TRAVEL RETAIL: Staying airborne

With the Tax Free World Exhibition taking place this month, Alan Lodge provides an overview of the travel retail arena today, noting a predictable downturn in sales, but finding the sector to be more resilient than most.

As the industry prepares to decamp en-masse to the glamorous surroundings of Cannes for this month’s Tax Free World Association World Exhibition, the mood among the travel retail sector is radically different from that of 2008.

Amid falling passenger numbers and a drop in consumer spending, the mood last year was one of trepidation and fear as companies wondered just how far the global recession was going to reach. Short-term prospects were bleak.

This year, however, is set to be markedly different. As the world’s leading economies continue to drag themselves out of recession, confidence is returning to the travel sector.

This optimism has reared its head despite rather depressing figures for the first part of 2009, which showed liquor sales in travel retail in the first quarter of the year were down 16.6% year-on-year.

Recent months have seen the rate of decline slow, but the losses already incurred within the market have been significant. The first quarter of the year alone saw the travel sector sell around US$300 million (£186m) less alcohol compared to the same period in 2008, when the “credit crunch” was yet to evolve into a full-blown recession.

“The liquor business has been affected as most other categories by the general downturn in the business that started in about September last year,” says Yngve Bia, president of Generation Research. “While we see an average slump in the business of all product categories – of
-14.2% in Q1 2009 versus Q1 2008, liquor is at a -16.6% decline performing only slightly worse.

“The consequences of intra-EU duty free sales abolition in 1999 included the loss of some $2.2 billion worth of sales – mostly liquor and tobacco. Even if we have a relatively strong second half in 2009, it will inevitably be compared to a weak second half in 2008 and where like-for-like comparisons come into play, I would not be surprised if this year’s recession results in similar or additional losses to those experienced in 1999/2000.”

According to Generation Research, the trend in global sales – in US$ – is down -1.9% over the past 12 months. Trading conditions continue to be challenging in Europe where sales declined in the first quarter of 2009 by -21.3% if measured in US dollars – equal to a decline of -9.9% in the euro (following the depreciation of the euro against the US dollar during the same period of -12.7%).

“Ten years ago we saw the creation of the important duty-paid liquor sector in Europe that coincided with the abolition of intra-EU duty-free sales and the ending of vendor control,” says Bia. “In recent quarters it is this duty-paid sector of the business that has been hit the hardest, while duty-free sales to extra-EU travellers are still keeping up relatively well.”

The business in Asia Pacific has been affected at a similar level as that in Europe, while the Americas is doing better. Sales in the Middle East have actually advanced slightly in Q1 2009 versus Q1 2008.

Such challenging conditions have proved too much for some smaller companies, who have seen their market share severely diminish. The big hitters, however, have capitalised on the weaknesses of their poorer rivals.

The global duty-free and travel-retail liquor market is dominated by two companies, Pernod Ricard World Trade and Diageo. Together these two giants command a whopping 46.4% of the global market. As rivals have fallen by the wayside, these two firms have actually seen their share of the market grow over the past 12 months.

Among the World’s Top 12 W&S companies, four performed better than the average evolution of the market (-16.6%) in Q1 2009 vs Q1 2008, thus gaining market share. They were, in order of market share percentage growth: Diageo; Pernod Ricard World Trade; LVMH and  Campari International.

“As we have seen in the past many quarters, the two industry giants are not only consolidating, but also further strengthening their market lead,” says Bia.

Other major players in the global market saw their market shares dip slightly in Q1 2009, including Bacardi International, Rémy Cointreau, William Grant, The Edrington Group, Beam Global Spirits & Wine Inc and Brown-Forman.

In Q1 2009 the world’s number one liquor brand Johnnie Walker further strengthened its market share in value terms to 8.8% from 8.4% in Q1 2008. Chivas, the world’s number two brand, added to its market share, to 6.4% in Q1 2009 from 6.3% in Q1 2008.

Additional market share gainers included Absolut, Hennessy, Martell, Baileys and Smirnoff. Slight declines in market shares were recorded for Ballantine’s, Rémy Martin, Glenfiddich, Jack Daniel’s and Camus.

Christophe Lemarié, president of Pernod Ricard Americas Travel Retail, believes the feel-good factor is returning to the sector. “After a tough first half of 2009 across the different channels in the region, there seems to be a stabilisation and signs of a recovery,” he said. “This is due to a less volatile environment, especially regarding local currencies, and a timid return of consumer confidence.”

The road to recovery is not at an end, but the rocky path has forced drinks companies to adjust their approach to the travel sector, which may lead to long-term gains for many. Phil Humphreys, managing director of Diageo GTME, says: “The radical global upheaval over the past year demanded that adjustments had to be made across the industry, including some very tough decisions, but we are certainly seeing the first signs of a return to confidence.

“The downturn has varied across markets in the severity and length of its impact and, perhaps even more importantly, we have certainly found that operators have varied in their response to it.

“It has, of course, been a very tough global market for GTME, but that simply means we have had to look harder at the opportunities. In particular, we have sought to maintain a strong, positive approach and used our extensive research and shopper insight to ensure that our strategies have been adapted to address the recent shifts in shopper behaviour.

“De-stocking has been a significant factor in some markets but whenever we have worked closely with retail and airport partners, we have seen a resilient performance across our portfolio.”

Top 20 analysis

Johnnie Walker leads the way as the biggest-selling brand in the global travel market, and a quick glance at the top 20-selling brands in the duty-free market clearly illustrates the strength of the Scotch whisky category. The sector enjoys consistently high sales and consumer loyalty, but what is it about Scotch that keeps consumers coming back for more?

“The major strength of malt whisky is its product quality and the type of consumer attracted to it,” says James Bateman, global travel retail manager at International Beverage Group. “It draws a combination of brand awareness and loyalty, combined with a curiosity for little-known distilleries or new expressions of better-known brands. They have the confidence to try or buy something new or unique for themselves or as a gift.”

Along with Johnnie Walker, the make-up of the top 20 is notable for the prevalence of premium brands, indicating that the duty-free consumer is perhaps rather less inclined to trade-down than domestic consumers might be.

Chivas, Rémy Martin, Ballantine’s, Hennessy and Martell all do exceptionally well in the travel-retail market, illustrating that the demand for premium goods is perhaps stronger in travel retail than in any other market.

Ian Williams, managing director of Pernod Ricard Travel Retail Europe, says: “Travel retail is slightly different from domestic markets in that it tends to be dominated by international brands, you will not find many local brands or low-cost own-label brands in wide distribution in travel retail. Therefore trading down is not the same.

“Obviously in the current environment there is pressure on all brands, not just premium brands, but given the right environment and promotional focus, premium brands are still being sold.”

Diageo’s Humphreys adds: “Consumers are still continuing to pay for premium products and there is still a market within travel retail for this. The travel retail channel provides a unique concentration of some of the world’s most affluent and discerning travellers, especially among business travellers.

“To take advantage of these opportunities we have developed new products to launch exclusively within travel retail, particularly in premium and ultra-premium products. Some level of downtrading is perhaps inevitable across all categories in the current climate but we have also perceived a trend in liquor whereby shoppers rely more than ever on known, trusted brand values.

“In uncertain times they want the reassurance of quality and reliability and, while cutting their expenditure in other areas, they often determine to enjoy the exemplary experience offered by brands such as Johnnie Walker, Smirnoff and Ketel One.

“Business traffic is obviously down but it remains a major opportunity for us. The majority of business travellers are male and fit the target profile for many of our brand portfolio, particularly in spirits but most importantly in Scotch whisky.”

Cognacs and whiskies dominate the top 20. While whisky’s popularity will surprise nobody, the continued popularity of Cognac through duty-free channels will perhaps raise more eyebrows. What’s important to realise here is that the popularity of higher-end XO Cognac blends is helping to slightly offset the decline in the market for regular Cognacs.

Cognac’s recent experiences in the travel-retail sector have been turbulent to say the least. The introduction of the liquids and gels laws in 2006 coincided with a loss of over three million bottles of travel retail sales between 2006 and 2007. Worryingly, Cognac’s most important duty-free market in Europe saw the most dramatic decline, with sales plummeting by 1.5m bottles. Similarly the Asian market suffered a 1.3m drop in bottle sales.

Yet super-premium seems to be bringing success back to the sector. A number of producers in the region are finding themselves with healthy stocks exceeding 20 years of age, allowing them plenty of scope to produce super-premium Cognacs for today’s market. At a time when consumers are seemingly saving their big spends for luxury goods, these stocks are making all the difference.

Wine and Champagne sales are also showing signs that the duty-free market is contradicting the spending patterns in domestic markets. While Piper-Heidsieck might be the only brand in the global top 20, different markets are experiencing demand for different products.

Saba Tahir, Dubai Duty Free’s acting manager of purchasing and research, says of the Champagne category: “Sales in 2008 were up 10% in quantity and 20% in value compared to the previous year, with Moët et Chandon and Veuve Clicquot dominating sales.

“There is increased demand from passengers, and with the introduction of new travel retail packs and new SKUs we are expecting to increase category sales.”

Beer is notable for its general absence, but then duty free has never really been a stronghold for the category aside from in-flight serving. That is not to say, however, that companies are not looking to do more within the market. Baltika, the Russian brewer, is evaluating the best ways to capitalise on opportunities for growth in the travel sector.

Ekaterina Zezkova, regional manager for Europe at Baltika, says: “Currently we have a contract with Peter Justesen Company AS, which serves diplomats, embassies and consulates, the United Nations and other international organisations. We see a certain potential in this field of business and intend to develop our presence on the travel retail market.”

Alan Lodge, October 2009