PROSPECTS OF DUTYFREE SHOP IN INDIA

Prospects of Duty-Free Shop in India

"Alpha Future will offer customers an exciting new duty free experience at the Delhi airport and is well positioned
to better serve the needs of the Indian travelers, who are amongst the largest duty free spenders in the World."

- Paul Topping, managing director, Alpha Airport Group-Asia

"Extensive international tie-ups have enabled us to offer a wide range of products at unmatched prices and
irresistible discounts to customers. Through innovative and extremely competitive rates and unique offers, we target
to make shopping at Flemingo DFS a unique experience of travellers and tourists.”

- Atul Ahuja, director, Flemingo India

Duty free shopping in India is fast turning out to be these days. An irresistible spread of the best
of liquor and wines, international cosmetics brands, and aisles choc-a-bloc with chocolates and
electronic products… enough for a shopaholic and a non-shopper to browse through. And all this
at competitive prices compared to their counterparts at international airports, saving you time and
giving you some super bargain shopping opportunities. Duty-free shops are retail outlets that do
not come under any local or national taxes and duties. Subsequently, the prices of products sold
in such stores are lesser compared to any other retail outlet. They are usually found in
international zones like international airports, sea ports and passenger ships. The Airport
Authority of India (AAI), a body functioning under the Ministry of Civil Aviation, is responsible
for managing the airports in India. In September 2003, the Airports Authority of India floated
global tender inviting bids for duty free shopping space of around 1,566.92 square meters in ten
major airports. The airports identified were Delhi, Mumbai, Chennai, Kolkata, Bangalore,
Hyderabad, Ahmedabad, Kozhikode, Goa and Tiruchirapalli. The licence was for five years.
Bids for duty free shops were also invited at a number of seaports including Goa, Chennai,
Kochi, Vizag and Haldia. These duty free outlets at seaports cater to cruise passengers, shipping
crew and ship supplies.

A duty is simply a tax. Thus, duty-free items are tax-free. The first thing that probably comes to
mind when you think of a tax levied on retail purchases is sales tax. Duty-free shops operate
differently, in that they don't charge the import tax that retailers are normally required to pay on
the imported items they sell.

Duty-free shops can be found in international airport terminals, on cruise ships, at seaports and at
international borders. Conceptually, since the items are not being consumed in the country, they
shouldn't be subject to import taxes. In theory, duty-free shops pass these savings on to
consumers, and some duty-free shops don't even charge sales tax.
Duty-free shops tend to carry only certain categories of goods: perfume, cigarettes, alcohol,
chocolate, jewelry, cosmetics and designer items. According to DutyFree.com, consumers can
expect to save 25-50% on items purchased at duty free shops, while Duty Free Americas, the
largest duty-free retailer in the western hemisphere, states that consumers can expect savings
ranging from 10-50% depending on the category of goods, with liquor and tobacco offering
better savings than other items.

In addition to the absence of import taxes, items purchased in duty-free shops can be less
expensive because they may be free of their usual category-specific taxes. Alcohol and cigarettes
purchased at regular stores typically have a sin tax added to them that is designed to discourage
excessive consumption of these items, as well as to raise money for local governments.
Likewise, designer items, perfume and jewelry may normally be subject to a luxury tax.

There are restrictions on the circumstances under which duty-free items can be purchased. For
example, if you're bringing duty-free items into India then only 2 liters of liquor and a carton of
cigarette (200 numbers) or 250 gm of tobacco is allowed. The items must also usually be in your
possession (as opposed to being shipped to you), intended for personal use or to be given as gifts
(not intended for resale), and they must be declared to Customs when you enter the country.
Each country has its own laws on this issue, so before buying duty-free items, learn the rules of
the country you'll be bringing them into.

Exhibit-1

Notifications & Circulars

Clarification on setting up Duty Free Shops approved by FIPB

Circular No.: 19 /2008-Customs

                       
F. No. DGEP/FIPB/100/2008
Government of India 
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs
Directorate General of Export Promotion     

New Delhi, the 14th November, 2008

 

Sub: Clarification on setting up Duty Free Shops approved by FIPB -reg.

  

            Many proposals of foreign direct investment for setting up duty free shops at airport/ports are being
considered by the Foreign Investment Promotion Board (FIPB). FIPB considers these proposals in totality (i.e. if it
includes technical collaboration/industrial license apart from foreign investment) for composite approval or,
otherwise keeping in view sectoral requirements and the sectoral policies vis-a-vis the proposal(s). The
recommendation of FIPB in respect of these proposals is only for foreign financial and technical collaboration.
Foreign investors will, however, need to take other prescribed clearances separately. This is in accordance with
the guidelines issued by the Department of Industrial Policy and Promotion, Secretariat of Industrial Assistance
(FC Division) under the Press Note No. 3 (1997 series) dated 07.01.1997.

2.         In this context, the FIPB’s approval is only for the purpose of permitting foreign investment and any such
approval does not automatically confer a right on the applicant to open a duty free shop at any port. The
observance of any conditions stipulated under the Customs Act, 1962 and rules and regulations made thereunder
is mandatory. CBEC has laid down instructions, conditions and guidelines for setting up private bonded
warehouse from time-to-time, notably under circulars Nos. 68/95 dated 15.6.95, 99/95 dated 20.9.95, 28/96-Cus
dated 14.5.96 and 18/2007-Cus dated 24.04.2007. At present, duty free shops can only be set up in the Customs
areas.

3.         It is therefore reiterated that jurisdictional Commissioners of Customs/Central Excise are required to
ensure that the conditions, restrictions and guidelines issued in this regard and statutory requirements are
followed scrupulously before grant of a license for setting up a duty free shop even in cases where the FIPB has
approved the proposal.

4.         Difficulties, if any, in implementation of these circular, may be brought to the notice of the Directorate
General of Export Promotion, New Delhi.

5.         Receipt of this may kindly be acknowledged.

                                                                                                           

Yours faithfully

 (M.Vinod Kumar)

Addl. Director General

Source : ,http://cbec.gov.in/customs/cs-circulars/cs-circulars08/circ19-2k8-cus.htm
Factors affecting the demand of more duty-free shops in India -

Average income

Per capita income, according to advance estimates for national income is expected to grow by
14.4 per cent during the current fiscal, the highest growth rate recorded in a single year in the last
decade.

Though the Gross Domestic Product growth rate during the current fiscal is estimated to drop to
7.1 per cent from 9 per cent a year ago, per capita income is expected to soar by Rs 4,801 to Rs
38,084 during 2008-09.

The country's per capita income, which is an important indicator of economic development of a
nation, was Rs 18,885 during 2002-03.

The growth in the per capita income takes into account the increase in the country's population,
which is likely to rise to 115.4 crore by March 2009 from 113.8 crore a year ago.

In percentage terms, the previous highest increase in per capita income during the last decade at
13.5 per cent was witnessed during 2006-07.

However, after discounting for inflation (at 1999-2000 prices), the per capita income is expected
to rise to Rs 25,661, representing an increase of 5.6 per cent.

Exhibit-2

Advance Estimates of National Income for the year 2008-09 (At current prices)

QE: Quick Estimate; RE: Revised Estimate

ITEM 2006-07 2007-08 2008-09

(QE) (RE)
A. ESTIMATES AT
AGGREGATE LEVEL
1. NATIONAL PRODUCT (Rs.
Crore)

1.1 Gross national product 37,49,606 42,97,047 49,74,696

(GNP) at factor cost
(14.6) (15.8)
 37,87,597 43,94,913
33,12,568
(14.3) (16.0)
1.2 Net national
product(NNP)at factor cost

2. DOMESTIC PRODUCT
(Rs. Crore)
43,20,892 49,89,804
37,79,384 (14.3) (15.5)
2.1 Gross domestic product (GDP) 47,23,400 54,26,277
at factor cost (14.4) (14.9)
41,29,173
2.2 Gross domestic product (GDP) 38,11,442 38,11,442
at market prices (14.0) (14.0)
2.3 Net domestic product (NDP) at 33,42,346
48,63,264 56,31,871
factor cost
2.4 Gross National Disposable 42,25,483
25,96,084 29,88,897
Income
2.5 Private Final Consumption 23,07,822
4,79,099 6,03,318
Expenditure (PFCE)
2.6 Government Final 4,21,546
16,05,440 18,75,953
Consumption Expenditure
2.7 Gross Fixed Capital Formation 13,43,843
1,70,315
(GFCF)
1,08,956 2,51,410
2.8 Change in Stocks (CIS)
53,591 50,668
2.9 Valuables 49,709
9,99,441 13,02,296
2.10 Exports 9,16,804
16,46,253
11,67,786
2.11 Less Imports 10,42,263
-13
22,756 -12,784
2.12 Discrepancies

B. ESTIMATES AT PER
CAPITA LEVEL
1,138 1,154
Population (million) 1,122
33,283 38,084
29,524 (14.4)
Per capita NNP at factor cost
(Rs.) (12.7)

Note: The figures in parenthesis show the percentage change over previous year
Population

The growing passenger traffic will lead to more investment in infrastructure in airports which
may lead to prospective growth in the area of duty-free shops in Indian airport.

SOURCE-KPMG

Consumer and Product Behavior in duty-free shop

There is usually a limit to how much duty-free stuff you can buy. Many countries allow you
to bring in only a certain dollar amount of items without imposing an import tax. For example,
the United States allows you to bring in $200, $800 or $1600 worth of goods, depending on the
countries you've visited, before you are required to pay taxes on them. After you exceed this
dollar amount, you will pay tax even if you bought the items duty free. Also, some countries
(including The United States) have quantity limits on the types of items you can bring into the
country - this is most common with items like cigarettes and alcohol.

Stores do not always pass on their duty-free savings to the customer. All duty-free means is
that the store does not have to pay customs tax because the items weren't technically imported
into the country. The presumption is that the store will pass the tax savings on to the customer,
but they are not required to and don't always do so. Many items will be marked up so that their
total cost to the customer winds up being roughly the same as buying it in a regular store. In
some cases, items may even be more expensive than they would be in a regular store. The best
way to make sure you're getting a deal is to research prices of items you're interested in buying
duty free before you leave for your trip.
Duty-free shops have varying prices.You might think that items would have a uniform cost at
duty-free shops, but you'd be wrong. Duty-free prices can vary from store to store and country to
country, and you can also get different prices from the duty-free cart on the airplane versus the
duty-free shop in the airport. The result is that it's hard to know what location is going to have
the best price for the item you want - should you buy at the airport before you depart, while on
the plane or when you arrive at your destination? The answer depends on what you want to buy,
where you are coming from and where you are going.

HISTORY

More than 50 years ago, in 1947 the staff of the Irish air company AerRianta, successfully
fulfilled their idea to create the first duty-free shop in Shennon air port.

It is considered that having passed the passport control the passenger has formally left the
country. Therefore the purchase taxes of the country become invalid in conformity of his or her
purchase, thought the staff of AerRianta. So everything bought before boarding, on board, and
before another passport control should be duty free. The idea was supported by local government
and in a short time found followers outside Ireland as well. In 1957 a duty free shop was opened
in Amsterdam, than in a year in Brussels, then in London, Frankfurt am Main and many other
international airports. Nowadays there are hundreds of duty free shops all over the world.

(The taxing case of dutyfree -investopedia .com)

ITDC

It is a public sector corporation created by the govt. to undertake major responsibilities in the
area where the govt. due to its limitations could not participate actively. It came into existence in
the mid sixties when the private sector was not that active in tourism development and
entrepreneurs were not willing to go to areas where profitability was not guaranteed. ITDC
undertook responsibilities of tourism seriously in areas when profit was not easy. To
compensate it, ITDC was given monopoly in some business where loss was not possible.
Monopoly of duty-free shops at all international airports is one of the compensation.
The pricing and quantity demanded structure is relatively inelastic as the change in quantity
demanded is relatively lesser compared to changes in pricing.

However scenario changed when 2 international market players Alpha jointly tied up with
Kishore Biyani’s future group and Flemingo tied up with Irish duty free players Aer-Rianta
entered into the market from 2004 onwards due to slow privatization of airports, the monopoly of
ITDC slowly drifted away and collusive oligopoly has set in.

ITDC lost heavily in its market share due to the collusive oligopoly played by the 2 international
market players.
However it has been recently reported that ITDC is all set to bid for 8 airports which are soon to
be privatized.

Flemingo

Flemingo DFS is the first private sector duty free shop operator on the Indian mainland. It
competes alongside the former monopoly operator, the state-owned Indian Tourism
Development Corporation (ITDC).  Flemingo DFS is a Dubai-based enterprise that manages a
chain of duty free stores at located airports, seaports and diplomatic missions around the world,
mainly in the Gulf, India and Africa. To support its growing operations in India, where it now
has duty free shops in 12 airports.

http://www.flemingodutyfree.in/

Alpha Future Airport Pvt. Ltd

Alpha Future is a joint venture between Alpha Airport Group of the UK and the Future Group,
India, has opened its first duty free shop in year 2007, at Indira Gandhi International Airport,
New Delhi. The value of the contract agreement signed by GMR DIAL with Alpha-Pantaloon
consortium is estimated to be around Rs.5 billion. The term of the contract is 39 months. It offer
customers an exciting new duty free shopping experience, with an unparalleled collection of
7000 duty free items displayed across 8,000 sq. ft. floor area, including two outlets at arrivals
lounge and one outlets at departure area.

The exclusive range of products cater the demand of passengers in different product categories
like liquor and tobacco; perfume and cosmetics; fashion and accessories; and confectionary.

Marketing strategy and structure of duty-free shops

Since duty-free outlets have restrained quantities which they offer, they try to target the niche
segment of people who have the purchasing parity to match up to the premium pricing of
commodities which the producers usually set.

Overall tendency or trends of duty-free markets have been observed as maintaining low volume
of sales but trying to keep a high margin of profit.

The segmentation and positioning of this market is basically done to cater to the niche person
who holds exclusivity and quality as a reflection of their status symbol.

With the entrant of Alpha and Flemingo DFS, ITDC has lost its monopolistic nature but still
duopoly of these two international players has set up an imperfect competition. So the impact of
government regulations and policies in duty free shops in India which act as a primary key factor
for setting up the imperfect competition that can be modified to setup perfect market.

Hypothesis Testing

H0: µ>=1

H1: µ <1

The null hypothesis states that if price elasticity is greater than or equal to 1 it’s elastic situation
when more substitutes are available and buyers can bargain with the sellers.

The alternate hypothesis states that if price elasticity is less than 1 then it is an inelastic situation
where imperfect competition is setup by few market players.

The following table shows the average price elasticity of various product sold in duty free shop

Liquor Perfume Confectionary Tobacco Perfect Mean

competition
 -0.10 0.36 0.66 0.95 infinity 0.574

Standard deviation=0.4556

T=(0.574-1)/(0.4556/sq.root 5)= -2.090

Whereas for alpha = .05 and Degree of freedom =4

t = -2.015

Hence null hypothesis is rejected

And we accept the alternate hypothesis, where the market structure is oligopoly.

(Refer to attached exhibits)

Observations

By looking at the market structure as well as the market share of the gigantic international
players, it can be inferred that they are having a collusive oligopoly since they are trying to
maximize their profits by restricting the quantities to be sold, at the same time they are producing
monopoly output and price.

ITDC is losing out on its market share, due to the collusive oligopoly set forth by Alpha and
Flemingo.

Alpha and Flemingo international have decided on the airports where they will be setting up their
outlets thereby not affecting or interfering on each other’s geographical territories.

Business Model

BASED ON THE ABOVE OBSERVATIONS A BUSINESS MODEL CAN BE PROPOSED

WHERE A CHAIN OF OUTLETS CAN ONLY TARGET THE DOMESTIC PASSENGERS
TRAVELLING INTERCITIES WITHIN INDIA:
 1) As per capita income in India has seen a rising trend from last 5 years, middle class
household members can afford travelling in flight.

2) Flight fares have been subsidized thereby enabling more passenger traffic in subsequent
years.

3) They can encourage subsidizing goods sold at international duty free shops at lower
prices in these retail outlets and thereby increasing domestic consumption as well as
contributing to nation’s GDP growth.

4) They can aim for product diversification strategy by tapping the needs of customers and
their consumption pattern and can accordingly implement a bypass attacking strategy to
their competitors while entering into the market and in international zone while catering
to international passengers although they can prefer to remain as market followers if they
wish to provide the lead to the 2 international giants and pricing model can be set
accordingly, hence maintaining Stackelberg’s equilibrium. The profit sharing ratio can be
maintained.

5) Initial promotional strategies in the form of rebates and educating the market can be
achieved by setting up a strategic alliance with few leading airlines and incorporating
joint attractive offers in order to attract more customers.

Preconditions

Government can reduce tax rates for the domestic retail chain outlets thereby increasing
more production at the same time if the prices are maintained at a subsidized level and
government encourages more disposable income in the hands of consumers by reducing
their personal income taxes, rapid consumption and flow of goods and services will take
place and also equilibrium needs to be maintained incase demand exceeds supply or for
that matter supply exceeds demand.

Global Implications on duty-free markets

A study shows amount of revenue generated from aeronautical and non-aeronautical

sectors from world-wide airport (Exhibit revenue generation)
 SOURCE-KPMG

Compared to worldwide sectors India has not potentially invested in duty-free sector,
more investment and involvement of FDI will lead to more revenue generation of GDP
thereby ensuring potential economic growth.

CONCLUSION

Globally our duty-free outlets should match up to the standards and quality norms which
an international shopper normally looks for in any international duty-free shops of any
nation, a mirror and glimpse of the nation is reflected in the duty-free outlets which has
innumerable offerings for its consumers and hence Government of India should seriously
think on more investment in duty-free retail outlets where privatization of airports are
being considered at a rapid pace.

Product mix of traditional as well as luxury and exclusive items can be interspersed well
which reflects the mixed culture of our country through Duty-free shops.
References-

1.Data on per capita income -http://mospi.nic.in/pressnote_nad_9feb09.pdf

2. India's per capita income doubles to Rs 38,084- http://www.rediff.com/money/2009/feb/09

3. History of duty free shop-www.CESifo.de

4. KPMG ‘s Airlines- www.kpmg.com

5.Alpha setups duty free in IGIA, Delhi- www.domain-

b.com/industry/retail/20070329_airport.html

6. The taxing case of dutyfree -investopedia .com

7. Economics by Samuelson and Nordhaus

8. www.flemingodutyfree.in

9. Statististics for Business and Economics-Anderson, Sweeney and Williams

10. Clarification on setting up Duty Free Shops approved by FIPB-

http://cbec.gov.in/customs/cs-circulars/cs-circulars08/circ19-2k8-cus.htm

11. www.wikipedia.org

12. civilaviation.nic.in