Once the darling of the drinks world, Asian duty free cost the industry dear when the tiger economies collapsed three years ago. An up-turn in fortunes has been welcomed, but Ben Cooper urges for caution as these are not the markets of old.

Having been a major beneficiary of the Asian boom in the early and mid-1990s, the travel retail industry suffered a significant reverse when the same markets collapsed in 1997/98. However, there are signs that the steady recovery seen in the region over the last eighteen months is again having a positive impact on duty free.

According to industry analysts, Generation, total duty free sales in Asia and Oceania rose by 15.2% in 1999 and suppliers and retailers alike point to a continued, albeit gradual, recovery in 2000. While patterns of consumption have impacted on the travel retail drinks market, duty free sales of wines and spirits nevertheless grew 8.5% in the region in 1999.

"UDV have noticed a parallel recovery in liquor sales in duty free in line with the economic pick-up in Asia," says UDV Global Duty Free's David Marr. "The strength of the recovery in Asia has buoyed consumer confidence and led to a resumption in spending by international travellers (although not yet to previous levels)."

Hong Kong and Singapore are the two Asian travel retail markets to have shown the strongest and fastest recovery. Singapore visitor arrivals from January to June 2000 were up by 12% and Hong Kong visitor arrivals for the same period were up 29.9%. This has been driven by a strong return in Japanese visitor numbers although critically their average spend per head is well down.

"We are very pleased to see a speedy recovery in travellers visiting Hong Kong," says Simon Au, purchasing manager at the Hong Kong International Airport liquor retailer, Sky Connection. "Most of the key nationalities reported double-digit growth in terms of passenger numbers. Being an airport operator, of course, we are the beneficiary."

According to Sky Connection, liquor sales were up over the last year despite "a marginal erosion in penetration". In common with others in the region, Sky Connection found that growth had been strongest in wines and whiskies. Wine in particular has been a growth area in many locations in Asia, while sales of Scotch whisky appear to have progressed at the expense of Cognac. "Supported by the new arrival business, we anticipate wine will achieve new highs," Au told just-drinks.com.

Like Singapore, Hong Kong has a fairly wide mix of nationalities passing through it so it is a good indicator for the general recovery in the region. The retailer found that strongest growth had been observed among Korean travellers with "satisfactory" progression in Taiwanese and Japanese passenger numbers. "The sales forecast over the next 18 months is very positive given a continued growth in traffic," Au adds.

UDV's David Marr is also sanguine about the region's future. "We would predict the next few years in Asia to show ongoing growth. Markets like Japan may take longer to recover unless they fix some of their underlying financial issues. The markets have definitely settled down to a more steady growth pattern."

It's a more upbeat view than one would have found eighteen months ago to be sure but, as liquor suppliers and retailers are keen to point out, they are far from out of the woods. For a number of reasons, there is only a qualified cause for celebration.

In the first place, as the statistics bear out, this is only a partial recovery. The 8.5% growth in 1999 followed a 28% decline in 1998. Furthermore, Japan, for so long the economic engine of the region, remains mired in recession. "Japan as a market remains relatively flat due to ongoing recession and spend per head reductions from the past," Marr adds.

For drinks companies, the general decline in the sales of Cognac in the region is a continued cause for concern even though the comparative growth in Scotch whisky has to some degree compensated. Most worrying has been the decline in the XO Cognac market once a premium-priced mainstay of Asian travel retail. "The downturn in the Asian economies has had a negative effect on the Cognac market and in particular the XO sector which has come under price pressure due to its high price point and the disruption of its pricing structure by the Japanese and Taiwanese discount stores," says Dennis Ackermmans, Allied Domecq Duty Free's (ADDF) director for Asia.

Like many, Ackermmans believes Cognac's problems cannot be solely attributed to adverse economic conditions. "The crisis in Asia accelerated the trend in the Cognac category," says Ackermmans. "However, the problems with the category pre-date 1997. The downturn in the Asian economies has hit the premium Cognac qualities the hardest and with Courvoisier we have put most of our recent emphasis on VS and VSOP especially." According to ADDF, the strategy has paid dividends with Courvoisier showing "excellent growth".

Allied Domecq is not the only Cognac supplier to have noted that the re-emerging sales patterns are different from those of five years ago. World Brands too has seen different patterns though the company believes there are still opportunities for sensibly priced products with a real point of difference, particularly those targeted at women. By the same token, other suppliers, such as Remy and Hennessy, are experimenting with products targeted at younger consumers.

The adjustments Cognac brands are having to make underline the way the overall shape of the Asian travel retail sector is changing. As the region's travel retail industry recovers, new patterns are emerging which could make a return to the pre-crisis highs less likely.

Chief among these changes are the increase in leisure travel and the greater numbers of younger consumers. Growing numbers of female passengers from Japan and increasingly from other Asian countries is also changing the balance of the market. It has also been suggested that Asian consumers have lost some of the extravagance which marked the region out for such growth in the pre-crisis years; even that the high-spending habits which had become the norm in Asia are being replaced by the more traditional Asian values of restraint.

It could be that the heady growth and conspicuous consumption of earlier years represented a unique boom and the patterns now being set during this recovery are actually more sustainable in the long term. It is now for suppliers to show that they can adapt to these new market conditions and make liquor more relevant to today's consumers.