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Key factors shaping global travel retail

The global travel retail market is in a unique position to capture the attention of billions of consumers. As well as opportunities, the sector also faces challenges, as we highlight in this report.

Global-travel-retail-spirits
We explore the trends shaping global travel retail and the challenges the channel is facing

Success in global travel retail (GTR) is inextricably tied to people’s ability to both travel and spend, and is therefore at the mercy of volatile external factors – whether Brexit, political riots or the spread of infectious disease. At the same time, there are internal challenges in the channel that risk stymying progress, from pricing pressures to legislative hurdles, the latter of which has a real bearing on spirits.

As the former Tax Free World Association (TFWA) president Erik Juul-Mortensen explained during the group’s World Exhibition & Conference last year, the travel retail industry has “never before faced so many challenges to its operating environment on a global scale”.

His successor, Alain Maingreaud, dissects the predicament further: “The global duty free and travel retail market is in a strong position, with passenger numbers and sales continuing to rise. However, we are facing a number of threats from different quarters, including the continuing debate around restrictions on hand baggage and increasingly draconian policies around the sale of alcohol and tobacco products.

“Rising geopolitical tensions, such as the looming threat of worsening trade relations between the US and China, as well as ongoing uncertainty over Brexit in the UK and rising concerns about sustainability among consumers, are also having an impact on the market. It is only by working together as a unified industry that we will be able to meet and overcome these challenges.”

Indeed, there is movement for change, and despite the turbulence, optimists will tell you that no market in the world holds as much potential as GTR.

“It’s rare to find so many opportunities for growth in a marketplace, and that’s what makes [GTR] such a dynamic and exciting industry to be part of,” enthuses Dafydd Williams, head of marketing and innovation at Diageo Global Travel Retail, whose sales increased by 5% in 2017/18, according to IWSR. “It’s a big market already and growth is being fuelled by more passengers entering various parts of the channel.”

In 2018, air passenger traffic increased by 6% year on year to 8.8 billion, exceeding the CAGR of 4.3% for 2007-2017, according to preliminary figures released by Airports Council International (ACI). Passenger traffic at the world’s 20 busiest airports – which represent 17% of all global passenger traffic – grew by 4.7% in 2018 to 1.5bn.

spirits-travel-retail
Air passenger numbers are increasing

Increasing air traffic has had a direct effect on spirits sales, notes Williams. Citing IWSR research, he says that between 2014 and 2018, 400 million more international departing passengers came into the channel, helping to “fuel the alcohol category by about 3% over that period”. He adds that GTR is the biggest market for Diageo in terms of people, with a bigger ‘population’ than both India and China. “And the vast majority are legal-purchase age, giving us a really unique opportunity to interact with consumers across the globe,” says Williams. “[GTR is] really important to Diageo, and it’s set to become even more so in future years.”

Spirits sales ‘softening’

The entire GTR sector received a boost in 2018, according to preliminary Generation Research figures provided by the TFWA – up by 9.3% in 2018 to US$75.7bn. Wine and spirits is the second-largest GTR category, after fragrances and cosmetics, and saw sales increase by 7.2% last year to US$12.2bn. With premiumisation sweeping all segments in GTR, drinks brands are well placed to capitalise on shoppers’ move upmarket, having practised in domestic territories.

“The market is continuing to perform strongly,” notes Maingreaud, “with growing numbers of millennial travellers and middle-class consumers from China leading to an increase in demand for premium spirits. Domestic trends, such as the rising popularity of gin in Europe and Tequila in the US, are also moving across to the duty free and travel retail market, with customers now expecting to find their brand of choice at the airport.”

The IWSR separates the performance of wine and spirits in its own volume data, and identifies a “softening” of sales for spirits in 2018 (up 2.5% to 24.5m cases), the result of a “slight decline” in Europe. Johnnie Walker remains the best-performing spirit brand in the channel (see table, overleaf) and reported the highest volume sales growth last year, followed by Aperol and Jägermeister respectively. The IWSR predicts that burgeoning categories such as gin,

Japanese whisky and cane spirits will lead volume growth for spirits in GTR over the next five years.

This would be good news for Venezuelan rum brand Diplomático. The brand’s biggest travel markets are in Europe, but it has been “very active” in the Americas and has recently “opened up new opportunities” in the Middle East, Australia, New Zealand, Hong Kong and Singapore. However, the brand’s global managing director, Patrick Rabion, wants to see retailers offer more shelf space to super-premium rum in the future. “In this complex and highly concentrated business, it is important for Diplomático to increase its exposure to deliver premium brand experiences,” he says. “Operators need to dedicate more space to this fast-growing category so it can compete with other premium dark spirits and offer the variety consumers are looking for in GTR.”

As the old adage goes, with challenge comes opportunity – and GTR has both in spades. Over the following pages we take an in-depth look at some of the key themes affecting spirits in duty free and travel retail – for better or for worse.

Innovation

Patron-spiritsThis year, the TFWA World Exhibition & Conference in Cannes will replace its Digital Village with a new Innovation Lab, designed to “showcase new ideas and fresh thinking” to an audience of travel retail professionals. As GTR seeks to quicken its pace of evolution, innovation is becoming increasingly important to all aspects of the channel. For spirits brands, it is playing a central role in new product development and marketing.

“Brands are really starting to show up strong in this space, and it’s been great to see the constant pushing of creative boundaries, by us and our competitors,” says Ed Stening, global head of marketing for travel retail at Beam Suntory. “The experiences brands are giving travellers are getting better month by month, [and] it’s not just happening in one place – it’s happening everywhere.” Stening adds that innovation is “growing basket-size in the category” and is helping the channel to become “more consumer-centric”.

Diageo is a prime example of a drinks firm capitalising on the consumer zeitgeist in GTR. As well as its core variants, the group’s innovations have bolstered its success in travel retail – notably, its Game of Thrones-inspired products. White Walker by Johnnie Walker launched in GTR in October, followed by the Game of Thrones Single Malt Collection this year. Diageo highlighted the range with a “one-of-a-kind” activation at Changi airport, which even featured props from the HBO programme.

“When it comes to all of our brands, finding the right partners is really important; finding that strong alignment in consumer offering,” explains Williams. “I think you’ll definitely see more of that going forward.”

According to Julie Witherden, marketing director at Bacardi Global Travel Retail, GTR shoppers “are in a discovery mindset – they are in the mood to try something different”. As such, she says 40% of alcohol shoppers buy products that are unique to the channel, where they have additional time to take in brand stories.

“With passenger dwell times averaging 73 minutes, we have the opportunity to communicate brand intrinsics and to sample signature serves in ways that domestic retail does not facilitate,” says Witherden.

For portfolio newcomer Patrón, Bacardi launched a sampling area in Cancún as part of a five-year agreement between the producer, the airport and Dufry. “The bar enables us to engage with consumers in new ways, inspiring great memories of their travels, while educating them on the benefits of the premium Tequila category,” adds Witherden.

Digital

TFWAThese days one cannot speak of innovation without highlighting the importance of digital technology. This is particularly pertinent to travel retail stakeholders in light of mounting competition from e-commerce. Shoppers have become astute at comparing prices online and have grown accustomed to the convenience online shopping offers. As such, GTR risks missing out if it does not evolve beyond bricks and mortar.

“It’s fair to say that in travel retail we are slightly under-penetrated in this channel versus what people see in domestic markets,” observes Diageo’s Williams. “There’s definitely an opportunity to leverage some of those key learnings, and because of the global nature of travel retail there are opportunities for thought leadership as well.”

GTR has arguably been slow in responding to this shift in shopper behaviour, but as Beam Suntory’s Stening notes, it’s now a case of “survive or die”. He adds: “We cannot rest on the success of the past, so the model must evolve [as] e-commerce and big box retail has reshaped the shopper’s journey. It is a challenge, but it’s also a positive opportunity, which must be acted on now.”

Stening says retailers have “started to understand the role convenience plays”, and there is even speculation in the industry about what a bottle-free travel retail environment would look like. “The conversations around digital are still in the early phases and it’s a slower machine to turn, [but] the industry has recognised that and they are trying to move forward,” he says. One example is Schiphol, which became the first airport in Europe to adopt the

WeChat app, which has more than 1bn active users in Mainland China, and features the mobile function WeChat Pay.

However, Stening believes: “Show rooming is here to stay in the business. That’s where unique travel retail innovations are playing a deeper role in the customer journey. Price is always going to be important but it cannot be the only differentiator or we’ll just end up in a death spiral, racing to the bottom.”

Beyond e-commerce, digital marketing in general needs to be become more sophisticated in travel retail, says Stening, and play a significant role throughout the “entire customer journey”. He adds: “When I first came to this business, people spoke about digital as digital screens in airports – that was seen as the digital channel. The screens would change based on passenger type, which is pretty simple in terms of what we can do, and that was seen as the benchmark of digital. We have really got to evolve from that – that can’t be ‘ticking the digital box’.”

Data

Glen-ScotiaAs stakeholders seek out new opportunities, access to reliable sales data is critical, but in this concession-driven industry, it is not easy to come by. The sector has praised Generation Research and IWSR for their work, but there are calls for greater openness within the travel retail ‘trinity’ of landlord, retailer and brand.

Stening says provision of data is “how the industry will survive”. He adds: “There needs to be a greater approach to sharing. Relying on IWSR and passenger data alone is very difficult. We don’t have a lot of information to make the necessary strategic decisions. If we are trying to find ways of explaining to our organisation why this is a channel we want to invest in, that data has to be there.”

Maingreaud agrees, saying: “There is still much work to be done in this regard. The fact of the matter is that the only global figures available to our industry are questioned by many. We as an industry must understand the importance of sharing data to gain a better understanding of passengers and their needs.”

A big step forward was taken in 2018 with the establishment of the Travel Retail Data Innovation Group (TRDIG). The group is made of suppliers, retailers and IT service providers, who are working to create a global exchange of master data in the duty free industry. In May, five leading travel retailers – Heinemann, Dufry, DFS, Lagardère and Kappe – hosted the group’s second annual strategy meeting in Hamburg. The data pool is now live, and a number of decision-makers have pledged to connect to the TRDIG data pool by 2019 and use it for master data exchange. Heinemann is aiming to integrate 80% of its data – including liquor – into the pool by the end of the year.

“We will continue to promote our vision for the standardised and automated exchange of master data across the industry,” says Inken Callsen, director of fulfilment at Gebr Heinemann. “Our common goal is to prove that we in travel retail have a different mindset to all other industries because we understand that collaboration in this aspect of the business is not a competition, but a real advantage for the whole market. After all, the more partners we have in the global data pool, the better.”

Trinity

Bacardi-travel-retailMany would like this ethos of collaboration to extend more fully to the parties in travel retail’s trinity structure of landlords, retailers and brands, which has long been criticised for what are seen as unsustainable commercial agreements. The TFWA continues to warn of the trinity’s failure to appropriately “share both the risks and rewards” within the business.

Brands often bear the brunt of passed-down costs, which can be particularly debilitating for newer or smaller players in the market. “In the medium to long term, the sustainability of the channel will depend on the trinity model and how it caters for all involved,” says André de Almeida, managing director of Loch Lomond Group’s travel retail business, which was established three years ago.

“For example, if airports continue to push on non-aeronautical revenue generation by squeezing retailers too hard, this could lead to increased demands on brands and more suppliers in the channel questioning the overall benefit of it. This could have the adverse effect of making the barrier to entry even higher for new brands and lead to decreased diversity on offer, reduced consumer engagement and lower store penetration.”

During last year’s TFWA event in Cannes, a discussion panel that included top execs from Heinemann, Lagardère and King Power agreed that the model was problematic, but also acknowledged that action to rectify it had been limited. Dufry CEO Julián Díaz González said retailers had “not been able to convince the landlords that we are not a sustainable business. They do not know what the answer is because they see the short term. We need to convince the landlords that this is a collaboration and not a fight”.

For Beam Suntory’s Stening, the trinity model is inherently flawed due to its failure to include airlines, which he describes as travel retail’s “fourth pillar”. He explains: “I really think airlines should be included in the trinity model. They play such an important role in the customer journey – from check-in to lounges to in-flight to arrivals – that they need to be part of that discussion.”

Legislation

Glen-Scotia-travel-retailMore than any other category – except perhaps tobacco – the alcoholic drinks segment in GTR has come under intense legislative scrutiny. The category has faced calls for additional labelling, such as health warnings and nutritional information, reflecting the enhanced measures recently introduced in some domestic markets. However, stakeholders are fighting against the calls, arguing that such legislation is not transferable to GTR.

Julie Lassaigne, secretary general at the European Travel Retail Confederation (ETRC), explains: “The requirement to provide information ‘on pack’ creates substantial problems for the duty free and travel retail channel, particularly when national language requirements or specific national/regional labelling laws are incorporated into regulatory initiatives. If applied to our channel, it would make it extremely difficult to have only one global product for our retail channel, therefore jeopardising travel retail-exclusives and reducing consumer choice.”

As such, the ETRC has developed a technology solution that allows consumers to access product information in multiple languages by scanning a barcode using a smartphone or in-store scanners. The association is now working with its members to move the project forward and gain approval from EU legislators.

But the legislative headache extends beyond labelling, with the debate over airport security restrictions on liquids and conflicting baggage airline policies rumbling on.

According to Lassaigne: “Consumer confidence in airport shopping has been considerably undermined as passengers observe the strict enforcement of these policies by certain carriers, and have at times been subjected by ground-handlers to similar restrictions on other carriers without these policies, generating further confusion.”

As such, the ETRC is lobbying for EU legislation to be amended to allow passengers the right to bring airport purchases on board at no extra cost, and in addition to their prescribed hand luggage.

One of the biggest fallouts from punitive legislation in travel retail occurred in August this year, when DFS announced the decision to close its liquor and tobacco concession at Singapore’s Changi Airport – one of the world’s busiest airports – when its term expires in June 2020. DFS has held the concession since 1980, but according to the group’s CEO, Ed Brennan, “changing regulations concerning the sale of liquor and tobacco, against global context of geopolitical uncertainty, meant that staying in Changi was not a viable option”. The “changing regulations” refer to Singapore’s plans to sell tobacco in standardised packaging from July 2020, and this year’s introduction of a further restriction on duty-free alcohol bought at arrivals, from three litres to two.

Brexit

BrexitNo talk of geopolitical uncertainty would be complete without a focus on the UK’s scheduled departure from the EU. While Brexit has largely been seen as a headache for international trade, it has presented an opportunity for the GTR market: the return of duty-free shopping between the UK and EU.

However, with a new UK prime minister in the hot seat and negotiations between the UK and EU seemingly at a stalemate, the divorce remains riddled with uncertainty. There is a risk of both a no-deal Brexit and a no-confidence vote in the government, potentially leading to a general election. At time of writing, neither action was confirmed.

Since January, the ETRC has been warning its members to prepare for a no-deal scenario, and has been concerned about probable disruptions to supply chains caused by the UK leaving the single market.

However, the association has “one clear demand”, says Lassaigne. “That the current EU legislation on duty and tax free sales to travellers simply applies when the UK leaves the EU and becomes a third country, meaning outbound duty and tax-free allowances will become available to travellers departing from the EU for the UK – and vice-versa.”

The European Commission has confirmed the move twice and the ETRC has “arranged a number of meetings in Brussels in September to ensure it remains the position of the EU”. However, the immediate return of duty-free shopping for UK travellers to the EU would require an amendment to current UK law, which the ETRC, its UK counterpart and authorities are working to achieve.

Asia

Asian spirits masters webIn a few short years, the archetypal traveller has changed dramatically, with eastern consumers now making up a much larger demographic. “Shoppers in travel retail are trading up to super-premium spirits, and this is a huge opportunity for us worldwide, especially relevant in Asia Pacific, led by the rising middle classes in China and India who are seeking to discover new brands and experiences on their travels,” says Vinay Golikeri, managing director of Bacardi Global Travel Retail. “Growth in Asia is undoubtedly one of the industry’s headline trends.”

According to preliminary Generation Research figures, Asia Pacific continues to be the largest market for duty free and travel retail, registering a sales growth of 14.2% to US$35.2bn in 2018. Wines and spirits sales in the region grew by 10.2% to US$4.2bn in the year. Growth has been fuelled by an increase in outbound Chinese travellers, which according to the China National Tourism Administration increased from 83.2m in 2012 to 129m in 2017.

However, clouds could be on the horizon in the wake of the Hong Kong pro-democracy protests. According to the latest data from Forward Keys, people are avoiding travelling to Hong Kong in light of the protests, which have seen sieges, rioting, arrests and, on 12 August, the unprecedented closure of Hong Kong International Airport.

In the eight-week period from 16 June to 9 August, flight bookings to Hong Kong from Asian markets (excluding Taiwan) fell by 20.2%. Long-haul bookings were also down by 4.7%. In a statement issued in August, Forward Keys spokesperson David Tarsh said: “Forward Keys is not optimistic about reporting a recovery in the immediate future.”

It is too early to fathom the immediate impact the disruption has had on travel retail sales in Hong Kong and how this will affect the performance of the wider Asia Pacific region for the year. Stakeholders will be hoping the channel’s trademark resilience comes into effect once more.

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