Beyond The Call Of Duty

The collapse of the tiger economies, 9/11 and the second Gulf war, the SARS virus and the abolition of intra-EU duty free have hit travel retailing hard in recent years. Drinks are having to run just to stay still in this fiercely competitive sector, writes Chris Losh.

Collapse of the Tiger Economies, 9/11 – Slaughter of the Innocents, SARS the Killer Virus, The Death of EU Duty Free, Gulf War II – Bush’s Legacy … These are not titles from your local video shop, but phenomena which have combined over the last eight years to knock the stuffing out of the travel retail industry.

Yet, rather like the protagonist in just such cheesy films, travel retail refuses to bow to defeat, picking itself up time and time again to keep on bringing alcohol, tobacco and designer sunglasses to the world’s weary travellers. Who said heroism is dead?

The retail environment, of course, has altered significantly in the last decade, not least because of the abolition of intra-EU duty free in 1999. Europe is the biggest travel retail market in the world, and the ensuing chaos following the sacrifice of duty free on the alter of politics is something from which the drinks industry is still recovering.

While the Asian duty free economy has bounced back hearteningly following its SARS-induced tumble (of which more later), European duty free has had a tougher 12 months. For starters, there are fewer American tourists, nervous of terrorism and hit by a weak dollar, while the strong euro generally makes prices unattractive to anyone from outside the Euro-zone.

Not that it’s all bad news, though. Look beyond the blips caused by economics, health-scares and terrorism, and the steady increase in traveller numbers (5% a year on average) is definitely helping to keep the category not just alive, but interesting. Not least because the penchant for longer check-in times also means travellers spend more time kicking their heels in departure lounges.

Unfortunately, the drinks industry has the disadvantage of being one of the travel retail stalwarts. And the increased competition from fashion, electrical goods and the like almost inevitably means a reduced share of the overall travel retail cake, with airline passengers in particular as likely to buy an iPod and some Ray Bans as a bottle of Scotch. Drinks are having to run just to stand still.

Then there’s the Budget Airlines Factor. Growth in passenger numbers per se might be a good thing, but opinion is divided as to whether the hordes who flock onto Easy Jet et al having paid £40 a ticket are doing a lot of good to duty free. One wine brand manager said there was “no evidence that the money saved on the ticket gets spent elsewhere”, but not everyone agrees.

 “Some think budget airlines means budget shoppers, but that’s not the case,” says Robin Johnston, regional director, travel retail, for Chivas Brothers. “There’s a lot of people with second homes in France or Spain who are flying down a dozen times a year. Those aren’t budget people.”

What may be a limiting factor to any beneficial impact of the cheaper airlines is their tendency to fly to small regional airports where the retail environment can vary from reasonable to execrable.

At the main international hubs, however, the story is a familiar one. With price (within Europe at least) no longer such a driver, travel retail has become a glittering environment where glitzy shops sell premium products to cash-rich, time-poor travellers who happen to find themselves with a couple of hours to spare.

Time on your hands

 “There’s a lot of people spending time in airports with not much to do,” says Adrian Bridge, MD of Taylor’s Port. “As a businessman, the airport is one of the few occasions when I have time to shop, and I tend to look for more expensive or interesting items.” Gifting, of course, has always been a strong driver for the travelling shopper. But with the increase in travel retail exclusives and super-premium line extensions, it’s becoming ever more popular. And not just for dark spirits either. “

Gifting is a driver for vodka in duty free now, which wasn’t the case five or 10 years ago when it was seen more as a commodity,” says Yves Schladenhaufen, international sales and marketing director for Wyborowa which has launched a single estate product in a zingy Frank Gehrydesigned bottle. “This end of the market is becoming more competitive, but I don’t see it as a threat; more as an opportunity. It’s dynamic.”

Vodka, in fact, is a category very much on a roll. While white spirits as a whole are steady at about 11% of all drinks in duty free, gin’s share is falling, while that of vodka is growing steadily. It now accounts for half of all the white spirits category according to Generation DataBank.

Much of this growth can be attributed to a positive ripple effect from various domestic markets, but products like Wyborowa Single Estate and Diageo’s Ciroc (marketed as a vodka despite being made from grapes) are clearly raising the bar, and brand owners are eyeing new markets with some optimism.

 “Asia is a very interesting market, and we’re planning very significant developments in duty free there,” says Schladenhaufen. “We’ve done extensive promotions in modern bars and will develop the distribution into Asian duty free as well.” Asia, of course, used to be Cognac Central, but a combination of economic nervousness and the end of corporate Cognac binges have hit the drink hard. In Korea, for instance, new austerity measures mean that individuals may only spend $500 a year on entertaining, after which any expenditure on booze becomes taxable.

All of which is bad news for the domestic market, but, perversely, good news for duty free. Koreans, Japanese and Taiwanese may no longer be buying Cognac through the company but if they want to buy it for themselves, they purchase it where possible in duty free, where it’s cheaper. Markets like Singapore (a big international hub, obviously) and Taiwan have seen big increases in duty free sales, and Cognac has benefited accordingly.

“The Japanese have virtually stopped the corporate gifting of expensive alcohol,” says Val Smith of drinks market information specialists The International Wine and Spirit Record. “But there are more travellers, particularly Chinese. The growth in Asia is being driven by China and Taiwan.”

In the US, Martell claims to be seeing encouraging growth, driven, perhaps surprisingly, by the Latino market, particularly around the Mexican border. To capitalise, Pernod Ricard has installed retail units in Mexico City airport.

Despite these positive signs (Generation DataBank puts Cognac figures up by 10% by value in 2004), the drink is only back to where it was in 2001 and significantly down on the late 1990s. And the category as a whole continues to lose market share within the drinks field, down from 17.7% of the total in 2000 to 13.6% in 2004.

No such problems for whisk(e)y which comfortably remains booze’s biggest player and remains rock solid with about one third of all alcohol sales. When duty free is up, Scotch is up; when duty free is down, Scotch is down. It’s a perfect barometer.

Added drama

Duty free is also the sort of arena where you’re most likely to see theatrical in-store promotions. Eighteen months ago, Jamesons set up a small movie theatre in a departure lounge, encouraging tired travellers to Take Five minutes to watch a short film, sponsored, obviously, by the whiskey, while visitors to Istanbul airport this year will have seen an entire recreation of Chivas’ Ice-fishing advert.

This was very much a one-off, but the sector’s number two brand (behind Johnnie Walker) also rolled out a major eyecatching promo in airports across the globe. The Capturing the Moment initiative required visitors to photograph wildlife on a large plasma screen, then scored their efforts for them. It proved a big draw, but its success, according to Chivas’ Robin Johnston, should not be measured purely in increased volumes. “In our promotions we tend to like to spend our money on stuff that’s good for visibility and then hope that the volume follows,” he says. “We’d rather do that than single-mindedly chase volume maybe at the expense of premium visibility. There’s a qualitative feel to it that’s as important as the volume uplift that we get.”

The attraction of such big-budget promotions to the retailers is obvious (“They’re desperate for anything that will improve their penetration,” as one brand manager put it) and since they’re clearly a hit with the public, the general lack of creativity in the drinks sector is, to put it mildly, surprising.

“Why we don’t see more of these interesting promotions I don’t know,” sighs Johnston. “Talk to the retailers at any of these places and they’ll always tell you that liquor is under threat to defend its shelf space from perfume, handbags and so on. I would love to see more liquor companies doing more in-store theatre to promote the category as a whole.”

There are not, of course, many companies with the budget for such lavish brand building, no matter how effective it is, and the majority of spirits companies still favour the with-purchase addition. Small carry-on bags per two-bottle purchase are popular in Europe, while three-bottles-anda- wheelie-bag is a proven favourite for the migrant workers of the Gulf, who are only too happy to take cut-price whisky back home with them. Ian MacLeod’s King Robert at $6 a litre is a big favourite.

Multi-packs are becoming more and more of a favourite with wine companies, too. Wine generally has been the drinks world’s biggest success over the last decade, and with sales over $1 billion for the first time it’s comfortably the second biggest category behind whisky. One, moreover, that is growing at getting on for 10% a year. And the fastest growing area within the wine segment is sparkling wine, which is probably not too great a surprise. Sales of fizz have been impressive in key domestic markets for several years now so there’s some case for saying that duty free is simply mirroring the high street. But Champagne, with its big brand names and premium image is also particularly well suited to the modern travel retail environment, and brand owners have been doing their best to cash in.

First appearances

Rather than create duty-free exclusive line extensions, LVMH has worked with World Duty Free at Heathrow to sell its standard non-vintages of Moët and Clicquot solely in twin-packs supported by a powerful presence of top-end wines. “The domestic market and the travel retail market should be supportive of each other,” says Philip Juniper, regional duty free director for Moët Hennessy Europe. “In places like Paris, Frankfurt and Heathrow we’re able to show good facings of our vintages and prestige cuvées. It really does give us an excellent chance to showcase, and people do trade up, there’s no doubt about that.”

In the airlines, at least, trade-up is the key to success. Prices might be cheaper than the high street, but the awkwardness of transport means that punters rarely buy more than two or three bottles. Packaging them together in a carry-case at a discounted price works (Allied Domecq found that it was possible to mix Montana and Campo Viejo in the same tri-pack without any problem at all), but so does selling a more upmarket single bottle in an attractive presentation tube. As well as being easy and safer to carry, it also pushes all the right quality buttons.

“You’ve definitely got two levels. People 34 are quite used to buying cheap spirits, but they’re not so used to buying wine, so you do need to get your signposting right and appealing at the right level,” says Richard Leaver, business sector controller, specialists/convenience at FGL Wine Estates. “But at the same time, they are looking for great value. We find with brands like Rosemount, when we do three-for activity it’s tremendously successful. But we’re trying to broaden that out a bit. We’re also doing two-for activity with higher priced brands like Rosemount Show Reserve or Penfolds Thomas Hyland where we’re looking to push up the average bottle price.”

Certainly, with increased traveller numbers not leading to an equivalent increase in footfall there’s an acknowledgement within the wine sector that more could and should be done to attract customers. Attractive packaging is only half the story, and many accept that wine can learn something here from the large spirits groups.

Taylor’s Port has its own dedicated area within Oporto, Lisbon and Faro airports. The shop within a shop concept began four years ago and is not a cheap investment (the company pays for the shelf space plus a full-time member of staff). But it has the advantage of making a vast array of complicated bottles instantly accessible to consumers, and gives good options for product trial. “We can be more authoritative in how we discuss our wines,” says Adrian Bridge. “We’re able to present our wines better than we might otherwise do because people are getting the tastings straight from a trained person. It’s what happens in perfume, after all.”

Tim Kington, travel retail manager, western Europe for EJ Gallo agrees. “Anything that can capture the consumers’ attention and draws them to the wine area stands a good chance of encouraging them to browse for longer,” he says. “In-store wine tastings, an interesting range feature in higher-end wines, POS outlining key points and tasting notes, and in-store theatre – the story of wine, reference books and a small seating area – these all work.”

Suggestive thoughts

The feeling is that consumers want information and education, and while they might be hesitant about going to look for it, they will certainly respond to it if it’s there. “There’s a latent desire for [education], but not necessarily an obvious one,” says FGL’s Leaver. “If someone comes up to you at an airport, you’re likely to go with what they tell you. The key for me is training and support for the staff.”

Certainly, companies who combine any price promotion with specific staff training can see major sales uplift – 50% is a commonly-cited figure – and it has the advantage of being attractive to a customer’s head as well as his wallet.

All of which suggests that to be really successful in the 21st-century travel retail arena, drinks companies in general, and wine companies in particular, ought to be looking at more ambitious strategies than simply plonking a standard brand in a onelitre bottle. Which brings us to another film title: Who Dares Wins … 

FERRIES AND THE NORDIC MARKET

Within the travel retail market, the cross-channel and Nordic ferries stand out, as different from the airport business as Aldi is from Harrods. It’s a big volume, pile-it-high, sell-it-cheap business that still relies far more on price (duty differential or duty free) than any other factor.

The cross-channel business has been hit hard by French strikes, docking problems at Calais, P&O’s decision to stop its Portsmouth/France routes and the growth in budget airlines.

 In the Nordic market, lower duties in Finland and Denmark have reduced its appeal for many Scandinavians, while rumours persist that Sweden might yet cut its duty, something which would, at a stroke, remove a large incentive for booze-cruisers.

The duty-free loophole of the island of Åland remains a last desperate refuge for the ferry companies, while the accession of Estonia to the EU means lucrative lower-duty trips to Tallin. Several companies (among them Silja Line) have set up big sales warehouses near the docks in Estonia, while ferry company Tallink has increased its sailings and put its best ships on the Helsinki route.

Nonetheless, for suppliers it remains, generally, a market of diminishing appeal. The stated aim of the ferry companies to be around 20% lower than the prices in the domestic market, and heavy promotional demands to woo less-interested consumers are taking a heavy toll on margins all round.

“The negotiations are absolutely brutal, and on those ferries you’re really just talking to a pile of drunken Swedes and Finns,” said one brand manager who understandably wanted to remain anonymous. “It doesn’t deliver the international premium audience that being in Singapore or Heathrow does. We’d rather be on the ferries than not on them, but I’m glad it’s not our bread and butter!”