Cloudy outlook for travel retail

Travel Retail suffered hugely at the hands of the recession, but things have improved since last year and those companies who have adapted intelligently look set to soar. Alan Lodge analyses the last year in duty free to see how the recovery is taking shape, if at all.

It’s always the way. Just when things seem to be getting back on track, a volcano erupts in Iceland, spewing ash clouds cover aerospace and put a halt to the gradual recovery the global travel retail industry had been enjoying since the dark days of global recession in 2008 and onwards.

As the sprawling clouds slowly enveloped air space above Europe for five days in April this year, so they suffocated the recovery. Weeks of disruption to flights inevitably led to falling sales figures, but should the statistics be viewed as distorted or genuinely troubling? After all, only two of the top 100 drinks brands in the global travel-retail and duty-free market recorded growth in 2009, according to latest figures from Generation Research – and that was before the volcano blew its top.

“I believe with the economic climate that we have been working in it is not surprising we have witnessed a global drop in volumes,” says Andy Lane, Ian Macleod’s director of travel retail. “I believe as passenger travel increases and consumer confidence improves we will see a return to growth, but this growth may not happen in 2011.”

The figures were perhaps symbolic of the slightly skewed landscape of the travel-retail sector, which is polarised to a greater extent than almost any other drinks sector.

The onset of recession exacerbated the problem, with regions such as Asia Pacific – where the likes of Australia avoided recession altogether and investors from Hong Kong and China continue to seek the ultimate in expense and extravagance – pulling even further away from declining markets such as Europe and the US.

According to the International Wine and Spirits Record (IWSR), global travel-retail wine and spirits sales dropped 9.3% in 2009 to reach 22.7 million nine-litre cases.

Spirits volumes fell 10.6% in 2009 with only one sub-category, rum, showing growth at 1.3%, to 1.25m cases. Wine saw duty-free and travel-retail sales decline by 6.3%, with still light wine sales – down by 5% – holding up better than other wine categories.

In company terms, market leader Diageo held onto its 18.1% overall share of the global duty-free and travel-retail market, but Pernod Ricard, in second place, saw its share diminish from 17.6% in 2008 to 15.6% in 2009.

Jane Ewing, Diageo Global Travel & Middle East (GTME) managing director, says Diageo’s performance has been “outstanding” given the testing circumstances in key markets.

“This was an outstanding year,” she claims. “Not only in the context of the previous 12 months, which were probably the most difficult trading conditions in travel retail that any of us has experienced, but in absolute terms too. In fact this is probably the best overall performance that GTME has ever reported.

“Versus last year, GTME has recorded very strong double-digit growth across all performance measures: volume, sales and profit. Even in the context of our financial plan, performance was significantly ahead of expectations.”

But how did Diageo manage to battle the market conditions so successfully? A company statement said: “Marketing spend was increased significantly, reflecting the important role of GTME as a brand- and category-building channel.

“A greater focus on priority customers, increased resources behind shopper understanding and a step-up in programmes to encourage consumers into stores all contributed to the success.”

Overall, the global duty-free and travel-retail industry saw a decline of US$2.5 billion (£1.6bn) worth of sales last year, down 6.8% from 2008. Sales across all categories in Europe fell 13.5%, while the Americas lost 10.5% and Africa slipped 7.5%.

Yngve Bia, president of Generation Research, does not offer too much comfort for the sector with his assessment of the market’s immediate prospects, either.

“I think people will see a gradual improvement as economies recover around the world,” he says. “Unfortunately, passenger spend is not improving. The travellers are not returning to the same spending pattern as before. It will take a while to really come back to previous levels.”

To read the full article pick up a copy of October’s edition of the drinks business.

db, 25.10.2010