When the European Commission finally abolished intra-EU duty free, the jury was out regarding how travel retail liquor sales would survive. Sixteen months on only some of the answers have been provided. Ben Cooper argues that the search for the model sales pitch means more transition is ahead.

The fact that the Commission came down so heavily on duty free while singularly failing to tackle the far more fundamental issue of the harmonisation of indirect taxation was what most vexed the drinks and travel industries prior to abolition. Now abolition is a fact of life, however, it is somewhat ironic that those tax and duty disparities now represent significant business opportunities. Because, while liquor is still being sold duty paid in airports all across Europe, the potential for liquor sales is naturally strongest in low tax/duty countries.

"There is still some demand for product in duty paid areas," says Vince Horne, managing director of UDV Duty Free. "Basically the demand gets stronger the greater the force of two meeting factors. When travellers from high tax countries are leaving low tax countries you get significant purchase potential."

While many retailers recorded a severe dip in turnover immediately after abolition, there is strong evidence that sales have recovered significantly. For example, Brussels airport retailer Belgian Sky Shops is forecasting a drop of between 22% and 25% in the above-21% abv segment this year, while volumes in the low strength segment should only be down by around 3%. Given that some 70% of the traffic in Brussels is intra-EU, this is a significant achievement as well as proof that intra-EU passengers still want to buy alcohol. Like other retailers, BSS's wine and Champagne sales have not been as badly hit and are currently only about 5% down year-on-year. Wine has also been a comparatively strong area for the German retailer, Heinemann, which also reported "positive" liquor sales to EU travellers.

The major UK airport operator, BAA, had predicted that the end of duty free would cost it £77m but has subsequently stated that the shortfall was "at the lower end of its predictions". Once again the pattern appears to have been one of steady recovery. In July 1999, net retail income was down 25% to £2.99 per passenger but by March 2000 this had recovered to £3.79, representing a drop of 11% year-on-year. These figures are particularly encouraging given the UK does not have the natural advantages in terms of tax/duty disparity of southern European.

Allied Domecq Duty Free believes that it has retained about 65% of its intra-EU spirits business, broadly in line with the experience of other major suppliers. "It has not been nearly as disastrous as it potentially could have been," says European marketing director at Allied Domecq Duty Free, Jonathan Ashworth. "The market forecasts were for something like at best 30% retention."

World Brands Duty Free also stated that intra-EU sales had been "at the better end" of what it had predicted. Both ADDF and World Brands have, like other suppliers, continued to invest in travel retail exclusives and brand extensions in order to combat the effects of abolition.

Multi-buys and multipacking have also proved positive strategies now that the vendor control limits on liquor no longer apply to intra-EU travellers. "The business traveller has wised up to the fact that he can now buy in bulk," says Luc Lauwers of Belgian Sky Shops. "And in any airport in Belgium, France, Portugal, Italy or Spain he can buy at a good value price and fill up his drinks cabinet."

A tale of two pitches

"The end of duty free meant the end of preferential pricing for travel retailers and the big suppliers have been adamant in their adherence to a defensible pricing policy "

However, while it appears sales opportunities remain, the approach retailers have taken to meeting this demand has differed. There have been effectively two approaches. The first, favoured for example by World Duty Free at Heathrow, Aldeasa in Spain and by Heinemann, is to offer a limited range of spirits to intra-EU customers at attractive 'travel value' prices. At World Duty Free, a range of some 350 lines in liquor and tobacco is on offer to intra-EU travellers, at discounts on UK high street prices of up to 40%.

The other principal strategy has been to offer effectively the same full range to all travellers, with dual pricing, displaying the duty free and the duty paid price. The customer presents his or her boarding card when making the purchase and the correct terms are applied. The approach has been favoured by Belgian Sky Shops in Brussels and is also employed at Schiphol and Charles de Gaulle.

The travel value solution has had its critics among suppliers primarily because its focus on price means that many flagship international brands are effectively barred from inclusion because they do not offer the retailer a sufficient margin on a duty paid sale.

The end of duty free meant the end of preferential pricing for travel retailers and the big suppliers have been adamant in their adherence to a defensible pricing policy giving travel retailers no advantage over much larger domestic customers. Consequently, though retailers have been able to retain a higher proportion of their spirits turnover than predicted, retailer margins have inevitably suffered. While some well known names appear in the intra-EU spirits ranges, there is also more than a sprinkling of comparatively unknown secondary brands which, while competitively priced, do not arguably have the cachet of the Johnnie Walkers and Beefeaters of this world.

A dual pricing policy at least gives intra-EU customers the opportunity to buy top-name international brands but that is not the only reason for its greater popularity among major suppliers. "It is the clearest, looks best on the shelves and is understandable," says Vince Horne. "The problem I have with the travel value solution is that you're saying to customers you can't have this. You can't promote the duty free products because there are too many people you are excluding. Your duty free products have the highest profitability and you can't promote them."

Cash 'n' clarity

As a significant proportion of the initial drop in liquor sales was attributed to customers simply misunderstanding the new system, it could be argued that clarity and simplicity on shelf is worth striving for. However, Raoul Spanger of Heinemann feels that this is precisely what the travel value concept embodies, as it is one range for all customers. At present about 90% of Heinemann's spirits range is travel value-priced. But by the end of the year the retailer plans to have a 100% travel value range. However, while this will be simple to understand, it could be argued that customers eligible to buy duty free will be deterred by the fact that they are not being offered their "duty free" price advantage over other travellers.

A more fundamental question relates to the type of retail proposition the travel value concept offers to either intra-EU or extra-EU travellers. In the view of many suppliers and retailers, such ranges simply must offer top-name international brands. "If you're going that route and the brands you get are not market leaders there is a danger of reducing what was an elite, upmarket shopping area to a cash 'n' carry quality," says Horne. "I think there is a danger that this preoccupation with duty paid will undermine the tenets of the shopping experience that duty free was offering a year ago."

Many people feel that one or other of these systems will be seen to be more successful and will become the model. So to a degree, 16 months on from abolition we are still in a transitional phase. Moreover, the European travel retail sector still faces another imponderable with the harmonisation of European tax and duty levels. Much of the intra-EU spirits volume is derived from the disharmony in duty and tax rates. If the EU does start to make serious progress in this area, the travel retail spirits market will have a further and equally daunting challenge to overcome.