#841: The Land Of Duty Free We meet the man who invented duty free shopping and find out if these tax free stores are really saving us any money.
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#841: The Land Of Duty Free

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#841: The Land Of Duty Free

#841: The Land Of Duty Free

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ROBERT SMITH, HOST:

Hey, I'm just leaving a voice memo for myself. I'm in the Shannon Airport in Shannon, Ireland, on my way back to the United States to New York. There is this picture wall - giant pictures of all the famous people who have come through here. So you know, they have like John F. Kennedy, and there's Fidel Castro and Boris Yeltsin. And there is one photo that was sort of amazing. There's a picture of the president of Ireland, and next to him is someone called Dr. Brendan O'Regan. And he's sort of out of focus. You can see he's wearing a natty suit. He's got a nice little pocket square. And it says that Dr. O'Regan was the person responsible for this airport - for basically developing the Shannon International Airport. And most importantly, he created the world's first airport duty-free shop.

(SOUNDBITE OF TIM WHITEHEAD'S "CHU CHU")

SMITH: You know, the duty-free shop - the place where you get the perfume and the chocolates and all the liquor - first one was here. And before I get on the flight, I just wanted to rush quickly over and take a look at what was the world's first duty-free - a lot of scarves, a little jewelry. Where's the perfume?

JESSE BAKER: Hello, darling.

SMITH: How's it going? This is Jesse Baker.

BAKER: I'm buying sheep.

SMITH: Oh, they're adorable.

BAKER: Cliche, but my children won't judge.

SMITH: I think duty-free shops are supported on people who forgot to get gifts for their children.

BAKER: I didn't forget. I've just been busy.

SMITH: (Laughing) You're getting them at the duty-free shop.

BAKER: (Laughing).

SMITH: Hey, no shame here - I bought chocolates for my kids.

UNIDENTIFIED PERSON: Flight 206 to New York.

SMITH: That's my flight. I got to go.

(SOUNDBITE OF TIM WHITEHEAD'S "CHU CHU")

SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith - here with international jetsetter and former duty-free addict, Karen Duffin.

KAREN DUFFIN, HOST:

This is true. Back in my corporate days, I did spend a lot of time and money in duty-free shops.

SMITH: It seems like these days we are locked in this epic battle between those who want free trade across borders and those who want to put up barriers. An early skirmish in this economic war happened at an airport along the banks of the Shannon River in Ireland.

DUFFIN: Today on the show, we have the story of Brendan O'Regan, a former bartender turned entrepreneur who said let the world have its Courvoisier tax-free.

SMITH: And we'll answer the question I know that I've asked over and over again. Are we really saving any money at the duty-free shop? [LB] The story of duty-free starts with a bit of Irish luck.

DUFFIN: In the 1940s, when people were travelling from New York to London or Paris, they were in these propeller planes. And to refuel, they had to land in the first runway they saw after crossing the Atlantic. And that was Western Ireland - County Clare, along the Shannon River.

SMITH: And so here was this former mudflat that all of a sudden became the grand gateway to Europe.

BRIAN O'CONNELL: In the '40s and '50s, every famous person that crossed the Atlantic almost certainly wound up going through Shannon.

SMITH: So movie stars, presidents, prime ministers, kings and queens...

O'CONNELL: Yes.

SMITH: ...They all landed in Shannon.

O'CONNELL: They all had to land at Shannon Airport.

SMITH: Brian O'Connell was a businessman in the region - still lives there. And he says that everyone realised pretty quickly that they needed to upgrade the local amenities for all these movie stars. In those days, the airplane ride from the United States was long and uncomfortable and bumpy. Sometimes, it was even in these flying boats - basically planes that would land on water.

O'CONNELL: They were probably tired. You could be cold because obviously, the - particularly, the flying boats flew quite low over the Atlantic compared with planes today. So people were looking forward particularly to good food and good drink.

DUFFIN: This is when our duty-free hero, Dr. Brendan O'Regan, enters the story.

SMITH: Don't let the doctor part fool you. It is an honorary degree. Brendan O'Regan had been a bartender, a hotel clerk, a caterer. And when the Shannon Airport realised that all the movie stars were coming, they needed someone quick. They hired Brendan O'Regan to feed them.

O'CONNELL: He was a man who was very soft-spoken, quiet, calm. There was no nonsense about him.

DUFFIN: When the movie stars got their pictures taken, you could sometimes see O'Regan in the background. He's a dapper man with sandy hair slicked back.

SMITH: O'Regan had this knack for promotion from the very beginning. Rather than continental cuisine - which is what they were serving at airports everywhere - he served Irish food. But he dolled it up with all these place names. Oh, look. This is Kerry lamb and Dublin prawns and Limerick butter. And when he would serve whisky in the coffee, he topped it off with this thick layer of local cream. And he named it the very first Irish coffee.

DUFFIN: Wait. O'Regan created the very first Irish coffee?

SMITH: It's delicious.

DUFFIN: Irish coffee is the best.

SMITH: There at the Shannon Airport - and he ran this little kiosk next to the restaurant. And it was nothing really - little mini bottles of whisky and trinkets and cheap stuff. But the important point here is that everything was always taxed back in those days.

DUFFIN: Well, not everything because O'Regan noticed that there was this loophole. In the British Isles, it had been a tradition that sailors about to head off on a long sea voyage could bring onboard rum and whiskey without paying duties.

O'CONNELL: Yeah.

SMITH: Which - I don't know. Why would they do that? Just to keep the crews happy?

O'CONNELL: I think that's right. Yeah, I suggest that must have been an element of it or have them sleep off a lot of the time. I don't know. But that was a tradition that went way back to - I think 17th Century - or way, way, way back, hundreds of years.

SMITH: And strangely, this loophole was still in effect in O'Regan's day. In 1950, he was on a trip to the United States, and he decides not to fly back to Shannon but to take a cruise ship - the SS America. And O'Regan notices when he's on board that the alcohol on the ship is way less expensive than the stuff he's been serving at the airport.

O'CONNELL: All this alcohol and tobacco was being sold duty-free.

SMITH: Because they were in international waters, this is like the law of the high seas.

O'CONNELL: They were on the high seas. So he said wait. Now, we're competing with these guys by air. It's not fair that I can't have the same tax advantages they have.

SMITH: And this was the genius of Brendan O'Regan. He went to the Irish government, and he said, essentially, what are airplanes but boats of the sky.

DUFFIN: That's kind of true.

SMITH: True. And what are airline passengers but modern-day sailors of the clouds?

DUFFIN: Right.

SMITH: Do they not also deserve their tax-free rum and perfume and Haribo-brand gummy bears?

DUFFIN: There were not Haribo-brand gummy bears.

SMITH: His exact words are lost to history. But we do know that a lot of people in the Irish government said wait - tax-free? Are you kidding me?

O'CONNELL: Because every department of finance - every customs people worldwide resist giving away tax revenue.

SMITH: Sure.

O'CONNELL: And particularly in this case, morally, the idea of who's benefiting out of this - wealthy people who fly the Atlantic in planes. I mean, that's only a tiny percent of the population. Why should we do any good for them?

DUFFIN: The government stood to lose a lot of money if they went with this tax-free scheme because, in some cases, when you buy alcohol, most of the price tag is actually taxes.

SMITH: Yeah, for example - I mean, just even taking today - if you buy a bottle of wine down the street here in the United States, there is a duty added to the cost of that wine if the wine comes from overseas. But even if the wine is made in the United States, there is a federal excise tax on alcohol added to the price, and then each and every state adds their own excise taxes to the wine.

DUFFIN: And this is all hidden in the price tag. Plus, then when you bring the wine to the counter, often you have to pay sales tax again on the total.

SMITH: Brendan O'Regan said to the Irish government yes. Yes, you will lose some money in taxes. But in the long run...

O'CONNELL: If we do this, we'll attract people to come to Shannon. If we attract people to come to Shannon, they'll see Ireland. Some of them might decide to go and visit the place. We'll make people aware of Irish goods. Irish whisky was not properly - it was minuscule in the U.S. compared with Scotch whisky. And we'll make money because I'm the franchisee of this government-owned airport. And you're making the profits, so I'll make you a lot more profits. And particularly, I'll make you dollar profits.

SMITH: Dollar profits.

DUFFIN: So Ireland said, all right, let's try it. But we are keeping you on a very short leash.

SMITH: O'Regan opened the first duty-free shop in the Shannon Airport in 1951.

DUFFIN: OK.

SMITH: It was only for passengers. And he did this trick that you will recognize from today. It was located between the lounge and the restaurant, so you had to walk through it to get to anything.

DUFFIN: I hate that.

SMITH: No, this is brilliant. And just like he'd promised the government, he featured local foods and crafts. I saw an early photo hanging in the airport. [LB] There's a picture of Gene Kelly, the old dancer from the old days, buying butter or cheese or something. And he's at the duty-free. And they're selling what looks like ham, bacon, honey, cheese, jam and eggs.

DUFFIN: Wait. Was this like a farmers market in the airport?

SMITH: I think the local stuff was kind of for show because honestly from the beginning this was all about cigarettes and alcohol. Whiskey and smokes were apparently one-third the price you would pay outside the airport. It was so cheap that the Irish government was paranoid that Irish gangs would try to smuggle alcohol out of the airport. I mean, you could make a fortune, right? They required O’Regan to take inventory three times a day. He had to account for every single bottle. If he accidentally dropped or misplaced a single bottle, he would have to pay all the taxes on it.

DUFFIN: And this was a hit. Within just six months, O'Regan had to expand the store because all of these other manufacturers wanted their products in there, too. I mean, this was a captive market of rich people...

SMITH: Sure.

DUFFIN: ...On vacation.

SMITH: Yeah.

DUFFIN: So in came the Leica cameras and the Omega Swiss watches.

SMITH: And even relatively inexpensive products discovered that they could get some of that airport glamour by just getting placed between the Chanel No. 5 and the cuckoo clocks. At least that's what Mr. Tobler of Switzerland thought.

TOM ARMITAGE: Mr. Tobler was a real person.

SMITH: Wait - Mr. Tobler?

ARMITAGE: Theodor Tobler - Theodor Tobler, who created the chocolate bar.

SMITH: Not just any chocolate bar - the Toblerone, a triangular prism of deliciousness. It was sold in that very first Shannon duty free shop. Tom Armitage is an executive with Mondelez International, which owns Toblerone.

ARMITAGE: The word comes from the combination, obviously, of his surname...

SMITH: Tobler.

ARMITAGE: ...With the Italian word torrone, which means - it's kind of like nuga (ph). It's kind of like that nutty, chewy, toffee kind of confection.

SMITH: Oh, nougat - we'd say nougat - newgat (ph) - nougat.

ARMITAGE: Oh, sorry, that's my (laughter) Britishness coming through.

SMITH: I don't think I've ever said it out loud - nougat.

ARMITAGE: I just called it nuga, but we can call it nugget if you...

SMITH: Nugget - nougat.

DUFFIN: Anyway. But I know that duty free was a huge break for the chocolate bar, which is odd because there aren't really heavy duties and taxes on chocolate, not like alcohol. But it did fit the duty-free aesthetic. It was kind of weird, fancy looking, yet you could buy it with leftover change in your pocket from what you didn't spend on that Swiss watch.

SMITH: Exactly. It would take a few more years for Toblerone and the duty-free concept to spread worldwide. All these international delegations would visit O'Regan's shop, and they saw how much he was making and they thought, wait a minute, anyone could do this. Amsterdam opened the second duty-free shop in the world in their airport in 1957.

DUFFIN: In 1962, a private company, DFS, opened the first duty-free shop in the United States in Hawaii.

SMITH: Tom Armitage, the Toblerone guy, says that the numbers just took off from there. Duty-free stores will do $70 billion worth of business just this year.

DUFFIN: Wow.

SMITH: Five billion of that is candy, and Tom will give you the chocolate stats all day long.

ARMITAGE: If you thought of duty free as a country, it would be the ninth biggest chocolate market in the world.

SMITH: Wow. OK.

ARMITAGE: The ninth biggest chocolate market in the world effectively just behind France and just ahead of India.

SMITH: (Laughter) So more people buy chocolate in duty free than buy chocolate in India.

ARMITAGE: By value, that's right.

DUFFIN: These days, Toblerone makes special chocolate bars specifically designed for duty free. And it's actually, if you think about it, the perfect place for test marketing and data gathering.

SMITH: Yeah. It's the one kind of store where you know which customers will show up when. So if the flight from Paris to New York JFK takes off at 1:28 p.m., then the duty-free store is filled with Americans right at noon, and you can test new products on them.

ARMITAGE: So we've done a dark chocolate Toblerone, milk chocolate Toblerone, crunchy almond Toblerone, a fruit and nut Toblerone, messaging, for example, on the Toblerone sleeve, (unintelligible).

SMITH: Wait, wait, what is - what does the message say? I forgot to get you a gift in Paris, and here's a Toblerone I got at the airport?

ARMITAGE: (Laughter) It would say, for example, I love you.

SMITH: Aw.

ARMITAGE: Or thinking of you.

SMITH: The duty-free store concept, the idea behind it, became so big, so powerful in marketing that people sort of forgot about that original duty-free shop in the Shannon Airport. And once long-range passenger jets were invented, not as many people needed to stop over in rural Ireland for an Irish coffee.

DUFFIN: And because Brendan O'Regan didn't try to own the concept, he sadly did not become a duty-free billionaire, but other businessmen would.

SMITH: But, you know, O'Regan remained a hero of Ireland. He helped set up tax-free manufacturing zones. He became obsessed with the way that trade could help world peace. And he set up all of these two-way peace exchanges between the Republic of Ireland and Northern Ireland that people say were really instrumental in creating the peace process there.

DUFFIN: Brian O'Connell has just published a new biography of Brendan O'Regan, so he's a little biased.

SMITH: A tad.

DUFFIN: But he believes that that first little store in the airport changed the world.

O'CONNELL: If he hadn't done it, there would be no airport duty-free business of the world. It wouldn't ever...

SMITH: Really?

O'CONNELL: ...Have taken off in my opinion.

SMITH: Really?

O'CONNELL: The argument that, you know, why are we doing favors for wealthy people who are travelling would've been a big factor. So I...

SMITH: When you put it that way, who would approve that now? Yeah.

O'CONNELL: You'd have shops at airports, but the duty-free industry would not have developed.

SMITH: It was O'Regan's gift to all of us travelers, but exactly how generous a gift was it? We'll have the answer after the break.

(SOUNDBITE OF MUSIC)

SMITH: So that was the history of duty free, but now the psychology of duty free because when I walk through these places in airport, there is this strange feeling that comes over me. I feel like I'm part of this exclusive club. You know, I've just paid hundreds of dollars for a ticket. I've presented my passport. There's people with guns guarding it, and then I walk through, and it's so bright, and it's filled with all these vices of cigarettes and alcohol.

(Singing) So many scotches, so many scotches and whiskeys.

DUFFIN: And also you're a little bored, so it's basically the classic setup to spend too much money.

SMITH: By design.

DUFFIN: Obviously. And we actually tried to find a definitive study to find out how much of a break you're really getting at duty free. Yes, there are no taxes, but you have to pay for all this very expensive airport retail space.

SMITH: So it's almost impossible to figure out the bottom line. Every duty-free store has different prices, different exchange rates, and the tax break depends on how much tax you usually pay back at home. So I tried to get at least some anecdotal data. I was traveling with my family through the Milan airport in Italy, and my daughter Elsie (ph) and I spent an hour logging all the prices.

Here's a carton of Camel cigarettes.

ELSIE: 39.5 euros.

SMITH: Courvoisier VSOP.

ELSIE: 48.5 euros.

SMITH: Jameson.

ELSIE: 24 euros.

SMITH: Maybe I'll buy that. That could be a deal.

ELSIE: 17 euros - it's 18.2 euros. You save 7.8 euros.

SMITH: I see.

DUFFIN: And what was your verdict on duty free?

SMITH: It depends. I know that is not the answer you want to hear. I will tell you that tax-free cigarettes are criminally cheap - under $5 a pack. And they're almost three times that here in New York City. So if you want cigarettes, you should buy cigarettes in duty free. But other deals are harder to find. So my daughter Elsie is a expert in makeup.

ELSIE: OK, so Giorgio Armani Luminous Silk Foundation...

SMITH: Natural, silky, lightweight fluid.

ELSIE: ...Is 49 euros, which is really expensive.

SMITH: Wow, like, 49 euros for this tiny, little foundation.

ELSIE: No, that - for that one. That's still not that much. That's so expensive.

SMITH: No, no, that's just the display one. This is the one you buy. See?

ELSIE: I would never pay that much.

SMITH: But I checked here in New York and not the worst price for Giorgio Armani, so that's a buy. But when it comes to alcohol, there is no logic. The American whiskeys in Milan are two-thirds the price of what you would pay here in the United States.

DUFFIN: Wait - even though they ship it all the way to Milan.

SMITH: And then you have to carry it all the way back - true. But Courvoisier from France, next door to Italy, was more expensive in the duty free than it is here in New York. And Toblerones, I hate to disappoint you, were almost double the U.S. price.

DUFFIN: Wait - so if we aren't always getting a huge deal on products and the governments are losing out on tax revenue, then what's the point?

SMITH: Well, here's my theory on this. It's that, you know, when Ireland first started duty free, it was this true bargain for the flyer. And Ireland got all these benefits from the extra tourist business. But then what happens is this sort of race to the bottom. Every other airport starts to offer the exact same tax breaks just to compete.

DUFFIN: And then once everyone has a duty-free shop, then there's pressure just to make your airport's duty-free shop bigger and brighter and fancier.

SMITH: Exactly. Everyone ends up with this sort of expensive shopping mall, and somewhere in all of this the tax break concept just sort of gets lost. Prices start to sneak back up because who can really tell? And suddenly, the people making the money are not the travelers but the shops themselves and the airports, which you'll notice are now redesigning themselves to provide even more space for duty free.

(SOUNDBITE OF FRANCK FOSSEY AND LAETITIA FRENOD'S "LADY SURFING")

DUFFIN: OK, cosmopolitans, if you spot a glitch in the international trade system, we would love to hear about it. We are @planetmoney in the usual places and planetmoney@npr.org on email.

SMITH: And a special note to all of our Aussie listeners - I will be hanging at the Audiocraft Podcast Festival in Sydney, Australia, June 2 and 3. They have a great lineup. You should stop on by and say hi.

DUFFIN: Today's show was produced by Sally Helm and Megan Tan. Our editor is Bryant Urstadt, and Alex Goldmark is our supervising producer. I'm Karen Duffin.

SMITH: And I'm Robert Smith. Thanks for listening.

(SOUNDBITE OF FRANCK FOSSEY AND LAETITIA FRENOD'S "LADY SURFING")

SMITH: Do you want to bring one of your friends a nice salami?

ELSIE: No (laughter), they don't want that.

(SOUNDBITE OF FRANCK FOSSEY AND LAETITIA FRENOD'S "LADY SURFING")

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