Toblerone Economics and Why Duty-Free Survives

For 70 years, duty free sat at the intersection of monopoly on concessions, opaque pricing, cross-border tax rules, very captive audiences, and political insulation. Non-aeronautical revenue — retail, food, alcohol, duty free — accounts for roughly 40–60% of total airport revenue at major hubs.

Duty-free shopping existed for a pretty straightforward economic reason: it helps countries capture spending from international travelers. When a traveler leaves a country, the products they buy in the airport are technically exports. Because those goods are leaving the country and won’t be consumed locally, governments allow retailers to remove local taxes like VAT or GST.

But does it still work? And why? Surely you're not saving that much in a system that's only gotten more rigged through the decades. Or ARE you.......

Transcript

Matt Brown 0:07

Hi everybody, it's No Show. I'm Matt. He's Jeff. I have never believed in duty free, and I don't know why. I've bought one thing in my life from a duty-free area in an airport, and that was, you guessed it, a tablerone bar, just to sort of do it. I don't think I'd ever even had Tablarone and I bought it just to kind of see. And it paid off. It was good. But I've always had a strange distrust of duty-free, and I don't know why. And today I'm gonna line on the therapist couch with Dr. Jeff. We're gonna talk about the only place in travel where everyone swears they're saving money, but nobody can explain how. And somehow governments, airports, airlines, and luxury brands all get paid. And I don't know how that math works. This is not shopping. This is not retail. This is a behavioral toll booth you walk through voluntarily and literally in a lot of places because you're tired and overstimulated and legally confused. And I'm on those three things many times. If you've ever bought a bottle you didn't plan to buy, justified it with the word in international, or said, I'll just grab it at duty free. Congratulations. This system worked exactly as designed.

Jeff Borman 1:28

Matt, I hate to correct you, but um, it's pronounced Toblerone.

Matt Brown 1:32

Oh, I said Toblerone. Toblerone. Toblerone. That's some Louisiana coming in.

Jeff Borman 1:40

Why does this model keep working? I think the reason it keeps working, it isn't because consumers are stupid, it's because the incentives are perfectly aligned. Uh duty-free sits right at the intersection of a monopoly on concessions, opaque pricing, cross-border tax rules that probably nobody understands when they're actually considering a purchase. Highly captive audiences. Once you've made it through your TSA, uh, you've been screened and you're allowed on airside in an airport, you're you're caught. And that we can't forget political insulation. There's always something. If you're gonna not pay a tax, some palm got greased along the way somewhere. So that combination doesn't just sell perfume, it manufactures corruption.

Matt Brown 2:24

Let's talk for a moment about why duty free exists in the first place. Um, and it exists for a pretty straightforward economic reason. It helps countries capture spending from international travelers. Full stop. When a traveler leaves a country, the products they buy in the airport are technically exports. Because those goods are leaving the country and won't be consumed locally, governments allow retailers to remove local taxes like VAT or GST. And that tax advantage makes products, especially alcohol, tobacco, fragrances, luxury goods, more appealing to international travelers, in theory. For airports and governments, the model works extremely well. Duty-free shopping encourages travelers to spend money before they leave, often in foreign currency, which benefits the local economy. It also generates a major revenue stream for airports. In fact, retail revenue from duty-free stores helps airports fund operations and infrastructure, and it can even help keep airline landing fees lower. So there are a lot of pluses, right?

Jeff Borman 3:26

We have to talk about scale. Nothing in airports compares to that of your average shopping mall. Hartsfield, Jackson, Atlanta, 108 million passengers are expected to go through this year. Show me, I don't know the numbers on Mall of America in Minneapolis, but it's not 108 million passing through. Dubai, 92, 93 million, DFW, upper 80s, and the like the traffic. This isn't just travel. These are populations being managed. These aren't airports in that way, they're population systems. International passengers will spend three to five times more per capita on duty free than a domestic passenger would. And 85% of Dubai's passengers are international. Hartfield international passengers are only 15, total inverse.

Matt Brown 4:13

And duty-free doesn't just care how many people pass through, it cares who you are and where you're going and whether customs lets you carry liquid. That's an important one, everybody, because liquids make up a big part of the duty-free play.

Jeff Borman 4:28

You mentioned at the top of the program you have only ever bought one thing, a tablerone bar. I have only ever bought one thing as well. It was leaving the airport in Delhi on a flight to the Maldives. And as we were a captive audience and we were thinking about our trip, we thought, you know what? Now would be the perfect time to grab a bottle of gin and a bottle of vodka because we're about to go to the Maldives and we're going to be resort-locked for a week. So it's going to be perfect. And we touched down and we went through customs, and uh the agents in the Maldives promptly took our liquid because that sort of liquid is not allowed in an Islamic country. We learned shortly thereafter that there is a large stock out back that they then auction off to employees afterward, because you are indeed allowed to have alcohol in the Maldives, uh, but you're not allowed to bring it in without a license. So they'll sell it to you on one end of the O and D and take it from you on the other. Matt, I think that duty-free economics are driven disproportionately by, as we've said, international long-haul travelers, tourists and not commuters. Also, though, what we haven't talked about yet is non-voters. And that matters a lot politically. That's why Dubai, Heathrow, and Istanbul and Incheon and Singapore, right? These airports generate more retail revenue per passenger than super high-volume U.S. hubs that we were talking about top of the program.

Matt Brown 5:49

Is it true that airports are no longer kind of funded primarily by government?

Jeff Borman 5:54

Yeah, I think non-aeronautical revenue. Uh, and our good friend Matt Cornelius explained this one to us a few years ago. Uh, the retail food, alcohol, and duty-free stuff accounts for about 40 to 60 percent of a total airport revenue in the hubs. In Dubai, that exceeds 50. Uh, Heathrow regularly close to 50. Uh, and the single most watched KPI is revenue per implained passenger. How's that? We haven't brought there's a new metric. We haven't brought a new metric on the show in a long time. Revenue per implaned passenger. And yes, those major global transit hubs, they're pulling about half of that metric. Our domestic flights, not nearly so close. Our domestic airports, the hubs in the US, not nearly close.

Matt Brown 6:35

For 25 years, we've been trying to not check bags. Your goal is to kind of travel as lightly as possible so you can stow above on the other side, get out. And it it always shocks me a little bit, especially with like liquor sales, and we'll get into liquor sales in a minute, but it always stuns me. Like people are like, oh, you know what? I'm gonna get in here, I'm gonna get a big bottle of cuddy sart to take home with me. But then again, uh, kind of like as I guess we're not talking about budget travelers, we're talking about international travelers who are on a holiday or they're giving themselves a treat.

Jeff Borman 7:06

Like shoes off, water gone, stress drops, wallets open.

Matt Brown 7:10

Yeah. That's the process in an airport, right? Um is it true? So we're recording this right after uh right after St. Patrick's Day. Is it true that this started in Ireland?

Jeff Borman 7:23

Well, folklore has it, yes. So uh they sold alcohol and tobacco tax-free. And that was not an idea that they uh that the Irish brought into the airport with the intention of creating a duty free. It was more of an accidental uh happening uh that travelers began to take advantage of. So before you, you know, if you were transiting through Ireland, uh or just before you're about to leave Ireland, yeah, why not why not get all your booze and smoke before you roll?

Matt Brown 7:51

So duty free was originally kind of compensation for inconvenience. And I might add, cigarettes, alcohol, very, very 20th century conveniences. Not that those things aren't still deployed today by many people, but it was originally kind of set up for those two things.

Jeff Borman 8:07

Yeah, and then jet engines improved. Uh refueling stops mostly disappeared, but the duty-free didn't. You didn't want to give up the shops just because you could go longer uh on a single flight.

Matt Brown 8:19

It seems like it sort of migrated as a lot of consumption did over the last 50 years, from necessity or vice, depending on how you want to define it, to perk. And now we are kind of fully in its its profit center phase of its life, right?

Jeff Borman 8:36

I think duty-free really just means that the VAT and the excise tax are waived at the border. That's it. It's it doesn't mean that the product was cheaper or more competitive. It is almost certainly not more consumer-friendly. Uh, the pricing is benchmarked against an inflated domestic MSRP, uh, not real street pricing either.

Matt Brown 8:57

And duty-free works because it kind of hits you when you're cognitively compromised. You have cleared security, you've taken whatever medicine you're going to take to calm your nerves, your dopamine spikes, and then uh suddenly in your subjectionable state, a$160 bottle of something feels entirely reasonable. And speaking of liquids, you know, if duty-free were a casino, perfume would be the slot machine. Probably the first thing that you will see in most duty-free shops, the perfume hustle, is the cash cow of this entire operation.

Jeff Borman 9:34

About a third of global duty-free revenue comes from perfume and cosmetics. The dominant market share here, fragrances and cosmetics collectively were valued at$15 billion in the duty-free sector just a few years ago.$15 billion. Margins uh are estimated at 79 to 90%. Uh production costs can be under$10 a bottle. Packaging and storytelling pretty much do the rest. And the travel exclusive label usually just means that the bottle size was altered so that there's no clear price comparison to be made to a street comparison retail shop.

Matt Brown 10:12

I wonder how much of this is driven by the fact that you traveled for work, you're on the way back, you didn't buy presents for anybody. And here's a convenient, nice, luxe way to show your love. In a tiny little package that fits on your carry-on. Absolutely. And you can say, Oh, I got stopped at the store, they had a great deal on it, and I thought about you. And if you're looking for slightly larger bottles, of course, uh, there's alcohol.

Jeff Borman 10:39

Alcohol represents the next third of duty-free sales. Uh in the 90s and the early aughts, duty-free alcohol delivered some real savings to consumers. Uh, 20 to 40 percent in high exercise markets. Uh, so you know, where taxes were real high and then waived, there was a period of time where duty-free shoppers actually were doing a smart thing and saving a little per per sip. But then he that advantage collapsed. Wait, why? Uh this was about the time also that big box retail began to really put a hurt on small shop profit margins. And also taking everything online in that era made pricing very transparent. Airports raised concession fees, that's important, and airlines demanded higher revenue share. So uh the opacity between what you bought in duty-free and what you bought on the street really intentionally increased during that era.

Matt Brown 11:31

So those are the liquids. Other categories, though, are a little bit less reliable. Electronics, sunglasses, you know, like everyday cosmetics, they're often priced close to or sometimes even higher than what travelers might find at home. Shocker. Retailers still control the base price, so so removing just the tax doesn't automatically guarantee a bargain. And that has gone through the roof over the last 20 years of online sales for sure. Savvy travelers kind of often compare prices before they buy. I'd never done that. I don't know if I'm ever going to be shopping the airport. Um, but you know, kudos to them. They're always on the lookout. Maybe they get lucky. And another factor that travelers sometimes overlook is currency. If you pay in a foreign currency with a poor exchange rate or a high credit card conversion fee, the savings can just disappear like that.

Jeff Borman 12:27

I mean, they'll just Yeah, I think the biggest strategic standpoint here is the shift that airports are becoming one of the last physical retail environments in the world with guaranteed foot traffic. Uh, every day, millions of travelers passing through airports with time to spend before boarding flights, and that makes travel retail incredibly attractive to global brands, uh, from luxury fashion to uh prestige beauty products. Because of this, duty free is increasingly moving from its original discount shopping identity and into premium retail. So, all that's the airports.

Matt Brown 13:02

There was a period of time, though, not too long ago, where airplanes, airlines said, Hey, look at all this. Why should airports have all the fun? We're an interesting space in travel. We should be offering duty-free objects as well.

Corruption Keeps Showing Up

Jeff Borman 13:17

Yeah, it actually, I think, began in the 50s and 60s on long hauls. Uh, international routes where a flight attendant, of course, that term didn't exist then, uh, would come down the aisle with a cart, and they began on onboard duty-free sales. And at that time, keep in mind, too, you had no seatback screens, iPads, uh, there was no Wi-Fi to complain about. Long flights were truly long flights. The passengers were the most affluent in the world to be able to be on that thing, and there was nothing to do. So airlines rarely owned the inventory being sold on board. Retailers would supply the product and the pricing, and uh, airlines simply supplied a captive audience and labor that was already paid for. And revenue share of that usually ran 20 to 40 percent to the airline. So it was a no-brainer for the airline to do it.

Matt Brown 14:09

We mentioned at the top of this that this is a model ripe for corruption. You'd figure that with so many eyes on this, getting away with with something would be a little tougher. But apparently, corruption is kind of part of this, right?

Jeff Borman 14:25

Yeah. I mean, I think there's might be a little cart and horse here. Did the model breed corruption, or did the corruption create the model? I don't know. Uh but you have monopoly concessions here. So there is only one operator uh with a massive revenue opportunity and very limited oversight. You have opaque pricing, there's no public benchmarking, and there's no advertised pricing. Uh, you have cross-border complexity, tax and customs and jurisdictional opacity and fog that intentionally uh helps a duty-free keep its model nice and secret. If that were to go away and transparency became clear, you you, the customer, would realize you might not want to be doing this. Uh, there's captive demand, right? Uh get to the airport three hours in advance is what we're told for an international flight, please. But that guidance sure helps people mill around and spend money. And I think in that last, you have just the pure government entanglement. Airports are sometimes state-owned. They are quasi-state entities. They really operate in a pretty gray place. So if you mix monopoly power plus pricing opacity, plus government revenue dependence, uh, government isn't really a risk, it's a guarantee. It's a feature.

Matt Brown 15:41

And when you go back to how airports are funded, duty-free operators, I think, often have to remit something like 40, 50, 60% of their gross revenue back to the airport authorities, and that creates a ton of pressure to protect who's already there, suppress all your competition, and just kind of ignore any irregularities. It's like it's all fun. It's all it's all slippage. It's all slippage and overage. Don't worry about it. We're all gonna make money.

Jeff Borman 16:10

And think about a 10% increase in passenger dwell time, just lingering around an airport, correlates to a five to seven percent increase in retail revenue per passenger. Now, I'm not going so far mad as to say that flights get delayed to make you stick around the airport longer. Um, but the idea that you need to show up two and a half hours early for a flight from Washington to New York is pretty absurd. Right. And that's the the money can be kind of dirty around all this. Well, in South Korea, Lote Group, a massive conglomerate, was implicated in a bribery tied to duty-free licensing uh in a very recent administration. Um prosecutors alleged tens of millions uh were siphoned off in improper donations for licenses. Executives were convicted, licenses restructured. So there are there's no shortage of examples where uh the opportunity to make a free buck by protecting a licensing scheme uh were an incumbent. Uh plenty of examples are out there. In Kenya, the world duty-free concession voided after testimony revealed cash bribes, literal money in a briefcase to secure airport retail rights.

Retail Beyond Airports

Matt Brown 17:22

You know, there's a there's a big shift that's kind of happening under the surface with duty-free that is expanding beyond airports, which is fascinating to me. You know, the industry as a whole now talks more broadly about quote-unquote travel retail, and that includes cruise terminals, train stations, border crossings, and even downtown duty-free stores that allow travelers to shop before they reach the airport. Some train station duty-free locations alone grew by roughly 12% in 2024. I wonder why we haven't seen this kind of growth before. Like, why doesn't why doesn't Times Square have a duty? Maybe they do, and I just haven't noticed, but why don't they have a duty-free zone? Why doesn't every city have a duty-free zone in the middle of the town that you can just say, oh, this is where you don't have to pay taxes? We do that for so many other businesses where we sort of wave off all the governmental things around it to kind of juice up investment. I wonder why we wouldn't do it with more consumer goods like this.

Jeff Borman 18:29

Outside the US, you do see that quite a bit. In China's resurgence that was mostly during the 1990s, one of the most successful stories was the whole city of Shenzhen, which was really a swamp in the 80s. And you know, today it's one of the world's most powerful economic cities, and not to mention 20 plus million people. That whole thing started off as basically duty-free, uh, only it was duty-free for entire companies and industries. Uh, you see economic zones like that pop up all around the world. China's expanding one to Hainan Island right now, uh, just again as a way to spur the economy in a place where it has lagged. So governments can use these things. Our government tends not to. Um, I think in part, uh the examples you gave, uh local jurisdictions cannot waive off a federal fee. So it would require Washington to be complicit in doing these things, which is unlikely.

Matt Brown 19:28

So duty free isn't uh a scam, really. It's worse. It's a state sanctioned behavioral toll booth.

Jeff Borman 19:39

Say that again three times. It is a state sanctioned behavioral toll booth. And at the moment when you stop asking is this cheaper and start asking who benefits if I believe it is, the whole illusion collapses.