just-drinks and the IWSR have teamed up for this report on the travel retail sector

just-drinks and the IWSR have teamed up for this report on the travel retail sector

A global recession was always likely to make for a tough time in travel retail but, according to a new IWSR/just-drinks report, projected growth in passenger numbers and closer collaboration between retailers and suppliers suggest the long-range prospects for the sector are very bright.

Travel retail is a notoriously volatile sector, particularly susceptible to global economic fluctuations and geopolitical instability. But, even by its own standards it has had a torrid couple of years. The downturn first impacted on the travel retail liquor market in the fourth quarter of 2008 and its effect continued to be felt throughout 2009.

However, according to a new IWSR/just-drinks report, the consensus among travel retail operators and suppliers is that trading is improving month-by-month, although conditions remain very difficult in some regions.

The key indicator for the health of the travel retail market is the volume of international travel and, according to the report, both statistical and anecdotal evidence suggests international travel “is recovering strongly”.

Having reported tourist arrivals down by 4.3% in 2009, the World Tourism Organization (UNWTO) forecasts arrivals will grow by between 3% and 4% this year. UNWTO says the closure of some European airports in April following the eruption of the Eyjafjallayökull volcano in Iceland had not significantly disrupted the upward trend. The latest Airports International Council (AIC) data also suggests improvement, with international passenger numbers rising by just over 10% worldwide in May against May 2009.

The IWSR/just-drinks Global Market Review of the Travel Retail Drinks Sector goes on to say that all the liquor multinationals have reported improved travel retail sales, and forecasts that this trend will continue in the second half of 2010. “Sales may still take some time to recover in Europe and North America,” the report states, “but as tourism is now increasing again in many countries around the world the signs are that 2010 will be a much better year for the global travel retail wine and spirits sector.”

There is certainly some ground to be recovered. IWSR statistics show that total volume sales of spirits and wines in travel retail fell by 9.3% in 2009 to 22.7m nine-litre cases.

Not surprisingly, North America was the hardest hit region, registering a fall of 19.5% in the year to 3.24m cases. The picture in Asia Pacific, meanwhile, was mixed. Australasia was one of the few regions to register growth last year, rising by 10.4% to nearly 1m cases. However, the highly profitable East Asia region declined by 13.5%, with South Korea and Japan suffering most acutely, though China and Hong Kong performed comparatively better. Sales in Europe fell by 7.4% to 13m cases.

However, while the last two years have been very tough – described by Diageo global travel managing director Phil Humphreys as “the most challenging of my working life without a shadow of a doubt” – the long-term prognosis for the travel retail liquor market appears extremely good.

“As the short-term outlook improves, the long-term outlook has possibly never been better,” the report notes. “There are many reasons for optimism. Despite the current economic difficulties, the long-term forecast is one of continued growth in travel and tourism.” Diageo believes the global travel retail liquor category could double from US$6bn to $12bn within five years.

Once again, expected growth in passenger numbers underpins the optimism. AIC forecasts that the number of air travellers will double to more than 9bn by 2025.

Furthermore, the “explosive growth” in travellers from emerging markets – and most of all the rise in Chinese and Indian travellers – is particularly positive for travel retail. “Like the Japanese in earlier times, these groups are eager to purchase gifts for family and friends, as it serves as a form of validation of their new status,” the report states. “As these economies develop, there will also be a corresponding growth in business travel. “

But it is not just increased passenger numbers that are likely to benefit suppliers to travel retail. Penetration and conversion rates for liquor in comparison with other sectors remain “woefully low” but tapping that potential represents “an enormous opportunity”. The report continues: “If the industry can just raise footfall by 50% from 23% to 37%, which is still far below the level for the fragrances, cosmetics and confectionery categories, it will double the size of the category.”

To that end, the liquor industry is using “to good effect” a range of marketing tools, including consumer research, travel retail exclusives, tasting bars, merchandising initiatives and a greater emphasis on customer service.

There is also evidence of closer cooperation between suppliers, operators and airport authorities, according to the report, which augurs well for the future. While issues such as margin structure, high concession fees and a continued adherence to the historic “stack ‘em high, sell ‘em cheap” model will continue to be a source of tension, “leading elements of the travel retail industry have come to recognise that liquor remains a central profit driver and they share a common interest in growing the business”.

The hope for the drinks sector is that this cooperation will increasingly be seen on a practical level between suppliers and retailers in areas such as category management. “Many industry players think that the implementation of forms of category management programmes by travel retail operators can play a key role in growing the liquor category,” the report states. Closer co-operation between suppliers, operators and airport authorities can create both efficiencies and value. Collaboration involves setting sales targets, sharing insights and data, and moving the focus away from global price discussions.

Other product categories, such as fragrances, cosmetics, confectionery and fashion, have in the past offered greater excitement and innovation than liquor, which has declined relative to these categories. However, the report concludes, the drinks segment “is fighting back” through innovation, travel retail exclusives and packaging and product merchandising, and is closing the “qualitative gap” with other product categories.

Exclusives, premiumisation and product innovation all clearly have a role to play in the future, as they have in the growth hitherto seen in travel retail, but there is a clear impression that it is the more constructive and collaborative relationship between retailers and suppliers that could be the key catalyst for the liquor segment going forward, particularly as it faces ever stiffer competition from other product categories.