Analysis: How WHSmith is preparing for travel retail to take off again

Airport retail is WHSmith’s largest revenue stream. The retailer operates in 29 UK airports and more than 100 internationally, with 280 travel shops in the US alone.

In the six months to February 29, total UK travel revenue at WHSmith, comprising air, hospitals and rail, rose 4% to £271m. Air revenue advanced 3% and 2% on a like-for-like basis.

WHSmith’s travel stores suffered a 91% decline in revenue in April

But since lockdown, the coronavirus pandemic has hit travel hard – and with it travel retail. Some borders have been closed, many flights have been cancelled and, across the world, people have been discouraged from travelling unless absolutely necessary.

WHSmith’s travel division consequently suffered a 91% decline in revenue in April as consumers stayed home and avoided transport hubs such as airports and railway stations.

Chief executive Carl Cowling expects passenger numbers to remain low in the near future, but he believes travel will start to pick up again in autumn 2020 – and he is confident that WHSmith will be ready for takeoff when it does.

Throughout lockdown, the retailer has been able to continue trading in its hospital stores, which form part of the travel division, in high street branches with Post Offices and even in a limited number of airport locations.

Cowling says that gives WHSmith an advantage over other retailers because it has a tried-and-tested operating blueprint to work to when the rest of its stores eventually reopen.

He aims to boost performance by bulking up the average basket value. WHSmith’s average transaction value (ATV) currently stands at around £7 in its travel division, but by using this time to plan adjustments to category offerings and store formats for the best socially distanced flow of shoppers, Cowling hopes to achieve higher spend per passenger once travel restrictions ease. 

Sufficient liquidity

While sales across most of WHSmith’s channels have been decimated by the coronavirus outbreak, the retailer has plenty of liquidity in place through a share placing and funding from lenders.

As of May 12, WHSmith had cash reserves of around £400m available. In April, it raised £162m through placing 15.8 million shares and secured new financing arrangements with lenders, including a new £120m banking facility from BNP Paribas, HSBC and Santander.

WHSmith said that monthly cash burn was roughly £20m when the government furlough scheme was taken into account, meaning it has sufficient funds should the lockdown be prolonged further.

“This stability will offer WHSmith a chance to participate in M&A in time, but shorter-term it may be able to take over some vacant space and also widen its range in travel locations”

Jonathan Pritchard, Peel Hunt

As retailers in travel locations continue to suffer, WHSmith’s liquidity will help give it an edge over its competitors, meaning expansion may even be a prospect.

Peel Hunt analyst Jonathan Pritchard says in a note: ”This [cash burn vs liquidity] stability is crucial as it is not shared by all of WHSmith’s peers and some will not re-emerge from the crisis. This will offer it a chance to participate in M&A in time, but shorter-term WHSmith may be able to take over some vacant space and also widen its range in travel locations.”

Cowling also notes that the retailer is in a strong position with airport landlords and rent agreements.

“A lot of airports have minimum rent guarantees, but quite a few have pax deflators with them – meaning that when passengers go down, so does the minimum rent guarantee. With a number of our large contracts, everything was in place to protect us,” he says.

“With [some] airports, we’ve been pretty successful at negotiating and getting them to be a turnover-based rent. We’ve got really good relationships with the vast majority of our travel landlords who have been really supportive, which gives us a lot of optimism for the future.”

Ready to trade

While government restrictions forced the bulk of WHSmith stores to close their doors, the retailer has continued to trade in just over 300 stores in the UK, as well as a few travel stores internationally, meaning it has already learned valuable lessons about how to operate in a post-lockdown world.

“We do have a big advantage over other retailers in that we have our hospital stores open, 200 high street stores open and a number of travel stores that remain open – they’re taking very little money, but our Heathrow stores and some international stores are open, too,” explained Cowling.

“Because of this, we know what we need to do when it comes to social distancing, changing the flow that customers take in the store, and we know all the equipment and hand sanitiser we need. Many other retailers are struggling to get their heads round these things, but we’ve been trading throughout this period.”

Cowling plans for high street stores to open in phases, as and when non-essential retailers are permitted to reopen. In travel, he says there will need to be further guidance from the authorities on exactly how they will operate, but he is adamant that WHSmith is ready to go.

“We know what we need to do when it comes to social distancing, and we know all the equipment we need. Many retailers are struggling to get their heads round these things, but we’ve been trading throughout this period”

Carl Cowling, WHSmith

“We’re very ready, we’ve got all our PPE in line, we’ve got all our stores mapped out in terms of how we’d operate them – we’re ready go when it comes to reopenings,” he said.

Cowling believes that, once governments give the go-ahead, airport landlords will be keen for WHSmith stores to reopen first because of its wide category ranges and appeal to time-pressed passengers.

While international travel may take time to fully improve, he says that the number of domestic passengers will increase sooner in some places, leading the way for recovery. The US, in particular, will be helpful in that respect as around 80% of passengers there take domestic flights.

Future opportunities

Despite the challenges, WHSmith is going full steam ahead with its plans to overhaul store layouts and formats to optimise sales in travel hubs.

After the success of larger store formats featuring pharmacies in airports such as Gatwick, Heathrow, Birmingham and Belfast, WHSmith is continuing the development of its flagship Heathrow Terminal 2 branch, to launch this summer.

Cowling hopes that the store, comprising 5,000 sq ft of retail space, will play a key part in the retailer’s focus on increasing its average basket size.

Appropriately, it will include ”a world-class health and wellbeing department with specialist staff”, carrying 3,000 products ”curated through our partnership with market-leading brands”, as well as providing healthcare advice and medicines.

WHSmith is well placed to appeal in new ways as customers return to travel locations because its variety of categories – including new ones – will encourage customers to top up their shopping if well ranged and presented.

Cowling says: “The exciting thing about our business is that our ATV is just so low, and we have so many different essential categories. So our teams at the moment are thinking about how we might reimagine or re-layout the stores such that customers are able to experience all the categories, meaning we get a much higher basket value.

“If you think that our ATV at the moment is £7, if you add 20% to that it’s only £1.40 more per customer. If we’re widening our categories – for example, health and beauty or low-end electronics – and when customers are coming in to grab a newspaper or magazine they’re seeing all these categories in an inviting way, that’s where we can benefit.

“We’ve got a lot of contactless points, too – our tilling areas are pretty well set up for this situation. In a lot of our rail and airport stores, we’ve got upwards of 10 self-scanning tills that people can use quickly themselves, which makes life a lot easier.”

Peel Hunt’s Pritchard wonders, though, whether social distancing requirements might dampen Cowling’s hopes.

“We fear social distancing will be a major factor here,” he notes. “Management tried manfully to explain what it had in mind to solve the issue, but the problem is that, in many cases, there is no solution.

“Yes, self-scan checkouts are helpful, but half will have to be cordoned off, and those just rushing through for a paper and fags will be put off by the queues, extended visually by the two-metre rule. 

“Simply put, stores with massive traffic will have to accept, in the short- and medium-term, that volumes will be lower. We believe historic densities will mostly come back when Covid-19 ceases to be or diminishes as an issue, but that is more a FY22/FY23 reality than FY21.”

Pritchard is confident, however, that despite some operational difficulties, WHSmith will eventually emerge better and stronger than some of its competitors.

And Cowling is sure that, when it can put this turbulence behind it, WHSmith will resume a smooth retail flight.