The beverage business operates in a dynamicenvironment, where changes to the structure and nature of the market can emerge as aresult of any number of external factors. Chief amongst these is latest governmentlegislation in which the European Union (EU) eliminates the Duty Free sales channel duringthe move towards a single market economy.
Alcoholic beverages are the foundation ofthe global Duty Free industry. Though recently their share of the total market has fallen,they still account for over 20 percent of total Duty Free sales. Therefore, it is asignificant sales channel for premium branded products in all categories. This articleexamines the potential impact of the abolition of Duty Free within the EU at the end of1999. Our purpose is to give companies guidance on how to use their information systems toprepare for and take advantage of the change in market dynamics.
Fig.1 Category value share of DutyFree
Fig.2 Category volume share of DutyFree
The significance of Duty Free
For a brand owning company, the Duty Free sales channel is a vital showcase fortheir premium brands on the international marketplace. The brand availability in Duty Freeis a direct reflection on its credibility in the international marketplace. Mostimportantly, the volumes sold through Duty Free are significant. For example, 25 percentof the gin category is sold through this channel. Also, at an operational level, the costof serving customers in Duty Free is low when compared to other sales channels. This isbecause many Duty Free operators take deliveries in bulk on an infrequent basis, thusreducing overhead.
The Duty Free sales channel is a veryprofitable one. Duty free buyers tend to trade up to premium brands, which have a higherprofit margin for the retailer and the brand owner. Therefore, there is a proliferation ofdeluxe and super premium brands in Duty Free outlets. Also, due to the much lowerincidence of promotional activity (discounts, flash packs and so on) it is a channel whereprice rises are easier to introduce. Consequently, there is a greater chance of increasesbeing maintained because the brand owner is unlikely to introduce a discount shortly aftera price rise.
From the consumer angle, two things enticethe foreign traveler to spend in Duty Free. The difference in price of Duty Free goodsversus their name brand equivalent is the major deciding factor. Typical discounts are inthe region of 20-30 percent and special promotions take this as high as 50 percent whencompared to the retail price. Recently, the number of ‘only available in Duty Free’products have increased. These are usually high quality, premium products, which carry apremium price tag. In this case, the rarity value makes the product more attractive andlack of a retail equivalent makes price comparison less of an issue for the consumer.
Trends in Duty Free sales follow those ofthe travel industry – more travelers equal more sales. Although there have been one or twoblips in recent years (due to the Gulf War and the Asian financial crisis) these are on asteadily upward curve. Duty free sales are also important for airports, airlines, and touroperators. For these players, Duty Free is a key source of revenue and profit. This islargely used to subsidize other parts of the business, in particular the fares charged totravelers. A rise in the cost of travel is one of the predicted outcomes of the demise ofDuty Free.
What does it mean?
It is easy to speculate on the potential affects of the removal of Duty Free.Apart from the impact on fares, mentioned above, it will certainly have a significanteffect on the value and volume of sales through this channel. Despite this, Duty Free willremain a major outlet for premium, deluxe and super premium brands. The main driver forthis will be the needs for airlines, airports and tour operators to generate profits tosupport their other low margin and loss making activities.
Due to their buying power, these playershave already negotiated advantageous pricing agreements with their suppliers. Therefore,they can afford some erosion of their margins. However, it is likely that the existingsimple, efficient duty free channel will be transformed into something much morecomplicated and expensive to operate. This will occur as the retailer demands the supplychain efficiencies of the multiple grocers.
Examples of this are more frequentdeliveries of smaller shipment quantities, and financial charges for floor and shelf spacecommitments. We may even see the emergence of a ‘Duty Free only’ label range, competing onprice or brand image to suit the retailer or airline involved. This will impact the costof sale for brand owners, and result in tough renegotiations of their Duty Free contracts.
Managing the change
Brand owning companies need to prepare carefully for the change. Indeed, withsome imaginative planning, it will be possible to jump ahead of the competition and turnthe situation to their advantage. Among the key questions which need to be answered arethe following:
How are my brands performing in the DutyFree channel?
- Volume of sales?
- Value of sales?
How are my brands performing intheir category compared to my competitor’s brands?
What impact will the removal of Duty Freehave on the above when:
- The price is increased?
- The range of products in a category is reduced?
What impact would introductionof a new product have on the category?
- Would it be profitable?
What is the impact of theincreased cost of servicing my Duty Free retailing customers?
- Can my distribution network handle it?
- Would contracting out to a Third Party logistics provider be a better option?
It is here that the enabling informationtechnologies of an integrated Enterprise Resource Planning system (ERP) can supportchannel managers as they develop their new competitive strategies in this market. Thebrand or category manager’s computer desktop needs to provide information in an easilyunderstood format. Some examples (shown in Figure 3) are using charts and graphs to showmarket share, channel profitability, and trends. Also, access to the raw data should beprovided for the more technically minded marketer. This will allow user development of thedata without the need for employing expensive and scarce technical resources.
Speed and flexibility are vital systemcapabilities. The ability to integrate data from a number of different sources is alsoimportant so that sales forecasts, profit margins and volume sales can be presented in aneasily understood fashion. Also, the system users are automatically alerted if the modeledscenario does not meet predefined criteria.
Ideally, it will also be possible to modelthe carrying out of business process change to support sales into the Duty Free channel.This will highlight opportunities for operational efficiencies that maintain or increaseprofit margins by reducing costs overall. It will also identify potential for improvementsin customer service. By adding value in this way, the position of the brand owner isstrengthened during contract negotiations, which are aimed at maintaining or increasingprice levels.
Currently, all of the major players are lobbying strongly for Duty Free to bereprieved. If not, they are forecasting major effects on their businesses. However, theEuropean Commission is showing no signs in relenting in its move towards a practicalintroduction of the single European market. In this situation, the most forward thinkingbrand owning companies will need to plan ahead using the capabilities of their ERP systemsto support their decision making processes.