Duty-Free Retail Industry Impacted Heavily by Air Security

The aviation security issue is creating a crisis of confidence among many North American air travellers, which is threatening to have asevere impact on duty-free liquor sales at airports across the region. In stark and welcome contrast, the unaffected Mexican border and US cruiseship sectors are growing strongly, although beleaguered retailers on the Canadian land border are struggling to cope with a drop in US traffic.

At US and Canadian airports the issue is the confiscation of duty-free liquids from passengers catching connecting flights at transit security points, a consequence of the discovery last August of an alleged plot by UK terrorists to blow up a US-bound jet with liquid explosives. Anybody caught carrying liquids and gels over the 3fl oz (100ml) limit in their hand luggage is liable to have them confiscated.

The US Transportation Security Administration (TSA) and the Canadian Air Transport Security Authority (CATSA) are strictly enforcing the new rule. Last month, for instance, national newspaper USA Today reported that between October 2006 and January this year Miami International airport confiscated more than nine tons of oversized bottles from passengers. Many of these unlucky customers were returning US holidaymakers who had bought duty-free liquor in the Caribbean.

The International Association of Airport Duty Free Stores executive director Michael Payne says it is hard to quantify what damage the restrictions are having nationwide. "No information is yet available,but the new security legislation is having an impact," he tells TRI."Some airports are less affected than others because they have less transit traffic and fewer flights to the European Union (EU) or otherparts of the world where this is an issue."

North American airport retailers are making strenuous efforts to educate customers about the new regulations. Los Angeles World Airports concessions manager Karen Tozer has nothing but praise for DFS Group's hands-on approach to tackle the problem, for instance. "DFS worked closely with the TSA, airlines and the airport to educate passengers about the new security restrictions from day one," she recalls.

"The problem was further complicated by the EU's introduction of restrictions on transit passengers in November last year, which also had an impact on unit sales of liquor and wine," she adds. "We and DFSboth support the Airports Council International's proposal for a global solution through the use of universally accepted tamper-evident bags and harmonised security procedures."

Consistency is key

Marketing and promotions director Mona Lee Tam at The Nuance GroupNorth America, which operates duty-free stores at Calgary and Toronto Pearson International airports, says: "Our staff have been trained to recommend that a customer does not buy if we believe there is a good chance that their liquor purchases will be confiscated."

The trouble is that the continuing industry-wide lobbying effort aimed at ensuring that countries accept each other's airport security regimes and the viability of tamper-evident bags could take several months. In the meantime liquor suppliers are worried that irreparable damage is being done to the trade's image. Remy Cointreau international director global travel-retail Francois van Aal warns: "Confused passengers would rather not buy at all than risk seeing their purchasesconfiscated in transit.

"Lost buyers may be lost forever. We need to see clear consistent information at airports worldwide. Our sales staff need to be properly trained so that they can provide accurate information to passengers. It would be helpful to have a simple leaflet explaining who can buywhat and where, and how they must carry their purchases."

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."

The Edrington Group area director duty-free and travel-retail William Ovens adds: "Sales of The Edrington Group brands in the region are up for two reasons. Firstly, the new Maxxium Travel Retail Americasdivision has effectively increased distribution and shelf presence across all channels. Maxxium has a much larger team than the previous distributor and this has helped bring added focus.

"Secondly, all our key brands--The Macallan, The Famous Grouse andHighland Park--are performing well in the US domestic market, which is having a knock-on effect on sales in travel-retail."

This optimism is reflected in the number of liquor exhibitors at this month's Duty Free Show of the Americas in Fort Lauderdale. All the floor space on the trademarket has been booked and several key players will be present, including Diageo, which has been lured back to the show after several years.

The show will include some big new launches too. V&S Group and Bacardi are going head to head with two new pear-flavoured vodkas: Absolut Pears and Grey Goose La Poire, while The Patron Spirits Company will unveil Patron Gran Burdeos, an ultra-premium $400-plus tequila, which has been finished in Bordeaux wine casks.

In short, a lot is happening--a clear sign that the North Americanduty-free liquor business has plenty of life in it yet.

Top 10 liquor brands in US

duty-free 2005

Absolut

Johnnie Walker

Crown Royal

Smirnoff

Chivas Regal

Baileys

Bacardi

Jack Daniel's

Canadian Club

Kahlua

Source: International Wine & Spirit Record


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