Weak dollar

"The problems with the US economy won't become a factor until they spill over to other major world economies," he adds. "Then we would see a slow down in travel-retail sales. US citizens contribute a relatively small proportion of our North American duty-free sales. Business is driven by Europeans, Canadians, Asians and Mexicans and they are benefiting from the weak dollar."

José Chao, Bacardi vice-president of travel marketing, shares Moran's optimism, but adds a couple of cautionary notes. "Our core brands have been doing very well, despite the pending US economic slowdown and the liquids, aerosol and gel (LAG) security issue. Our US business continues to be strong mainly due to the ongoing weakness of the US currency, making purchases here so attractive to European travellers.

"To say we do not see some softness, however, would be understating some of our concerns," he adds. "We see difficult trading conditions in the northern US border, where the border security issue has hit our Canadian retailers and the LAG issue has impacted sales somewhat at Toronto airport.

"However, despite our problems, we still had a very good 2007, particularly for Bombay Sapphire and Grey Goose. Barring any unforeseen disaster, 2008 should also be strong."

Regional air traffic is likely to slow in 2008 from the 5.7 per cent growth seen last year as a result of soaring oil prices and the credit crunch, but the International Air Transport Association (IATA) still sees this sector of the airline industry turning in US$2.2bn for the year, the best regional performance by a considerable margin.

The biggest challenge affecting the US$350 million North American airport duty-free liquor sector is, of course, the continuing aviation security restrictions on LAG s. Passengers on EU-originating flights transiting at US airports are still liable to have their liquid purchases confiscated. Likewise, US airport retailers are themselves unable to sell LAG's to passengers on flights transiting at EU airports or indeed any other country, which has brought in similar airport security measures.

LAG solutions

Michael Payne, the executive chairman of US trade body IAADFS , says the US Transport Security Administration has hardened its stance on the LAG issue and, in stark contrast to the Canadian authorities, is no longer trying to make a reciprocal agreement with the EU on aviation security matters, which would effectively solve the transit issue.

Instead, the TSA is going it alone and trying to find a technological solution. "They are trying to develop a device which will screen passengers' baggage for liquid explosives," explains Payne. "I can't see them even beginning to trial such a device in the next eight months so coming to the US is still going to be a problem and I don't see that changing for quite a while."

Despite the relatively benign trading climate, suppliers and operators remain worried about the LAG situation. "It is obvious that operators not being able to sell to a significant number of travellers continues to be a major concern," says Maxxium Global Travel Retail president Erik Juul-Mortensen. "We must hope that 2008 will bring some solution to the matter. However, it would appear that the outlook in the US for an acceptable solution is not likely in the foreseeable future, whereas Canada is in the process of reaching an agreement with the EU."

"Common sense tells you the situation must be having an impact," adds Moran. "However, business is so good it is disguising how much of an impact the issue is having. It is creating customer uncertainty. We tend to think the worst case scenario is if a single passenger gets an expensive bottle of Cognac or malt whisky confiscated, but what about all those people who are unsure and gradually lose the habit of buying duty-free?"

The overall Canadian airport duty-free business, valued at C$174m, could soon be about to receive a shot in the arm . The Canadian Airports Council is lobbying the government to introduce arrivals duty-free, already in place in some 45 countries . The CAC estimates the move would generate C$61 million in sales. If the experience of other countries with recently established arrivals shops is anything to go by, a sizeable chunk of this would be liquor and wine.

The region's undoubted success story from a liquor perspective is the cruise ship sector. The Cruise Lines International Association predicts a record year, with 12.8 million travellers forecast to take a cruise in 2008, 10.5 million of them originating in North America. This equates to a huge captive consumer group with money to spend in the onboard bars and shops .

"Cruise ship companies are expanding their fleets and are going out full as they offer American consumers great value when compared with the prices they would pay if they travelled to Europe," says Chao. "As consumers often book well in advance, thus far we see a very positive future for the cruise ship sector .

"The cruise industry forecasts growth for 2008-10 of 3-6 per cent annually," he continues. "In addition, many of the new ships being built are either in the premium, contemporary or luxury segments of the market, which is in perfect alignment with our core premium brands."

Bacardi is busy bringing airport-style promotions onboard the ships. The company employs brand ambassadors to hop from ship to ship, providing interactive cocktail making demonstrations and helping educate bar staff. "By engaging travellers in this manner, they discover our brands and become ambassadors themselves," says Chao.

Booming cruise market

Ned Carpenter, v ice president of North American duty-free liquor distributor Alexander James & Co , whose product portfolio includes Lanson Champagne, Cutty Sark whisky, Camus Cognac and Sonoma-Cutrer Californian wines, believes the booming cruise market, while still growing, may be beginning to slow down. "The cruise ship business constitutes about half our [duty-free] volumes," he says.

"Our emphasis is skewed more heavily towards wines and the brands follow the consumption patterns of the North American consumers, who remain the vast majority of the passengers sailing. We have been outpacing the organic growth of the industry, which last year came in unexpectedly low at about 6 per cent. It had been growing at about 7-8 per cent, but now with so many millions of folks sailing annually it was bound to slow down eventually."

While the cruise sector blossoms, border operators on the Canadian side of the US border are having a hard time of it. Increased security checks on the border, impending legislation requiring US and Canadian citizens to carry a passport when crossing between the two countries, and low domestic prices in many neighbouring US states are adding to operators' woes.

Tania Lee-Hartmann, vice-president for sales at Ontario-based Blue Water Bridge Duty Free, is also critical of the Liquor Control Board of Ontario , the state-run body through which the retailer is forced to buy all its alcohol. "The LCBO adds a provincial surcharge on each purchase," she explains. "US duty-free shops purchase liquor direct from the manufacturer with no surcharge added. This situation reduces our relative price advantage versus US competitors and is therefore negatively affecting our sales."

Looking at the bigger picture, 2008 should see some significant industry changes for those involved in the northern duty-free liquor business. The market's biggest selling brand, Absolut vodka, is to find a new home, while on the operator side of the fence Spanish travel-retailer Aldeasa, already running duty-free shops at Vancouver airport and across Latin America, has recently made its US debut at Atlanta Hartsfield-Jackson, the world's biggest airport.

With its excellent track record in the category, industry interest is high in the Spanish firm's current refurbishment of its new store at the giant US hub.

It says it is committed to revamping the liquor offer, focusing more strongly on US whiskey and bourbon and Californian wine. "We are looking at bringing in a bigger product assortment with better use of merchandising, new fixtures and a very modern image," says company spokesman José Llorent.

Another recent development has seen Duty Free Americas , the US' largest duty-free operator owned by privately held investment company the Falic Group, purchase 267 Infusions, a small California-based spirits company producing hand-blown bottles of various premium spirits mixed with fresh fruit and spices.

267 Infusions will operate as part of a new division, Innovative Liquors, which suggests the ambitious Falic Group, which has already shown its financial muscle by purchasing the loss-making fashion house Christian Lacroix brands from LVMH in 2005, is keen to make more purchases within the spirits sector.

"There is going to be a lot of change within the industry this year," concludes Brown-Forman's Moran, who himself is to retire in May, making way for his successor, Jim Perry. "For anyone involved in the business there is an awful lot going on to keep track of."