Duty Free Alcohol Sales Trends, Part 2
The duty-free business model is evolving as consumer demographics and purchase patterns change. Liquor brands are trying to attract these consumers with personalized and enhanced shopping experiences and by providing exclusive and premium products. Meanwhile, the coronavirus outbreak had a profound impact on duty-free shop sales, including alcohol brands. However, some analysts believe this trend will be short-lived.
Duty-Free Shops are Suffering the Effects of the Coronavirus
- In 2019, insiders and experts were optimistic about the growth of the industry, driven by millennials and Chinese middle-class consumers. Market reports, as recent as October 2019, expected the market to flourish, despite political uncertainties such as Brexit and the China-USA trade war. However, the narrative changed in the first months of 2020, and as the Wall Street Journal observed, duty-free shops and airport retailers are now "under siege from the coronavirus."
- The Asian hubs are the most affected, and duty-free shops are suffering from the loss of foot traffic. The Moodie Davitt Report, a travel retail intelligence service provider, reported that airport retail at some major Asian hubs had plunged 60% to 70% due to the coronavirus.
- Martin Moodie, chairman of the report, claims that this is the greatest crisis the travel retail sector has ever faced, even worse than SARS, the Gulf Wars, and significant financial crises. It is not surprising, considering how much the airport retailers relied on Chinese travelers.
- In February 2020, a survey was conducted with over 1,000 international travelers from the UK, the US, Australia, and Asia, who are regular duty-free shoppers, to discover how their habits have changed. More than one-third stated that they would spend less time in a store, not purchase if they needed to wait in line, and would be less likely to touch or pick items.
- With the growing number of consumers who want to go straight to the departure gate to reduce their exposure, the crisis is growing to a point where transport authorities in Singapore and Thailand began to offer rent relief to airport retailers to help reduce costs and protect jobs. Hong Kong's airport authority is expanding an earlier relief package as well, expected to reach $205 million.
- Some analysts are comparing the recent outbreak with the 2013 SARS, albeit some claim is not a perfect comparison. If the coronavirus mirrors a pattern similar to the SARS outbreak in 2003, the reduction in liquor companies' earnings could be significant but probably short-lived, experts predict.
- During the SARS outbreak, spirit volumes in the travel retail channel in the Asia Pacific fell by 1.6% in 2003 but rose again in 2004 by 5.9% and 5.2% in 2005. Cognac and Scotch, critical categories for the Asian travel retail market, also suffered. Cognac fell by 7.3%, and Scotch fell by 1.5% in 2003, but picked up in 2004, with volumes increasing by 7% and 6%, respectively.
- For instance, Remy was hit with a 23% decline in quarterly global cognac sales between April and June 2003, which was then succeeded by a rebound in the subsequent quarters. Likewise, Pernod and Diageo's impact from SARS was offset entirely within a year.
- Moody's analysts noted, however, that during the SARS outbreak, the market was not as reliant on the Asian market as it is today.
Companies being Affected by the Coronavirus
- Moody's report predicts that Europe's most prominent spirits companies could take massive hits in the next months from the outbreak, due to the loss of duty-free sales and supply disruptions across China.
- UBS found that the brands Brown-Forman, Diageo, Pernod Ricard, and Rémy Martin are "most exposed" to a dip in travel retail. "We expect the coronavirus to compound recent weakness in Asia Duty-Free that resulted from unrest in Hong Kong," the UBS analysts wrote.
- Duty-free shops, in general, are taking the hits. Lotte Duty-Free is taking steps to protect its employees and customers, and created an emergency response committee. China Duty-Free Group has closed its successful CDF Mall in Haitang Bay, which was one of the world's most famous duty-free locations, generating $1.98 billion in sales in 2019.
Personalized, Digital and Enhanced Shopping Experiences
- The duty-free business model is evolving. New consumer profiles are bringing new purchase patterns that need to be addressed. Companies that wish to thrive in this market need to be innovative, agile, and pursue customization and enhanced shopping experiences to find success.
- Duty-free shops used to be the place consumers would find lesser-known or luxury brands at lower prices than traditional stores. However, technology, geopolitical disturbances, and e-commerce changed that scenario. Erik Juul-Mortensen, the former president of the Tax-Free World Association, stated in 2018 that the travel retail industry has "never before faced so many challenges to its operating environment on a global scale."
- His words were corroborated by his successor, Alain Maingreaud, who said that despite the growth, the global duty-free market is facing many threats, including the "increasingly draconian policies around the sale of alcohol and tobacco products."
- With consumers becoming increasingly tech-savvy and prices no longer being as attractive as they once were, the duty-free liquor industry is attempting to draw more consumers by providing enhanced and luxurious shopping experiences, with better service, convenience, exclusivity, and high-end product merchandising.
- Consumers are also integrating their shopping experiences at duty-free shops with third-party online platforms, such as Alibaba's pre-travel duty-free platform, WeChat, Jessica's Secret, among others. Kian Gould, the CEO and Founder of AOE, believes that integrating these third-party vendors into retail travel ecosystems will change the industry.
- Mark Childerhouse, the Director at Pioneer Group, states that personalization and making high-end shopping and attainable luxury for travelers are the biggest trends in airports for 2020. He further adds that shops need to focus on delivering experiences that are either super convenient or a luxurious experience. For reference, airports accounted for three-fourths of the global duty-free liquor market revenue in 2019.
- For example, Mumbai Duty Free trains its front staff at arrival and departure terminals to take feedback from customers on a list of questions to collect data and accordingly devise marketing strategies. Another duty-free shop trying to improve customers' experience is the Munich Airport, which recently introduced smart checkouts, allowing customers to pay for items using their smartphones.
- While travelers plan their purchases before arriving at the duty-free store, they may still be undecided when it comes to specific spirit purchases, particularly Armagnac, brandy, and Cognac. The TFWA estimates that around 33% only make their mind when they are in the store, which makes the experience even more important.
- The Quarterly Global Shopping Monitor 2019 showed that the new approach is generating positive results. The global customer satisfaction index has been increasing over the last two years, and 45% of the duty-free consumers that interact with staff (48%) made a purchase. The service level loses only to value for money in terms of impacting overall satisfaction, while the atmosphere/design of the shop was ranked forth.
- The desire to attract millennials may be the secondary driving force behind this trend. Overall, millennials are less likely to make purchases at duty-free shops than their older counterparts, except Chinese millennials, whose conversion rate is one point higher than younger and older generations.
- Chinese millennial travelers have a conversion rate of 52%, the highest among the eight nationalities examined by a recent study. Japanese millennials come in second place (35%), followed by Russians (30%), British (23%), French (22%), Brazilians (20%), Germans (14%), and Americans (11%), who have the lowest purchase rate.
- The study shows that communication touchpoints, experience, and staff interaction are critical for these consumers, as well as planning and price comparison. The researchers concluded that millennials are more demanding than other age groups, so the brand message must be consistent across all touchpoints and media, and unique retail experience is vital to engage them.
Companies at the Forefront of the Trend
- Hoping to understand its consumers and provide better shopping experiences, Pernod-Ricard conducted extensive market research to uncover the buying behavior of duty-free shoppers.
- The liquor giant accounts for 25% of all wines and spirits purchases made by international travelers. It considers eight markets particularly strategic for the group: China, SAR Taiwan, South Korea, Russia, India, the UK, the US, and Brazil. Extensive fieldwork, including personal interviews and home visits, was conducted to analyze these shoppers.
- The company used insights from the Global Travel Retail (GTR) organization to segment its consumers in four different groups: discerning value explores, quality seekers, pragmatic deciders, and bargain catchers.
- It also found out that these consumers' decision-process is different from what it was before. In fact, only one third decides what they will purchase in the store, while one third decides at the airport, and one third makes their decisions before pre-trip.
- The findings informed a "comprehensive new traveler-centric digital strategy that delivers tailored content at specific micro-moments when these travelers are most receptive to brand messages." They motivated the company to shift its digital spending to reach consumers and influence decisions pre-trip, as well as discovering new ways to engage millennials. The brand is also focused on improving the in-store experience and increasing brand ambassador presence at priority airports.
Affluent Travelers and Premium Brands
- A recent report showed that consumers mostly prefer to buy premium brands of liquor at airports. This preference has resulted in premium brands moving faster.
- The previously mentioned research conducted by Pernod Ricard discovered that in travel retail, such as duty-shop purchases, consumers are more likely to trade up and explore different parts of the range. For instance, a consumer seeking a Ballantine's 17 is more likely to purchase a Ballantine's 21 in a duty-free shop than in a conventional store.
- The premiumization trend is driven by the increase in millennial passengers with more disposable income than before, especially Chinese consumers. Traditionally, brown spirits have dominated the market. However, vodka brands are trying to gain the market by launching super-premium products to target a rise in affluent luxury spirit buyers. Premiumization is also driving the sales of Gin in duty-free shops.
- It is not only Chinese consumers. Indian consumers are also developing a taste for premium liquor brands, which in the country are mostly sold in duty-free shops. 8 Recently, the Commerce Ministry proposed that only one bottle per person would be allowed at duty-free shops, which caused an uproar in the industry.
- Liquor companies are also launching products exclusive for duty-free shops. Pernod Ricard only sells some of its products in India through duty-free shops, while other brands have launched limited editions that can only be found in these stores.
Companies at the Forefront of the Trend
- Bacardi recently launched a series of premium rum cocktail demonstrations at Schiphol Airport to encourage shoppers to make their own drinks at home, as well as offering prizes and personalized bottles.
- Hendrick's focuses on premiumization and craft, originality and exclusivity. It offers travelers in-store promotions and experiences where consumers can engage with the brand.
- In 2018, Greenall's Gin Brand launched two premium, artisan-inspired products for global duty-free stores. 19
- To attract affluent travelers, the Dubai duty-free shop underwent massive renovations recently. The store entrance now features a Champagne wall designed by Moët Hennessy, while other liquor categories gained luxurious displays.