter to cover operating costs and make a contribution to capital costs but this is no longer the case.

“To continue on the old basis, operators would have to increase winter fares to recover the lost duty-free profits.”

The UK Retail Travel Forum, formerly known as lobby group the Duty-Free Confederation, estimates that UK operators have lost a total of £500m over the past year as a result of abolition.

Secretary-general Barry Goddard said: “The last six months of last year were pretty chaotic in every sense. Customers’ perceptions of what they could buy were confused.

“Ferry companies were selling goods at the same prices in unlimited quantities but their sales still went down. We didn’t really know what to do.”

Goddard strongly denies industry fears about abolition amounted to scaremongering.

Cross-Channel operators have hiked prices by 30%-40% and an estimated 3,000 jobs have been lost to date. Worse still, the complexity of the new regime is such that ferries can only open their shops part-time.

The impact of abolition

n The UK Travel Retail Forum estimates UK airports, ferries, airlines and the cross-Channel operator Eurotunnel havecollectively lost £500m over the past year. It also claims 3,000 jobs have disappeared so far, of which 1,000 have gone from airlines.

n Ferry companies have increased prices by about 30% overall. Leading operators P&O Stena Line and Stena Line have blamed the loss of duty-free for poor results in the first quarter of this year. They reported losses of £11.4m and £38.9mrespectively.

n BAA estimates it has lost £80m in revenue as a result of abolition. It has spent around £5m trying to educate passengers about the new system. Landing fees at BAA’s main London airports have been increased by around 44p per passenger, but other operators have put fees up by as much as £2 per passenger.

n Eurotunnel has increased fares by 40%. Its traffic in thesecond half of last year was 13% lower than in the first half. The company is due to announce its results for the first six months of this year on July 24.