Comment - Rouble Plunge Heaps Pressure on Travel Retail
Russia's currency is feeling the squeeze
It's been almost three years since I first went to the Tax Free World Association exhibition, the premier global Travel Retail event held every October in Cannes. The sun shone, and exhibitors chatted happily about the tremendous growth the Chinese and Russians were bringing to the sector.
How times have changed. Last year, the Chinese fell out of the good books as government austerity measures cooled the fervour for high-end Cognacs and single malts. This year, when October comes around, it will be the Russians' turn to tumble from grace. Political tensions over Ukraine and subsequent trade sanctions have led to a dramatic fall in the value of the rouble over the past six months, severely denting the spending power of what was Travel Retail's other star customer.
Inflation in the first half of the year was at a reported 7.5% in the country, and the central bank has raised interest rates in an attempt to boost confidence in its currency. According to Fortune magazine, the Russian Government's own growth forecast for 2014 is a low 0.5%.
What this means for the Travel Retail industry was put into context for me at Frankfurt airport, where on Tuesday I was invited by Beam Suntory's and Edrington's distribution unit, Maxxium, to see the latest promotional push for Jim Beam Bourbon.
In an interview with just-drinks, Glen Williams, Maxxium's Travel Retail MD, cited industry figures that showed total spending in Russia's airports across all categories was down by 11% in February and by 14% in March. Maxxium's own sales have yet to be materially impacted - Russians are still buying alcohol, it seems - but Williams warned that the devaluation will “definitely influence our numbers for this year”.
“All our pricing in Russian airports are in euros or in dollars,” he explained. “Consumers flying through are all of a sudden finding prices 20% more expensive than before.”
What is more worrying for the sector is that, unlike the impact of China's austerity measures, which is expected to level off next year, no one knows how long the factors causing Russia's withdrawal are likely to last. Only a few weeks ago, the rouble appeared to be rallying, before the downing of Malaysia Airline Flight MH17 reset any gains. Reports today that Russian troops could be preparing to invade eastern Ukraine under the pretext of a humanitarian mission highlight further just how much uncertainty surrounds the region.
On a human level, this is all an absolute tragedy. For businesses, it means that accurately predicting the future is, at the moment, a pointless task and that contingency plans, as Williams told me, can extend only to shifting focus to less volatile markets in Europe while events in the east play out.
For Cannes in October, it means that talk will be of the Chinese and Russians, just as it was three years ago. This time, however, the mood will be a lot less celebratory.
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