Getting to grips with the new normal

03 November, 2016

When Erik Juul-Mortensen tells you that business conditions in travel retail are as tough today as he’s ever seen, you’d better sit up and listen

After all, he has been the president of the Tax Free World Association, the organiser of the Cannes and Singapore trade shows, for the past 17 years. The much-respected Dane was also president of Maxxium Global Travel Retail for more than four years and president of global duty free for V&S Absolut Spirits. This guy knows a thing or two about duty free.

“The past 12 months have been among the toughest I have seen in my time in the sector,” he told me recently. Nonetheless, he remained upbeat, pointing to continuing rises in international passenger numbers in the air and on the sea as evidence that a possible turnaround might be around the corner in 2017. “Footfall and penetration are key,” Juul-Mortensen continued, “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.”

He is right. Turning those travellers into shoppers is the real challenge. More people are being crammed into departure lounges around the world but, for the moment, duty free sales at those airports are not heading in the right direction. And unfortunately, talking to retailers and suppliers in Cannes last month the consensus is no one expects a dramatic recovery is around the corner in 2017.

So what’s going wrong? Well, there are a host of issues buffeting the good ship duty free at present, most of them related to currency fluctuations and economic slowdowns in emerging markets. Then there is the perplexing problem of the mainland Chinese, who only a few years ago were being hailed as the saviours of the entire duty free business – the perfect combination of a nationality in love with overseas travel and shopping.

The Chinese remain key to the fortunes of the whole duty free business, accounting for more than 30% of all luxury goods sales worldwide. Yet, since the crackdown on corruption among party officials began in 2012, sales of high-end spirits and wines in duty free have undoubtedly suffered. That slump has been reflected in the full-year results of some of the big drinks players in recent months and in IWSR figures that show a 3.2% dip in duty free volumes and an even greater 4.9% drop in value in 2015.

A new wave of less affluent middle-class Chinese travellers is now venturing abroad for the first time. Many of them are unfamiliar with western brands. They clearly have less money to spend—average tax-free shopping spend by Chinese travellers was down by 30% in Asia in August, according to tax-free refund company Global Blue.

Says a Global Blue spokesperson: “Overall, due to the current less favourable economic situation in mainland China, frequent Chinese globe shoppers are reducing their average spend through reduced numbers of trips and lower spend per trip, highlighted by Japan’s current picture for the year to date: a 26% increase in transactions and 25% decline in average sales.”

It’s an unsettling picture for sure, but not one without opportunity for a business, which perhaps had got a little complacent in Chinese boom years. We have to get used to the idea that, for some Chinese travellers, standard and premium products are now aspirational in the same way that super-premium and ultra-premium ones once were for others. A broader range of price points and a renewed emphasis on educational in-store activities are going to be crucial moving forward. In the margin-hungry world of travel retail that’s going to be a challenge, but lower average spends could well be the new normal.

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