The duty-free business has recovered relatively quickly from the major disruption caused by the security scare in the UK in the summer, writes Joe Bates. And as the industry prepares for the annual Tax Free World Association travel retail trade show in Cannes next week, drinks suppliers have cause for cautious optimism with signs that their share of the market has stabilised after years of steady decline.

Exhibitors, buyers and distributors will be heading to next week's TFWA World Exhibition in Cannes in better spirits than anyone might have dared hope given recent events. The discovery in August of an alleged UK terrorist plot to bomb transatlantic airlines using liquid explosives smuggled onboard has not turned out to be the perfect storm the long suffering duty free industry was dreading.
 
There was a significant short-term impact to duty-free sales of liquor, fragrances and cosmetics not only at UK and US airports, but also at other major international hubs with flights to either country. The introduction of strict carry-on rules banning liquids and gels on US-bound flights saw duty free retailers' sales of these products drop by as much as 50%, but the effect was made less severe at many airports by the introduction of gate delivery schemes.
 
However, regulatory authorities on both sides of the Atlantic have been comparatively quick to ease baggage restrictions. The US Transportation Security Administration (TSA) was the first to respond to pressure from the aviation industry and the travelling public on 26 September when it allowed passengers to take all items, including liquids, purchased airside onto their flights as before. On 5 October, the European Commission followed suit, calling on all European airports to relax restrictions by the end of the month.
 
The duty-free industry breathed a collective sign of relief when these two announcements were made. Any long-term continuation of such strict carry-on restrictions would have threatened the survival of three key product categories, which together generate nearly 45% of total duty-free sales. Now, barring any further incident, it is business as normal; the industry has clearly done a good job of convincing the authorities that its supply chain is one of the most strictly controlled of any distribution channel.
 
The mood then on the exhibition floor of the Palais des Festivals in Cannes this week should be one of cautious optimism. After years of steady decline the liquor category appears to be holding steady against other product sectors, accounting for 17.6% of total duty free sales in 2005, down only 0.3% on the previous year, according to industry analyst Generation.

In the same year sales of spirits, beers and wines grew by 6% to reach US$4.76bn, a result not only of increased passenger numbers at airports and on cruise ships, but also of rising retail standards and the emerging purchasing power of the mainland Chinese traveller.
 
Long-term problems such as competition from domestic discounters, bureaucratic interference and enhanced security measures may remain, but one of the encouraging trends in recent years has been the willingness of suppliers to meet retailers' needs to offer something different from their downtown competitors with travel-retail exclusives. Manufacturers have realised exclusives not only meet the retailers' needs, but are a great way of testing new releases in a fast-moving, international retail environment dominated by affluent ABC1 consumers.

Diageo is a recent convert to this approach, launching two limited-edition Baileys Irish Cream flavours (Mint Chocolate and Crème Caramel) in duty-free last year before a wider roll out in the US domestic market in January. The company has followed a similar path with the release in August of The Singleton of Dufftown, an entry-level single malt, which has initially been made an exclusive to UK duty-free shops, but may be distributed more widely if it is successful.
 
Similarly, Pernod Ricard-owned Chivas Brothers has done well with its travel-retail exclusive The Glenlivet Nadurra, a non-chill-filtered 16 year-old expression launched in 2004. At many duty-free stores, Nadurra's sales are reaching 50% of the volumes of the core Glenlivet 10 year-old reference, and its popularity led Chivas to launch Nadurra in a cask-strength version for the US domestic market earlier this year.
 
Next week, a fifth of the Cannes show's 40 new exhibitors will be drinks companies, yet another encouraging sign for the sector. The major new launches are dominated by spirits categories such as Tequila, vodka and gin, which were once shunned by margin-hungry operators focused on deluxe blended Scotch whisky and XO Cognac.

For instance, the ultra-premium Tequila brand Patrón is using the show as a launch-pad to boost its international presence outside the US. Despite failing to get into the Palais, the company is determined to make a splash, hiring a suite at a top seafront hotel and throwing both a cocktail party and a blues night at a popular Irish pub.
 
The other significant new name at the show is first-time exhibitor Campari, which has recently created a dedicated duty-free division to boost its profile in the channel. The Italian firm is aiming to wow buyers with high-end vodka Skyy90 and Martin Miller's gin.

Whether buyers will be tempted by either company's offerings remains to be seen, but with Scotch and Cognac's share of duty-free liquor sales slipping from half to just over 40% in a decade, there is clearly a need for retailers to find new products that appeal to consumers and deliver the sort of margins needed to justify their shelf space.