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As the Travel Retail industry gathers for next week's TFWA World Exhibition amid the luxury yachts and pampered pooches of sunny Cannes, this most global of sales channels has much to ponder.

Pernod Ricard's full-year results, released last month, illustrate the challenges that currently face an embattled sector, which accounts for 10% of the French multinational's overall sales. The group reported "difficulties" in the Asian Travel Retail market with sales "declining". At the same time, sales in the Americas' Travel Retail channel were down by 9%, while Europe also recorded a "small decline".

The outlook for the 29.4m-case Travel Retail wine and spirits business appears gloomy. The sector's challenges are multiple: from currency fluctuations and the slowdown in once-booming emerging market economies, to airport terrorist attacks, from the erosion of price savings versus the domestic market, to growing concerns over a 20th Century retail channel in danger of becoming out of touch with the smartphone age.

"The past 12 months have indeed been among the toughest I have seen in my time in the sector," admits Erik Juul-Mortensen, president of the Tax Free World Association (TFWA), which organises the annual Cannes show. "Yet, while many brands and retailers are still under considerable pressure…there is every reason for confidence as we approach 2017.

"International passenger numbers in the air and on the sea continue to grow, which suggests there is plenty of opportunity for developing sales," he insists. "Footfall and [shop] penetration are key, so the challenge and the opportunity will be to focus our energies on how we turn ever-larger numbers of a relatively 'captive' audience into buyers."

Travel Retail has plenty of runway - Comment

Passenger numbers do indeed continue to rise. During the first seven months of this year, international traffic at airports worldwide rose by 6.4%, according to Airports Council International (ACI). This healthy upward movement looks set to continue for years to come - aircraft manufacturer Airbus predicts air traffic will grow annually by 4.6% until 2034, for instance.

Unfortunately, all these extra passengers are no longer translating into increased sales. Penetration rates for liquor hover at a low 12% and, according to the IWSR, four of the top five spirits brands in Travel Retail recorded drops in sales last year of between 7,000 and more than 100,000 cases.

Cyclical factors such as the collapse of the Russian Ruble and the Brazilian Real account for some of the sector's woes. Yet, there are also some more long-term challenges to consider. Mainland Chinese travellers, for instance. have been held up as the saviour of the Travel Retail industry for most of this century. In the wake of the Chinese government's ongoing anti-corruption campaign, however, a new type of Chinese traveller is now flocking to countries as far away as Australia to stock up on household goods they consider cheaper, better quality and, in many cases safer, than the ones they can purchase back home. For many of these travellers, baby formula milk, bedding and fish oil are just as important as Scotch whisky or VSOP Cognac.

Meanwhile, in the mature markets of Europe and North America the appeal of saving a few Euros and Dollars on a heavy bottle of duty-free spirits that can be purchased in seconds from a smartphone and be delivered to your home is likely to be an easy question to answer for tech-savvy Millennials.

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Juul-Mortensen concedes that the continued focus on luxury spirits and ultra-premium price points may need reconsidering. "I believe we do need to provide a wide spectrum of products suitable for all pockets," he says. "As passengers remain cautious in an uncertain climate, my views have not changed. The increasing democratisation of travel means that we need to cater for a broad range of budgets.

"In my opinion, there is - and always will be - a very important market for the ultra-premium and luxury category in both wines and spirits. But, we also need to bear in mind that a premium or standard brand could well be aspirational for travellers from new, emerging markets."

Similarly, Juul-Mortensen recognises that the Travel Retail sector has in some instances been slow to recognise the threats and opportunities of online retail. "E-commerce cannot be a bolt-on or a watered-down version of what is available in our retail stores," he argues. "It must enhance and augment the overall retail experience, be that in an airport, on a cruise line or in a downtown or border duty-free store.

"There is also much the 'real' retail environment can offer that the online shop cannot," he adds. "We can give our customer a truly multi-sensory experience, and we need to make sure that experience is an outstanding one if we are to remain competitive in an increasingly-connected world." 

It's not all doom and gloom for Travel Retail, though. Reflecting its growing popularity in many domestic markets, gin is also on the rise in Travel Retail, with sales up nearly 6% last year. Malt whisky is also powering forward with key players such as The Singleton, The Glenlivet and The Dalmore all growing their sales by double-digits in 2015.

Then, there is the complex issue of 'Brexit', which of course many UK-based drinks companies lobbied against during the campaign, warning about likely tariffs, higher costs and more red tape for exports. And yet, from a Travel Retail perspective, the UK's pending departure from the European Union could lead to the return of duty-free shopping for those travelling to the EU from UK airports and ports.

Brian Collie, group retail director of UK airport operator BAA, has called the prospect of Brexit "the biggest opportunity" for the industry in a generation, which could lead to a "phenomenal" increase in sales and profit margins.

With the UK government having yet to trigger Article 50, however, Jul-Mortensen takes a more cautious stance. "We still need to understand the shape and form of the agreements of the future relationship between the UK and the EU," he warns. "While, on the surface, it would be good to see the return of duty-free sales between the UK and the EU, I also believe we need first to carefully consider and contemplate all possible consequences. Based on this, we can form a strategy to secure the best possible outcome for the industry."

Juul-Mortensen's wary stance at this early stage is understandable. However, if a hard border between the UK and the EU does become a reality, it just might give the European Travel Retail business the shot in the arm it desperately needs.

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