Shop and Go

By overcoming dreadful trading conditions the travel retail sector has shown its remarkable adaptability.  Faced with the demise of duty-free, it has found enticements other than price to attract shoppers on the move, says Chris Losh

BY MORE or less whichever standards you care to measure it, travel retail has had a pretty miserable time of it for the past seven years.  It has had to cope with the Asian economic crisis, 9/11, SARS and the Iraq War, all of which have had a serious impact on the numbers of people flying and, therefore, buying.

And, of course, somewhere in the middle of all this, in 1999, the European Union decided to do away with duty free sales between EU countries.  Many predicted at the time that the abolishment of dutyfree would presage the death of the whole travel retail sector.

But, in fact, with the last few years containing as much political strife as they have, although volumes may be down on where they were five years ago, it’s something of a minor miracle that there’s still a travel retail industry left to talk about at all.

Not only that, but it appears to have stabilised after a truly horrendous few years and (whisper it) be tentatively rebuilding once again. 

 "In volume terms, no one’s doing particularly well, but 2003 was the first year we’ve not seen volumes decline for four or five years," says James Clarke, marketing director of Pernod Ricard World Trade.

Hard by nature Make no mistake about it, behind all the glitzy golden giftpacks, this is an industry with a steel core.  It has staggered, sure, but it has not fallen – and key to its continued survival has been its ability to adapt and drag opportunity from the jaws of disaster.

If the politicians had done their jobs thoroughly in 1999, these opportunities would have been even less than they are now.  But, though the Eurocrats ended duty-free, they did not have the political power to go the extra step and harmonise duty rates across Europe.

These duty inequalities, along with increased personal allowances (initially limitless, but hastily reined in) fostered a thriving, if not exactly healthy, market in cross-border shopping which still exists today.

Hence, for travellers from a northern European high-tax market, travelling to a low-tax market there is still a financial incentive to buy alcohol – hence holidaymakers from Malmö and Manchester stocking up with bottles of Bacardi in Malaga airport.

It’s not duty-free, but Spanish spirits duty is so much lower than in the UK or Sweden that the price still attracts the buyers in just the same way that the old duty-free used to. 

The industry has recognised, however, that simply knocking out the same products all over Europe and relying on northern Europeans to hoover them up for a few euros less than their usual price is not going to be enough to sustain a business.

Besides, with traditional high-rate countries like Finland and Denmark halving their duty on alcohol inside the last 12 months, there are signs that this little loophole could be closing, (the UK ingloriously excepted).

What the new world order did, after the abolishment of duty-free in June 1999, was to force the industry into a rethink; specifically into looking at incentivising the customer to buy by using tools other than price.

"The change has forced us to become better at what we do – it’s actually been quite beneficial," says Clarke.  "Are we just selling at a discount, or are we about selling something because it’s attractive?"

The industry’s ability to reinvent itself may have kept damage to a minimum at a time when (almost literally) everything was stacked against it, from killer bugs to Al Qaeda to George Bush’s foreign policy. Yet there has still been damage.

Health problems The International Wine & Spirit Record (IWSR) reports a drop in spirit sales from 1998 to 2003 of nearly 40%, from 11.3m cases to 7m.  The travel retail patient may not have been mortally wounded, or even be in intensive care, but it’s no exaggeration to say that he’s had a mild heart attack and needs to watch what he eats.

Whisky, as the biggest category (just under half of all spirits sales), has unsurprisingly been hit pretty hard, with the IWSR estimating a fall of 31% from 1997 to 2003, from 8.7m cases to 6m.

With the travel retail business moving towards the luxury end of the market, it’s no surprise that standard blends have found it toughest, while super-premium blends (18-year-olds and upwards) and single malts are more or less where the action is.

"As a category, malt whisky now accounts for over 13% of the global market," says Jonathan Ashworth, marketing director, Global Duty Free for Allied Domecq. "At Allied, we clearly believe that the increase in the demand for malts will continue to grow and become an even more important part of the sales mix," he argues.

Whyte & Mackay clearly feel the same way, and hope that the effort it’s putting behind its large range of age-statement blends will have a beneficial trickle-down effect for its standard blend.

 "The more awareness we get for our aged range, the more the whole perception of Whyte & Mackay increases," says the brand’s travel retail marketing manager, Keith Bonington.  This has long been one of the great advantages of dutyfree (as was) and travel retail (as it is now): the fact that it is a shop window for more esoteric brand extensions and, more significantly, that people actually buy them.

There is a compulsion to buy – and buy well – in an airport that simply doesn’t exist in the high street.  Consumers are prepared to pay more partly because of the positive atmosphere generated by being surrounded by glitzy airport shops and partly because there’s not, frankly, much else to do.

Then, of course, with savings on price there is a tendency, rather than spending less and getting the standard product, to spend what you would have done in the high street but go for the more premium product.

Trading up, the holy grail of the high street, is a travel retail actuality.  "We sell a lot more upscale products like vintages or aged tawnies," says Adrian Bridge, managing director of the Fladgate Partnership, that owns Taylor’s port.

"We’re now finding that the majority of people making a purchase are well-heeled customers who are money-rich and time-poor.  When they travel is probably the only time they ever have the opportunity to go shopping, and we can sell them something a bit more upscale."

Nonetheless, there remains the challenge of translating a departure lounge full of bored, cash-rich consumers into sales.  "Our biggest challenge is getting people to go into the stores," says Pernod Ricard’s Clarke.

"Airline passenger figures are up 13% on last year – they’re coming back faster than expected.  But still it’s estimated that only one in three travellers goes into the main store." To address this, last year Pernod Ricard set up a joint promotion with airport operator BAA and opened a mini cinema in Heathrow’s Terminal 1.

Sponsored by Jameson Irish Whiskey, it showed short films and highlighted the offers available instore.   An ambitious project, it paid off, catching the imagination of travellers to the extent that Jameson’s saw double digit growth there.

Taylor’s, too, takes an active approach, with a series of instore "shops within a shop" at Oporto and Faro airports.  "Rather than just sell at a discount, we can use other tools to get the attention of shoppers, with wines of the month and so on," says Bridge. Again, it is quite an investment, but drives footfall and gives the port house an element of control.

Whyte & Mackay doesn’t have such a high profile sales pitch, but also recognises the importance of working with sales staff at various key outlets.  "We’re very much about getting people to trial and learn more, especially the staff," says Bonington.

"A lot of sales in duty-free are made on recommendation, and if the staff member knows more about your product than your competitor’s you’re more likely to get a sale."

levels.  Firstly, for the consumer, it taps into the "away from home" mindset – that after a week or a couple of days on the road one feels like a little celebration on one’s return.

For business travellers visiting their clients, a carefully-chosen bottle can cement a relationship.  For the producers, the phenomenon of gifting works because it allows them to produce lines that are "special" (ie not widely available and therefore not open to price comparisons with the high street).

Diageo’s duty-free director, Vince Horne, splits the gifting category into high-end (premium) formal gifting, destination-item gifting and informal "token gesture" gifting.  The high-end gifting is somewhat restricted in terms of passenger/nationality, and showing some signs of decline over time – however, gifting overall remains a powerful motivation.

Give a little

The high-end gifting was epitomised by the vast sums of money spent on superpremium Scotch and Cognac in the Far East in the 1990s. 

Its dismemberment following the region’s economic difficulties remains one of the reasons why Cognac’s travel retail figures, in particular, make such dismal reading. In the 21st century it is less about kudos and more about uniqueness.

"More than price, people look for added value – something a bit different like a higher strength or a different finish," says Whyte & Mackay’s Bonington. 

Essentially, the drinks trade is targeting those shoppers who are looking for something different which, as well as something unusual in the bottle (whisky finishes have been a popular way of extending range trial to loyal customers) means imagination when it comes to the packaging.

Simply loading up the shelves with one-litre versions of the standard bottle and waiting for the price reduction to do the rest no longer works. 

Particularly in Europe, where personal allowances are less of a factor than how easy a product is to carry, multi-buys and "suitcases" are becoming ever more popular. Codorniú, for instance, has recently produced six-bottle suitcases for its Nordic ferry customers.

Scotch companies, too, have found that multi-packs of miniatures have appeal both to the connoisseur and the gift-buyer.  Easy-to-carry, affordable and different, they tick all the gifting boxes and epitomise the change from "one litre of the usual because it’s cheaper" to "something a bit different".

It’s one of the reasons, that Warre’s Otima 10-year-old tawny port has been a travel retail hit. Its unusual design is a world away from the standard port bottles, and its feminine, almost perfume-like 50cl bottle makes it appealing to female travellers as well.

No surprise that companies like Diageo have also been looking to target this group with gift packs that draw their inspiration from perfume packaging.  All the line extensions and packaging gurus in the world, however, can’t help you if your category is fighting the spectre of unfashionability.

It’s one of the reasons that dark spirits have fallen further than white spirits over the last few years – but why Scotch value sales are up on 1999; vodka and single malt are trendy, standard blended scotch and low-end Cognac aren’t.

In fact, vodka’s only disadvantage in travel retail is that it can be a harder product to upsell than Scotch or Cognac, which each have clearly defined quality designations.  Still, the superpremium vodkas (particularly in the US) claim a disproportionate share of shelf-space.

Likewise, rum’s 6% rise from 2002 to 2003 (the highest of any sector of the drinks category) is on the back of a newfound fashionability.  Which brings us, rather neatly, to wine.

It has a growing consumption, and a general trend for people to drink less but better, both of which factors should guarantee it success in the Brave New World of travel retail. Certainly, wine sales fell less post-1998 and have recovered faster than any other category.

According to IWSR, case sales in 2003 were only 8% down on 1997 – the best of any sector, and a reflection of the fact that selling the product sans duty was never much of a driver for travellers, who could save more by carrying spirits back.

Just as it has in the non-travel retail environment, wine is performing strongly.  Now, according to Generation Data Bank, wine’s value share of the travel retail drinks market is 23% and, significantly, growing every year.

It splits, perhaps more noticeably than spirits, into two areas: fine wine and "convenience" wine, though Codorniú, for instance, has managed to find a space inbetween the two. "With the economic difficulties in Europe, many travellers couldn’t afford Champagne, and there was a gap between there and cheap cavas," says Claudia Philippi, the brand’s Travel Retail director.

The Spaniards brought their duty-free sales inhouse in 1998.  Bypassing importers gave them extra margin to take to the travel retail operators, and saw an instant increase of 15% in sales.

Fine and dandy The fine wine arena is best served by specialist outlets such as Berry Bros & Rudd, which has two outlets at Heathrow T3 and T4, but is in the process of negotiating a new deal with BAA for a presence in all four terminals.

Unsurprisingly, the company relies heavily on travellers from the well-heeled collector markets of North America and the Far East.  "We do do promotions, like six-forfive offers," says Robin MacMillan, BBR’s duty-free buyer, "but it will be on Château Palmer rather than Bells."

Unsurprisingly, gifting of these top-end wines is a factor, but they need no extra packaging to make them attractive.  It is, though, the convenience wine sector that has seen the most growth.

With more people taking to the skies, it has opened up an opportunity for wine that simply wasn’t there 10 years ago.  Regular travellers will treat drinks stores in airports like their local off-licence and pick up a bottle for the evening meal on their way back from Amsterdam or Paris.

"People are treating travel retail more like a supermarket," says Paul Symington.  "It’s convenience more than the duty-free element that appeals to them.  It’s the same wines as the high street."

This is certainly true, but wine companies, crucially, see travel retail as an environment where consumers trade up not down, and as such it’s a massively useful shop window that might benefit their product in the high street.

And even with the tough margins of the travel retail operators, there is still money to be made in the mid-price sector.  Thus, although a lot of business is done around the Jacob’s Creek, Lindemans, Sierra Valley price level, all are looking to move their loyal consumers upmarket.

 "Gifting is growing, so we’re putting more emphasis on the higher-end wines," says Tim Kington, travel retail manager, Western Europe, for E&J Gallo.  "More of us brands are taking duty-free seriously now.

Now we’ve established the brand ranges, we can build on what we’ve done with the addition of more of the finer wines."  Not, of course, that increased volume comes without promotions – it’s just that they tend to be less brutal than on the high street.

"We replicate the same style of promotion that is used in the domestic market," says Kington, "so we might do three bottles of Turning Leaf for £15. If you have a Christmas or summer promotional slot, it has a huge effect – you can increase your sales by 30 or 40%."

The key, of course, for the wine producers as well as the spirits brand owners is not simply driving volume, but generating profit by encouraging consumers to move upmarket. 

Travel retail may not be shifting the cases that it once was, but when it comes to selling highermargin, high-end products, it still has plenty to offer.