We will continue to see strong growth

Interview with Heinemann Group CFO Dr. Kai Deneke.

Kai, is it fair to say that 2023 was the first real post-crisis year after the Covid-19 pandemic?

Dr. Kai Deneke: Yes, it was — but, at the same time, it wasn't. It is true that it was the first year without any relevant Covid-related travel restrictions. However, in many regions, passenger numbers have not yet reached the pre-pandemic levels, especially in Asia Pacific. Similarly for our home market: Germany is below the European average in terms of passenger numbers. We have also noticed that, although the Covid pandemic is over, it has led to considerable changes in people's travel and purchasing behavior — for example, the replacement of business trips with digital meetings, the greater importance of digital commerce, and higher expectations of the shopping experience at the point of sale. At the same time, the Covid crisis was followed almost immediately by other crises that are also having a major effect on our business and whose outcome we cannot predict. Russia's war in Ukraine and the Hamas attack on Israel, as well as the tense overall economic situation with high inflation rates in Germany, Europe, and around the world have a negative impact on the global duty-free business.

How did the global duty-free market develop in 2023? And, of course, we are particularly interested in the group's results for the year.

Dr. Kai Deneke: Overall, the market recovered faster than expected. On a global level, international passenger numbers have reached 93 percent of 2019 level in 2023 which shows the strong rebound of the market. Our core markets in Europe and Turkey were even stronger. We were also quite happy with the revenue per passenger as an important key performance indicator for us as a retailer — it was significantly higher in 2022 and partly 2023 due to catch-up effects and “revenge shopping.” However, that is now leveling out again. Looking at 2023 in total, we increased our turnover by 25 percent last year to 3.6 billion euros, which means that we reached our turnover level of 2019.

What's the situation at the largest Heinemann airport locations?

Dr. Kai Deneke: When we look at the Heinemann world map, we can see that Western Europe with the large locations in Frankfurt, Copenhagen, and Vienna performed very well. In contrast, our duty-free business in Norway was negatively affected by regulatory changes and currency developments. Turkey, especially Istanbul, continues to be the Heinemann Group's main driver with an annual retail turnover of more than one billion euros. Sydney and especially Kuala Lumpur have been hit hard by the delayed return of Chinese travelers and by the end of the year had only reached 62.3 percent of the pre-crisis level in terms of turnover. Tel Aviv experienced record sales until October 2023, when the terrorist attack by Hamas on October 7 caused business to collapse.

Despite the terrible situation in Israel and the ongoing conflict, you have taken over all the shares of JR/Duty Free.

Dr. Kai Deneke: Tel Aviv Ben Gurion Airport is very attractive and represents one of the largest markets in global travel retail. Our previous partner JR had been active there for 30 years; we joined in 2017. Despite the current situation, we believe that the Tel Aviv location still has great potential for future growth. As a family business, we take the long-term view.

Sustainable diversification of the business is always important for airport retailers to cover all forms of international travel and to better manage global risks. Which path have you taken?

Dr. Kai Deneke: The pandemic, as well as the armed conflicts in Ukraine and Israel, have reminded us of the importance of being broadly positioned. This means that we should diversify our business portfolio not only regionally, but also across different channels or product groups. For instance, we have invested in the border-shop business by acquiring the shares of our former joint venture partner of Travel FREE in the Czech Republic and by acquiring a 50 percent stake in the NOBILIS GROUP, the largest independent perfume distributor in the German-speaking region. In addition, we are working on broadening our product groups, for example, through growth in the Fashion, Accessories, Watches, and Jewelry (FAWJ) category division and the development of completely new categories for us, such as pre-owned watches and handbags. We are also diversifying regionally, entering a new growth region by winning the license for the Jeddah site in Saudi Arabia, for example, and growing our wholesale customers base. Despite the sharp rise in financing costs and the current political and economic uncertainty in our markets, we will continue to invest heavily in growth and innovation — but of course with great caution.

The Heinemann Group is active in more than 100 countries. An important part of your role as Group CFO and a member of the Executive Board is the ongoing development of the IT infrastructure. How will you realize the Heinemann idea of a globally integrated and consistently structured company in this respect?

Dr. Kai Deneke: That really is a challenge and, at the same time, a great opportunity. On the one hand, we have many companies in the Heinemann Group that differ greatly in size and business model and therefore naturally have different requirements for their IT systems. On the other hand, we can increase our competitiveness on the global market if we also create synergies in the area of IT and develop efficient solutions for the group, for example for checkout systems, supply chain management, e-commerce solutions, and global reporting systems. Recent developments like cloud technology and service-oriented architectures allow us to better leverage our capabilities, therefore we are currently transforming our solutions into this kind of architecture. This will enable us to offer easy-to-use services for all group companies. Overall, driving digitization on a global scale and using data effectively to steer global supply chain processes and reshaping our commercial offer will be more and more important — and our global IT operating model and infrastructure needs to be the backbone for this.

In terms of group financing, Heinemann is relying on a syndicated bank loan closed in 2020. Do you plan any changes to your financing strategy?

Dr. Kai Deneke: We experienced tremendous support from our banks during the crisis, and the syndicated loan will remain the main pillar for our group financing. In 2024, we will start preparing for an extension of the loan as it will expire in January 2026. In parallel, to diversify our financing strategy in terms of lender structure and maturities, we are currently issuing a Schuldscheindarlehen (promissory loan) with different capital market investors, which will also provide us with more headroom for future investments. We plan to complete the process in the second half of 2024.

Speaking of financing, the ESG fields of action are of particular importance and will certainly be very closely monitored by investors and banks. What progress have you made here and what are your plans for the coming year?

Dr. Kai Deneke: Today, a company's position on Environmental, Social, and Governance (ESG) issues is a relevant criterion for financing by banks and other lenders. In addition, the legislator has stipulated a massive extension of reporting requirements for larger companies. For Gebr. Heinemann, sustainability has been an integral part of our company's development for more than 140 years, and we see sustainability as a foundation of our corporate identity and mission. We have defined ambitious sustainability goals for environmental, social, governance, and responsible value chain action fields and have embedded them in our group strategy. For instance, as part of the Science Based Targets initiative (SBTi), we are committed to the 1.5-degree target of the Paris Agreement and plan to achieve net zero in our Scope 1 and 2 CO₂e (CO₂ equivalents) emissions by 2030. In addition, we pay very close attention to compliance with human rights in our supply chain and aim to cover at least 80 percent of our purchasing volume through independent supplier assessments by the end of 2024. We are also working toward having our newly developed global strategy for diversity, equality, and inclusion confirmed by ISO certification in 2025.

Let's take a look into the future: What is your outlook for 2024? Where do you see growth potential for the group?

Dr. Kai Deneke: In 2024, I expect that we will continue to feel some headwinds from the market and the impact of the ongoing war in Ukraine and the conflict in Israel. Nevertheless, I am confident that we will continue to see strong growth, not only through the ongoing recovery of air traffic but also fueled by the acquisitions we made in 2023. Looking at the individual regions, I expect Western Europe and the Nordics to continue on their recovery path, in line with the restoration of capacities on the airline and airport side. Asia Pacific will benefit from the return of international Chinese travelers, and I hope that Sydney and Kuala Lumpur will return to pre-Covid levels by the end of the year. In terms of new business, the Middle East continues to be very interesting for us and Saudi Arabia is certainly our most prominent example. There are also a number of other interesting tender opportunities on our list in our existing markets in 2024. In addition, we see potential in acquiring new distribution customers. Overall, I believe 2024 will be a year that will be equally challenging and rewarding.