Duty-Free Retail Industry Impacted Heavily by Air Security

Confusion on duty-free liquids in airport setting and connecting flights hurting business

Imagination Unlimited International is the exclusive inflight and Asian duty-free distributor of Inniskillin icewine. Owner Lars Johansson suggests a neat solution to the problem. "The [US duty-free] industry needs to push for arrivals shops," he argues. "On average I spend 30 minutes waiting for luggage. This is time I could spend shoppingas at Singapore Changi and other airports that offer arrivals duty-free."

While US airport operators struggle to cope with the new security restrictions, the most pressing issue for US/Canadian border operators is the drop in US traffic.

According to Ontario-based Blue Water Bridge Duty Free vice-president sales Tania Lee-Hartmann, the main reason for the decline is a new US law that requires US and Canadian citizens travelling between the two countries to carry a passport.

Airline passengers have been required to carry a passport since January, but the implementation date for land-border crossings has beenpostponed from January 2008 to 2009. Unfortunately, Lee-Hartmann says the US media's recent reports on the air travel part of the law have confused potential US visitors.

"There has been a deluge of information through all forms of mediato the public reporting that from January 23 2007 they would be required to present a passport to enter the US when flying into the country. The problem is that people are assuming this applies to land border crossings, although travellers entering the country this way are not required to carry a passport until the end of 2008. Consequently, people are confused and are not traveling."

Blue Water Bridge Duty Free's liquor sales are down as a result, but Lee-Hartmann says the category is still her best-performing product sector. Sales trends have been unaffected by the recent weakness ofthe Canadian dollar, a clear sign that the retailer's customer base is now predominantly Canadian rather than American. Canadian and Scotch whiskies are still among the best-performing sub-categories.

Jeff Butler, liquor buyer at rival Ontario operator 1000 Islands Tax/Duty Free Store, where liquor sales fell by about 3% in 2006, agrees. "The Canadian business has picked up nicely. Crown Royal is a bigbrand for us, although it is popular with Americans too. Smirnoff, which performs well in Canada, is doing well, while Absolut, which is a bestseller in the US, has dropped a little."

Later in the year Blue Water Bridge will expand its liquor offer by 800sq ft (75sq m), an indication of the importance of the category to the operator's overall business. "There will be a new look, which will incorporate customised units and many areas for high-profile promotions," explains Lee-Hartmann. "We will also add a new wine boutique, which will highlight icewines and domestic wineries, but will alsofeature a large range of imported wines."

Despite obvious challenges, the outlook for the duty-free liquor category is not all gloomy. Suppliers report fast-growing sales on board cruiseships, for instance. Margins are tight in this promotion-driven, competitive business, but the volumes are often big and set to increase as the industry expands. The Cruise Lines International Association predicts that 2007 will be a record-breaking year, with passenger numbers forecast to reach more than 12m and a further 30 new ships set to be launched by 2010, adding another 73,500 beds.

Bacardi Global Travel Retail division vice-president travel-retailmarketing Jose Chao says: "The cruiseship channel is doing very welland we do not expect any slowdown. Instead we foresee increases as more ships enter service in the next couple of years. Since many cruise passengers are American and because our brands are strong in the USand Canadian domestic markets, we are well placed to capture a strong share of their dollars."

Although concerned about the aviation security issue, other leading suppliers are upbeat about their performance in the region. While some firms have yet to feel the flail impact of the airport transit issue in their year-end sales figures, their largely optimistic comments also reflect what a strong premium liquor market the US continues to be, and what potential remains in the comparatively small regional duty-flee business.

Ultra-premium tequila supplier Patron Spirits Company COO John McDonnell explains. "We continue to watch the travel restrictions on liquids issue closely, but it has not affected our overall US duty-free business. In the past year we have doubled our business in the duty-free and travel-retail sector."