Vacationers already devote 35% of cruise trip budgets to onboard retail purchases — and experts say pandemic protocols will only make duty-free retail more pivotal
- Luxury retail is a major money maker for cruise lines — for example, one expert predicted it to make up $300 million in annual sales for Carnival.
- Experts see on-board shopping as a way for cruise lines to rebound from the pandemic.
- Historically, cruise lines have been able to combine on-ship activities with retail, promoting products available for purchase while educating passengers on vintage watches or fine wine.
- Future cruise ship designs seem ready to incorporate more ways to push luxury retail on passengers — for example, with satellite shops around the deck or pool — as coronavirus protocols force 2021 voyagers to stay on the boat more than usual.
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Since March, the cruise industry has been hemorrhaging money, turning a high seas cash cow into a maritime money pit. Observers wondered whether mega-lines like Carnival, prevented from sailing in US waters by CDC edicts since March, might even survive. It wasn't just passenger tickets and onboard meals that businesses like Carnival were losing out on. Luxury retail at Carnival alone is thought to make up $300 million, according to one expert.
And those losses in retail made up part of Carnival's 50% decline in revenue in the 12 months ending on August 2020.
Malls have become a mainstay of mega-ship design, from duty-free staples like liquor and tobacco to onboard galleries selling prints and paintings and an increasing number of branded boutiques from luxury marques like Bulgari.
There was a glimmer of hope when the CDC lifted its sailing ban. But incidents like the one on the private cruise line SeaDream, where positive COVID-19 cases popped up despite precautions, have confirmed that the cruise industry's recovery will be a long and complicated one.
As a result, most remaining 2020 itineraries have been canceled, and it looks likely cruise ships won't return to operation until the first quarter of 2021.
When they do, expect operators to ruthlessly leverage every available revenue stream to help bolster their shaky finances, including onboard retail.
Onboard spend is now more than one third the overall cost for most cruisers
It's a startling development given that the earliest modern cruise ships, in the 1960s and 1970s, featured little more than a closet-sized store. Back then, passengers would instead be siphoned off to shop on shore in key ports.
"St. Thomas was called Duty Free Disneyland — the main street of Nassau in the Bahamas was the same way," said Allan Jordan, a cruise industry historian and reporter for the Maritime Executive. Of course, major lines soon recognized the potential in retaining control of retail, moving those duty-free outlets onboard instead and creating mini, airport-style malls in the common areas of new ships.
Since then, retail has only grown more critical to cruise lines. "The dollar spend onboard has been the big change we've seen over the last 10 or 15 years," said C. Patrick Scholes, an industry analyst at Truist Securities, "It's gone from roughly 25% of your overall cruise vacation cost to closer to 35%." Another industry executive, as quoted by CNN in 2018, reported a 60% rise in onboard spending since 2013. These outlays, of course, include other upsells, from spa treatments to internet services. Duty-free, however, is a significant portion.
Cruise-line retail has undergone much of the same changes as malls in Las Vegas
The increasingly upscale product mix has driven the boom, as Ross Henderson, SVP of onboard revenue operations for Norwegian Cruise Line Holdings, which owns the namesake line, as well as Regent Seven Seas and Oceania, explained.
"Remember Las Vegas in the early 1990s? It had stores, but it was mostly souvenirs," he told Business Insider. "Now it's all the best brands you can imagine — the cruise industry is very similar. Ten years ago, it was a tougher sell to get higher-end brands on board. Now that's not the case." See, for example, the dedicated Bulgari outlet on Norwegian Cruise Line's Encore ship, launched in 2019, or the multi-brand store on small ship specialist Crystal featuring designer brands like Hermès and Gucci.
Jordan said that duty-free shopping on a ship evokes an old-fashioned idea of shopping, too.
"It's bringing back the old trunk-show idea, having the designer present a collection to their customer so they can browse and buy," he said. Unlike an airport, where travelers are merely passing through, cruisers are a captive audience for days, who can be gladhanded and cajoled — in industry lingo, clienteled — to clinch a big-ticket purchase.
Education and promotion are twin boosters of onboard retail
Most lines delegate day-to-day operation of onboard retail to one of four major concessionaires. There's Germany-based Heinemann and Harding in the UK, plus Starboard in Miami, FL, which is a subsidiary of luxury giant LVMH. Dufry AG from Switzerland, best known for airport outlets, has a smaller cruise line business, too.
These firms partner well with cruise lines for one simple reason: money.
At airports, concessionaires are charged fixed rent for the space and operate autonomously; on cruises, there's a different model, Henderson said, where tenants typically contract on a revenue share basis. Encouraging travelers to shop, then, is mutually beneficial.
Events and programming onboard often include seminars and workshops that are equal parts educational and promotional: the Apprentice of Time seminars on Celebrity Cruises, which explore the craftsmanship of fine watches, or the wine tastings on Royal Caribbean's Symphony of the Seas, for instance. Luxury boutiques will likely be close to the ship's casino, better to allow them to lasso high rollers into spending their winnings onboard.
New ship designs are pivoting to emphasize retail as much as restaurants or shows
There's a holdover halo from that extended exposure after guests disembark.
"Top brands think of [cruise retail] as a way to form a relationship with the guest — educating them about a product like that, they're likely to become a long-term customer of the brand," Henderson said. Such workshops have become so crucial to boosting onboard revenue that future ship designs will incorporate dedicated spaces for such events. Ships that will join in Norwegian's fleet in 2022 and 2023, for example, feature dedicated makeover spaces, with chairs and mirrors, and a bar area in the liquor store where official tastings can be conducted.
Cruise lines are also moving retail beyond the fixed sites that usually cluster in the social hub of a ship. Instead, they'll station carts with sunglasses or headphones by the pool or the on-the-deck promenade to spur impulse purchases of lower priced items — see the pop-up retail program dubbed Serendipity by Celebrity Cruises. Duty-free is less a driver for these items than convenience — margins on big-ticket electronics like smartphones are low, but cases and accessories are a lucrative, high-margin market.
Lines might also bring vendors on board for a day or more, pegged to their destination: See, for example, the Italian shoemaker invited onboard to make custom mules for passengers on the spot.
Pandemic protocols only make duty-free retail more pivotal
One other major upside to onboard retail: Few lines allow travelers to use shipboard credit on luxury purchases. This promotional credit, often used as an incentive during booking rather than discounting the cost of the cruise, can be spent on spa services or drinks packages — both of which are bundled with duty-free sales as part of overall onboard spend in annual reports. Compared with a massage in the spa that could effectively act as an overhead, a pricey purse is pure profit.
The full resumption of operations is likely to prove beneficial to onboard retail, too, as historian Allan Jordan pointed out. A few sailings have already resumed around the world, notably in Italy, the homebase of cruise line MSC. Passengers and crew on these voyages are tested for COVID-19 before boarding to create a disease-free bubble while on board, and excursions are curtailed — anyone leaving the ship can only do so under supervision, and on organized trips; no more browsing local stores on a whim, for example. The only place for retail therapy, then, will be the ship's own shops.
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