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America’s Duty Free & Travel Retailing

March 4th, 2016

Neutral Duty Free’s long-term bet on Melancia
Enrique Urioste, Neutral Duty Free’s CEO, is one of the biggest backers of this ultra-modern Northern Uruguay mall, which opened last year during tough economic times. With GDP growth in Brazil, where most of its clients hail from, slated to turn positive in 2017, he could prove to be right.

Large projects, such as the $70 million Melancia Mall, which opened late last year near in Northern Uruguay, take years to organize, plan and build. So promoters of the region’s largest retail development had no way of predicting that by the time it opened, Brazil, where most of its customers come from, would be in the midst of a major downturn.

“None of the public or private sector forecasters anticipated the scale of Brazil’s economic weakness,” says Enrique Urioste, CEO of Neutral Duty Free, which along with Grupo Wisa’s La Riviera banner, comprise the mall’s two major anchor tenants. “So we had to adjust tactics quickly. However we did not start the Melancia store for short-term gains. Successful retailers need long-term outlooks – to navigate these kinds of fluctuations.”

Urioste has been a visionary since the start of his career. In 2011, the former InterBaires and Duty Free Americas executive made his biggest move yet. With backing from JH Partners, a San Francisco-based private equity firm, Urioste led a buyout of Neutral, which at the time consisted of eight stores on the southern side of the Brazil/Uruguay border as well as airport duty free stores in Argentina. His mandate was to build the firm’s legacy business both through organic growth and acquisitions.

Melancia Mall: cross-border and duty free shoppers
Neutral Duty Free’s 4,000 square meter store in Melancia Mall is one key element in that strategy. The 60-store project includes a variety of characteristics that prime it for long-term success. In addition to the two major anchor tenants, Grupo Marchesano the developer, which invested USD $42 million in the shopping complex, was able to attract a slew of innovative retailers, - including Paratodos Free Shop, Varlix Servicios Financieros, Movistar and many others – which invested another USD $28 million.

Melancia Mall’s coveted location, in the Uruguayan town of Rivera, just across from the Brazilian border, has attracted Brazilian tourists and cross-border bargain hunters from the get go. Many are seeking to take advantage of favorable duty free conditions on the Uruguay side of the border. However traditional Brazilian cross-border-shoppers, who conduct day trips to do their regular grocery shopping and others who go simply to take advantage of the mall’s luxury products, alcohol, tobacco, clothing, cosmetics and other offerings are also key target markets.

The Mall’s Facebook page, which had an impressive 26,000 “likes” (when we visited it) as well as a substantial number of posts in Portuguese, provides a signal of just how important that Brazilian traffic is. (Uruguayan shoppers are not eligible to take advantage of Uruguayan duty free stores).

Neutral Duty Free: updated merchandizing
Under Urioste’s guidance, Neutral invested more than $15 million into its retail network during the first two years after he led the buyout of the company. This included increasing the number of available SKUs in the chain’s stores, and almost tripling its retail space offering. “When we bought Neutral it was a solid business, with a good brand name and an almost 25-year history,” says Urioste. “They had developed a proven success strategy. But the company did not have the capital available to fully develop the brand and the flexibility to leverage the most modern retailing knowhow.”

Key to developing that potential has been Urioste’s strategy of building licensing arrangements which enabled the company feature “store in a store,” offerings of The Gap, BMW, Nike and Tommy Hilfiger and other brands in its Melancia Mall outlet. “We want to offer “affordable luxury,” says Urioste. “We are looking for partners whose products offer good brand awareness, exclusiveness, competitive pricing and which can provide good margins.”

Urioste also has infused the chain with updated merchandizing, training, presentation and marketing techniques. These included improving the chain’s loyalty system and developing its ecommerce offerings. “Duty free shopping is about buying a dream,” says Urioste. “Clients feel special when they travel and are more open to “treating” themselves.”

Many of Urioste’s innovations are now evident in the Malencia Mall outlet, which attracted a considerable number of new clients to the chain in its first few weeks, as measured by the small percentage who were using Neutral loyalty cards. According to Urioste, the average ticket price at the store, of more than $100, was also significantly higher than another Neutral store located downtown.

Solid momentum moving forward
How these developments will play out in the future is unclear. However there are numerous positive signs. Last year Urisote led a restructuring at Neutral that significantly streamlined operations. The company is also studying opportunities to open up duty free shops on the Brazil side of the border. If the Brazilian economy does return to positive growth next year, as expected, this would no doubt also provide support for its outbound tourists. The new Uruguayan border immigration office for Rivera and a domestic and international bus terminal, which are opening near Malencia Mall, should prove to be another positive development, as it means that all travelers crossing the border from Brazil, will have to stop there. Rivera is the main crossing point between for travellers between Brazil and Argentina.

A projected firming of the Argentinian economy is also expected, over time, to increase the number of travelers who pass through the crossing each year, on their way to Brazil’ s beaches. “The changes that the new government in Argentina is making are huge,” said Urioste. “We are already seeing positive signs. The number of Argentinians travelling to Uruguay last summer increased by nearly 30%.”

However Urioste’s biggest strength, may well be his temperament, which enables him to focus on long-term corporate success. “I am lucky, because our investors, JH Partners share our vision.” says Urioste. “The hold onto their investments much longer that traditional private equity firms. This enables them to get timing working for, rather than against, them. They once held onto an investment for 19 years, before they divested it. That is rarity in a today’s fast moving world.”

Peter (at) peterdiekmeyer (dot) com

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peter@peterdiekmeyer.com

Peter Diekmeyer Communications Inc.