Aer Rianta International: 
How a small country like Ireland became a Duty Free giant

It is a State body, a wholly-owned subsidiary of Dublin Airport Authority (DAA) to which it makes an important financial contribution. 

Headed by its chief executive, it is structured into six departments:  Business Development, Retail, Procurement and Supply, Design, Finance and Legal.  Henry Rooke is the Group Head of Procurement and Supply. His background is in logistics more than in purchasing. The retail business has been new territory for him. He worked for seven years with Lucent Technologies in Dublin where he managed the European and Far East logistics operations and gained extensive experience with managing suppliers.

Rooke is responsible for all purchasing for the retail outlets that ARI support. Products range across liquor, tobacco and confectionery, perfume and cosmetics, fashions, electrical and travel. He declined to give a figure for annual purchasing sales, citing commercial sensitivity, but for an operation of the scale of ARI, our unverified estimate would be northwards of €100 million a year.

Rooke is in the process of completing a major reorganisation of his operation.  “I joined ARI in April of this year,” he notes. “Since then, my focus has been on some fairly extensive restructuring of the whole function of procurement and supply. The new organisation chart represents radical change.

He has a staff of 24 reporting to him at present and he has organised them into three main groups: Purchasing, Quality & Processes and Customer Service. Purchasing is now divided into two regional teams each with seven purchasing personnel, with responsibilities by product category.  – one for Ireland and one for Eastern Europe and the CIS (the Confederation of Independent States, that includes Russia, Ukraine, Belarus and a number of other former parts of the USSR).

ARI has been present in Russia since 1989 when, together with partners Aeroflot, it was awarded the concession to operate Moscow Duty Free at Moscow 's Sheremetyevo airport. This was added to by Pulkova airport, St. Petersburg . Since then ARI has continued to expand its operations in Russia . In 2004 the company announced that, together with its local partners, it had been awarded the concession to operate duty free shops in Domodedovo, Moscow . This was followed in 2005 by Vnukovo, Moscow . And, since 1992, ARI has had a presence in Kyiv , Ukraine .

Since 1993, ARI has operations in the Middle East , which are run on a separate basis. ARI entered the North American market in 1998. North American operations are run from Ireland but they have their own local purchasing capability, based in Montreal . Rooke’s Procurement and Supply department provides some support, particularly at the start-up of a new location. “We are currently about to open a number of shops in Barbados and we are managing all the initial purchasing from Ireland . This involves contracting with suppliers, establishing the physical supply network, getting the first orders into place, and generally handling the procurement and supply issues up to the opening of the shop. Once that’s in place, we hand over to Montreal ”.

He regards the new organisation structure as a full supply chain model for ARI’s type of business. “Up until now, we have had one purchasing team at headquarters. O ur objective now is to bring more focus into the individual regions and on getting purchasing specialists based in the regions. I spend a lot of time in the CIS markets and I visit Moscow at least once  a month.

“On the buying side, we’ve got specialist buyers covering the main categories in both markets. The people in place have expertise in understanding the product and our market. They spend a lot of their time working with our retail outlets to understand their requirements, what’s selling in the shops – and, if they are not selling, withdrawing and replacing them. If it’s not selling, it’s taking up retail space, which is unproductive. They are the conduit between the supplier and the retail side of the business. There is a very strong relationship between retailing and procurement.”

All of ARI’s business is in airports. In each of the airports in which it operates, and certainly in the CIS, the head of the retailing part of the company is based in Ireland , while staff are located in the market. Most of the Eastern European & CIS retail businesses are joint ventures with a local partner, usually not a retail organisation.

“Fundamentally, what ARI brings to the partnership is its retailing capability, says Rooke. “We provide the retail expertise and we typically provide much of the senior management of these operations, with ARI usually providing the general manager.”

Procurement is a major part of this expertise and there are two aspects to this. One is managing the suppliers; the other is managing the physical delivery to the airport retail outlets.  The locations ARI ships into are often quite difficult environments. “Shipping into Russia is quite different from shipping into Western Europe ,” says Rooke. “The regulatory environment, customs requirements and certification of products are unique for each country. We are experts in how to do that and have built up that expertise over time.

“Procurement obviously plays a key role in profitability and our ability to negotiate effectively with suppliers is a significant determinant of profits. Two elements of procurement expertise contribute to profit – negotiating capability and bulk buying strength. It is a combination of both. The way the business is negotiated does vary to some extent, depending on product category and, in some cases on individual supplier circumstances”.

Unlike manufacturing procurement of materials and components, which are usually unknown to the end user, retail purchasing is driven by the brand name.

ARI deals with hundreds of suppliers, of which around 20% would be core brand vendors – key brands in the marketplace that are pretty well essential in a duty free shop. Brand strength largely determines supplier selection. As with any specialist retail operation, it is essential that Duty Free shops carry the big brands and market leaders that customers want. This is a highly discriminating and affluent customer base that demands the comfort factor of top brand names and is not interested in unknown brands or generics.

Thus, while it carries some Irish merchandise, most of ARI’s suppliers are international companies, reflecting the reality that one of the major attractions of Duty Free shops is that they are selling high quality international top liquor, tobacco, perfumes and other consumer merchandise brands that reflect the most sophisticated markets in the world, be it the United States, France, Italy or wherever.

“In most instances,” says Rooke. “We have a very close working relationship with our retail division because it is their expertise that can tell us not just what is selling but what is likely to sell. Our suppliers have multiple brands, some of which are very well known and have a strong market share, while other brands may be less well known and may not be associated with the supplier’s name. We aim to have a mix of product types and brands in the shop.”

This can vary with the type of customer at individual airports. What drives the business is the volume of passenger traffic at the airport. An airport in Moscow and, say, Pristina in Kosovo are basically very different. There are different levels of affluence and type of passenger going through and the expected spend per passenger will vary.  Moscow would be high end in fashion while some of our other outlets would be dependent on fashion items such as, for example, rugby jerseys.

Rooke makes the point that the way ARI operates with suppliers is not necessarily typical of other industries. “We work with our suppliers almost like a joint venture. It’s two partners working together to get the best end result. In manufacturing purchasing, by contrast, it’s usually a case of buying something that gets the manufacturer the best deal. We can’t work independently of our suppliers; we must work with them.”

“Typically in a shop we have a limited area to allocate amongst the different brands. We decide the mix and we negotiate with suppliers on how they allocate their space among their brands and how they furnish their space. The bigger companies usually have their own branding approach to their space. So it’s quite a complex negotiations process.”

In a lot of cases, what ARI actually negotiates is a margin percentage, not a cost price. “Keep in mind that suppliers are heavily involved in the retail end. It’s their space, furnished by themselves, and they wish to have an influence on the selling price. So what they say is: We’ll give you a certain margin on an end price that we set. That’s not always the case but it is for many suppliers, particularly in perfumes and cosmetics.”

One area where ARI can leverage its global capability is in leveraging promotions with suppliers for some brands and running a promotion across all its airport shops is something that it can bring to the table. 

ARI works hard to develop positive and open relationships with its suppliers. “The calibre of suppliers varies, of course, in terms of service and delivery on time. But there are some who are more difficult to deal with than others and tend not to have the same interest in wanting to work with you. There are suppliers who are focused on trying to shave the last cent on every margin, whereas the better suppliers look for a win-win between themselves and us and have the flexibility to maybe lose a little in one area and gain in another. That’s nothing unusual in the procurement business.”

In negotiating with suppliers, ARI prefers to do it across the board, covering all its shops. But it doesn’t always work out that way.  Rooke explains: “Among larger suppliers in particular, we’re dealing with different divisions of the company when we’re negotiating for the CIS and for Ireland so it can be difficult to put it all together. But whenever possible we bring our total purchasing power into play and leverage it to get a margin that is based on our total volume of business with the supplier. And the new organisation structure is an important step in bringing all our purchasing power – including North America and the Middle East as part of our overall restructuring. That’s the next step.”

For centralised distribution, ARI leases space in a bonded warehousing facility in Holland . Suppliers ship to the warehouse where ARI ships them on to the airport stores. The intention is to process merchandise pretty well straightaway. “When we look at the logistics capabilities of suppliers, there is a huge variation in capabilities and that can give us some internal operational issues,” says Rooke.

Stock periods can vary hugely. ARI operates where possible on the basis of back-to-back orders where, essentially, they are not holding at all. In practice, they may hold some product, usually for no more than a fortnight, but sometimes longer, depending on how sales are going. If something is not selling in the way that it was predicted, it may be held in the warehouse rather than shipped to the shops.

In some cases, suppliers ship directly to shops, when the joint venture partner places orders directly with suppliers and ARI’s role is to set up the arrangement. For products like confectionery, with a short shelf life, we make special arrangements and they tend to be delivered directly to the shops.

There are supply chain challenges.   In fashion, for example, the issue is making sure that ARI orders what is going to sell up to six months ahead. The fashion offering will change completely twice a year and sometimes more often. It is crucial to get it right in terms of what will sell and then ordering the products in time for them to be in the shops in time for a new fashion season. As fashion retailers everywhere know, that can be quite difficult to do because the lead times from fashion suppliers tend to be quite long and it can take six to seven weeks to get merchandise from the fashion supplier.

ARI’s new organisation structure features a new Customer Service department. “its role is basically about fulfilment and delivery,” says Rooke. “It used to be part of the purchasing team but I believe that the discipline required for that is very different. It’s like any operations process; at some stage, you have to place an order and get the goods in and that’s all about operations – chasing orders and dealing with the logistics people on the supplier side, progressing the order and getting it into our warehouse in Holland and getting it out the other end.

“That’s a day-to-day operations activity, which is very different to setting up the structure for identifying the product range that we’re going to buy in the first place, setting up that information on our IT systems so that we can process the business, agreeing the margins that we’re going to get for that business, agreeing the volumes we’re going to buy and then, for example, as the different seasons come around in fashion, continually responding to the changes that the business requires”.

Aer Rianta International’s business – Duty Free retailing – has been around for some 60 years but its emergence as a major global industry is recent. It is now at a stage where it is maturing and consolidating, as new and emerging markets open up new opportunities.  Air travel continues to increase and this has impacted on the business. For example, five years ago, Moscow had effectively one major airport; today it has three, one of which is the fastest-growing airport in the world. The longer established airports run their own Duty Free shop but the international trend is for airports to outsource Duty Free. Competition has increased significantly in the past five years. ARI is not the biggest operator in the industry and it has some big competitors like the Swiss-based Dufry and the German Gebr Heinemann.

“Our model is quite different to that of our competitors,” says Rooke.  “They don’t typically put their own people with retail expertise on the ground as general managers in the way that we do it, giving a professionalism and experience that very often is not available locally.  Even in Russia, which has now developed its own expertise from the time we first started operating there, ARI personnel still provide the expertise in many cases.  This is a competitive advantage that has produced real results and our ability to operate in this way is a defining difference between ARI and its competitors in the global Duty Free business.”

The late Brendan O’Regan, acknowledged as the founding father of Duty Free retailing, and who established the first Duty Free shop in Shannon Airport , was possessed of one of Ireland ’s most innovative and forward-thinking minds. Long before the days of the Celtic Tiger, at a time when the Irish economy seemed to be foundering, he foresaw a bright economic future for Ireland as a player in the global marketplace.

O’Regan firmly believed that, having created Duty Free, Ireland had first mover advantage and it was vital for Ireland to develop its Duty Free reputation and build on its expertise to create what could become the biggest Irish-run operation of its kind in the world. In this, he has proven prophetic.

(c) Purchasing and Supply Solutions