The Travel Retail channel is struggling to remain relevant to Millennials

The Travel Retail channel is struggling to remain relevant to Millennials

Next week sees the International Association of Airport & Duty Free Stores host its annual 'Duty Free Show of the Americas' in Orlando. But, this year's exhibition marks the end of an era. Joe Bates reports.

Next week's Duty Free Show of the Americas has become a victim of the Travel Retail channel's recently-discovered thriftiness: The annual show won't run in its current format again. From next year, the event will merge with the annual South American Duty Free conference, which is organised by Latin American regional duty-free trade body ASUTIL and held each June in a different South American or Caribbean venue.

"A once-thriving business built on gratuitous spending, significant price savings over domestic markets and indulgent gift-giving is having to face up to a changing customer base and challenging trading conditions"

The new 'Summit of the Americas' is likely to keep its March time slot and Orlando location, but will include more educational content in the form of workshops and daily conference sessions. This consolidation of regional events was not unexpected. The Travel Retail industry is slowly learning to cut its coat according to its cloth. A once-thriving business built on gratuitous spending, significant price savings over domestic markets and indulgent gift-giving is having to face up to a changing customer base and challenging trading conditions.

A series of mega-mergers and acquisitions on the retail side of the Travel Retail business in recent years has also reduced the business case for a packed calendar of industry shows, conferences and networking events. It's worth remembering that Dufry, the world's leading Duty Free retailer, now accounts for over 20% market share of the airport retail business. A handful of buyers now decide which wine and spirit brands land on the Travel Retail shelves of the world's biggest airports.

Of late, the Americas Travel Retail business has been affected by a series of negative factors, most notably the strength of the US dollar against regional currencies. The strong greenback has lessened the spending power of overseas travellers, especially those from key Latin American countries such as Brazil and Argentina, which have had their own economic woes to contend with. Last summer's Zika virus outbreak also contributed to a tough 2016 for the region, which saw Travel Retail liquor sales slide 10.1% in Latin America and 6.6% in North America, according to The IWSR.

There are positive signs, however, that Latin America is recovering more quickly than many in the industry had expected. For instance, Dufry, the largest duty-free operator in Brazil, has reported organic growth of 3.7% in the fourth quarter of 2016 for its extensive Latin American store network.

The strong US dollar has also encouraged more Americans to travel by road and air into Canada. The Canadian Frontier Duty Free Association (FDFA) recently reported that liquor sales at Canadian airports grew by nearly 11.8% to total CAD85.8m (US$64.2m) last year. Sales of liquor at Canadian borders shops rose an even higher, 12.1% to reach CAD67.9m in 2016.

Canadian whisky was one of few spirits categories to show growth in Americas Travel Retail last year, according to The IWSR. Rum also fared well, with Gruppo Campari's Appleton Estate and Pernod Ricard's Havana Club among the best-performing brands. Havana Club has recently received a boost through the partial relaxation of the US trade embargo on Cuba, which allows us travellers to bring Havana Club back into the US, provided it is for personal use.

The cruise ship sector is another regional bright spot. The US and Canada account for over half of all cruise ship passengers, and the Cruise Line International Association predicts 25.3m people will take a cruise in 2017, up 4.5% on the previous year. Major drinks players continue to pump significant resources both into the onboard retail experience and the increasingly-sophisticated onboard bars.

"The underlying excitement of the cruise sector is the multi-layer opportunity it gives us to influence consumer purchase decisions both on vacation and when they are back home and buying our brands from the domestic market," says Geoff Biggs regional director for the Americas at Bacardi Global Travel Retail. "We are increasing our long-term investment and our premium range in all categories. Our dedicated team of cruise brand ambassadors are driving greater traction for us direct with consumers and in training cruise line staff." 

Much of the talk next week in Orlando is, of course, likely to centre around the impact of the new Trump administration. The early signs look bleak: The president's controversial initial travel ban on passengers from seven predominantly-Muslim countries (Iraq, Syria, Iran, Libya, Somalia, Sudan and Yemen) has led to a worrying slump in international bookings to the US. Heightened border security checks and fears over Trump's plan to build a wall have also impacted Travel Retail sales on the US/Mexico border.

In fairness, there is some optimism in the trade about the new Trump administration, especially around its pledge to encourage $1trn in private sector investment in the country's transportation infrastructure. The Airports Council North America (ACI-NA) says the country's crumbling, congested airports need $100bn-worth of investment over the next four years to cope with predicted passenger growth.

Patrick Nilson, president of US Travel Retail drinks distributor Haleybrooke International, says: "When President Trump was campaigning, he mentioned many times that our airports were not up to the standards of many airports around the world, so I think that airport infrastructure will be a priority for the Trump administration. If the US airports are expanded and improved there will be more room for retail shops, including duty-free, which will help fund the airport improvements."

Trump aside, the longer-term challenge for the Americas Travel Retail business - as for the entire Travel Retail sector - is how to remain relevant to the key Millennial demographic. Last week, United Airlines announced it was following in the footsteps of Delta and American Airlines by axing its in-flight duty-free programme, blaming the decision on "declining revenues". The move is yet more evidence of the Travel Retail industry's growing image problem as an old-fashioned, legacy retail channel.

"For Travel Retail operators to continue to be successful they need to attract Millennials," urges John McDonnell, MD of international at Tito's Handmade Vodka, which is bucking the trend and expanding its presence at North American airports. "There are 77m Millennials in the US so, if retailers don't have the right product portfolio, they are not going to attract them into the stores.

"Millennials don't want to shop in Duty Free because their parents shopped there," McDonnell adds. "They don't have the right products there, and they have rules that Millennials don't like. They ask: 'How come you don't allow us to take pictures? We like to take selfies and show our friends where we are in the world'. Unless they start to adopt rules that are friendly to the Millennials, they are going to be losing business."

McDonnell's warning is one that this troubled retail channel would do well to heed.

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