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Already battling the recession, those attending next week's Tax Free World Association (TFWA) Asia Pacific Exhibition are nervously watching developments in the swine flu outbreak, remembering the adverse impact the SARS outbreak had on the travel retail sector six years ago. So far, the effects in Asia Pacific have been minimal, writes Joe Bates, while continued spending by Chinese travellers has helped offset some of the recessionary pressures.

Exhibitors and buyers flying in to Singapore Changi airport to attend next week's Tax Free World Association (TFWA) Asia Pacific Exhibition will be screened by a thermal scanner before they can clear immigration. Any traveller showing the slightest hint of a temperature will be whisked out of the queue and subjected to rigorous medical tests before being allowed through. It's now standard procedure at most Asian hub airports.

The response of Asian health officials to last month's outbreak of swine flu in Mexico has been predictably swift and robust, but the painful memory of the 2002/3 SARS outbreak, which originated in China and killed 774 people worldwide, is still fresh. Moreover, comparisons with the SARS outbreak have particular resonance for those attending the show as it proved disastrous to the region's travel and duty-free business. Nobody wants history to repeat itself.

Of course, swine flu is the last thing the travel retail business needs right now, as it battles the global downturn. However, Asia Pacific looks better placed than other regions to weather the storm on both fronts. Only one confirmed regional case of swine flu has been reported to date in South Korea, and although regional air traffic plummeted by 14.5% in March, according to the International Air Transport Association (IATA), retailers and suppliers are confident business will return to pre-crisis levels.

This confidence is reflected in the decent turnout of liquor suppliers at this week's show with big guns such as Diageo, Pernod Ricard and Bacardi making the long trip east, alongside independent players such as William Grant & Sons, Patrón and Ian Macleod Distillers. Credit has to go to show organiser TFWA, which has gone out of its way to drum up business, freezing exhibitor costs, and offering special travel packages and discounted accommodation.

But why all the regional pluck given the generally gloomy market conditions? Much of it has to do with the mainland Chinese, who have been the main driver of growth within the regional duty-free wines and spirits business in recent years. They are continuing to travel and spend, albeit in smaller numbers. This has led to a major shift in purchasing patterns at some airports with duty free sales of Cognac and premium French wines holding up better than other sub-categories.

While Chinese traveller numbers are down, Thibaut de Poutier, managing director of Pernod Ricard Asia Duty Free, says the drop has been less sharp than for other nationalities. "The number of overall travellers in the region has been decreasing since the middle of last year, but the drop in Chinese traffic is comparatively less," he tells just-drinks. "Their importance to the [regional] duty free business is getting bigger and bigger."

Cyril Camus, president of Camus Cognac, adds: "There are fewer mainland [Chinese] travellers around, but the volume of sales to them of premium brands is quite stable. China is one of the very few markets where there is still some overall growth potential for the [Cognac] category in the coming year. Our investments there have been significantly increased over the past few months and we have been maintaining our [growth] rates as predicted."

Asia Pacific has indisputably led the way when it comes to the premiumisation of the duty-free liquor category. Regional operators such as LVMH-owned DFS Group, which runs stores in such locations as Singapore, Guam, Saipan and Bali, have raised the industry bar in terms of branded merchandising and ultra-premium product offers.

However, the economic downturn is forcing some operators and suppliers to readjust their approach. "We are going back to basics in terms of promotional activities, which are geared towards core items and offering value propositions," says Simon Au, buying & merchandise director at Hong Kong airport liquor retailer Sky Connection. "We are also temporarily not listing new items and pruning our existing assortment."

In a similar vein, Diageo Global Travel and Middle East managing director Phil Humphreys says the current market conditions have forced the company to take a broader focus to its promotions in the region. "We are playing across all different segments of the category in a way we haven't done before. The sweep of activity is different to where we were 18 months ago."

Peter Sant, managing director of Rémy Cointreau Global Travel, is convinced the regional business will get back in the trade-up groove sooner rather than later. "Before the economic crisis, all nationalities in Asia were trading up and the best retailers accommodated this trend and certainly contributed to this trend," he says. "Mid-term this will continue."

Pernod's de Poutier agrees: "The trading down is just a sporadic and temporary phenomenon. Asian travellers are still keen on premium and high-end products."

Indeed, the super- and ultra-premium categories will be very much in evidence at this year's show. Luxury launches include a new Inniskillin Icewine costing over US$200 per bottle and Glengoyne 40-Year-Old, the oldest variant of the single malt ever released and priced at GBP3,000 (US$4,531). Glengoyne-owner Ian Macleod Distillers will also be unveiling a limited-edition Springbank 40-Year-Old whisky costing GBP800.

Whether buyers take a punt on these high-end offerings remains to be seen. Many are taking a cautious approach when it comes to stocking inventory.

On the question of how long the economic crisis will continue to depress the global duty free business, forecasts vary. For instance, Diageo's Humphreys predicts it could be up to a year before the industry turns the corner. But if the current swine flu outbreak worsens, it could well take much longer.


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