Covid-19 prompts short- and long-term shifts in global travel retail

Alcohol brands in travel retail are facing a number of fundamental short- and long-term shifts as a result of the impact of Covid-19 on the channel.

With air passenger numbers unlikely to return to pre-crisis levels for some time, operators are targeting alternative revenue sources to offset the effects of the pandemic, including domestic duty free, intra-continental travel and digital solutions.

The crisis could also prompt an overhaul of the delicate business model that has historically underpinned the commercial relationships between the ‘travel retail trinity’ of airport authorities, retailers and liquor suppliers.

“Travel retail in all its forms – point-to-point air travel, airport hubs, airport arrival duty frees, ferry business, cruise business, land border shops – was severely impacted in 2020, and worldwide restrictions in Q1 2021 will have depressed travel activity even further,” says Thorsten Hartmann, Director at IWSR Drinks Market Analysis.

Brown spirits are particularly exposed to global travel retail (GTR) downturns, with the IWSR noting that, before the pandemic hit, whiskies, brandies and rums (excluding white rum) accounted for 57% of GTR spirits volumes, and three-quarters of revenues. Scotch whisky alone made up almost one-third of GTR spirits volumes, and 40% of turnover, in 2019. Meanwhile, Cognac accounted for only 7% of GTR spirits volumes, but more than 20% of the channel’s spirits spend.

“In other words, the spirits category in GTR is heavily dependent on brown spirits, and within them Scotch and Cognac together are dominant,” says Hartmann.

All stakeholders in the channel – airport operators, retailers and suppliers – have worked to mitigate the worst effects of the pandemic through a number of initiatives, including:
• ‘Domestic’ duty free, especially at Hainan in China
• Intra-continental travel, including border stores and ferries
• Digital initiatives, including investment in domestic ecommerce

Hainan in China was transformed as a travel retail location by the government’s tripling of duty free allowances (to CNY100,000) in July 2020.

“Based on external forecasts, Hainan is expected to represent 18% of total global duty-free business before 2024, with China representing 30% on a similar time frame,” says a Beam Suntory spokesperson.

Aude Bourdier, MD GTR at Brown-Forman, says Hainan’s potential is ‘enormous’: “First, the influx of Chinese travellers visiting Hainan has become a solid driver of travel retail business, which for Brown-Forman is reflected by a marked increase in the sales of Jack Daniel’s and Woodford Reserve. Secondly, and potentially more significant, is the creation of a successful business model whose impact and success could indeed compel other countries to replicate the actions of Hainan.”

Edouard de Boissieu, head of travel retail at Champagne Lanson, points out that the Chinese government wants to attract 100m global tourists a year to Hainan in the next five years – driven in part by the world’s largest duty-free shop.

However, question marks still remain over its long-term potential once international travel opens up. “Many wealthy Chinese, especially those aged 25-45, see international travel as a great aspiration,” says Ed Cottrell, a consultant and ex-MD of William Grant & Sons’ GTR business in Singapore.

The curtailment of international air travel has shifted the GTR focus to more localised, intra-continental travel by land and sea. Clarisse Daniels, head of marketing for travel retail at Whyte & Mackay, notes that, for the first time, more than half the company’s GTR revenues now come from outside airports.

However, local travel has also been impacted by the pandemic, points out JP Aucher, GTR director at Stoli Group. “Airlines have been badly hit, but so have cruise ships/ferries, border crossings etc. While some of these are now opening up again, it is limited and the overall contribution they make to global travel retail sales compared to airports is very small.”

Nonetheless, IWSR believes that ferry (eg Nordics) and land border (eg US/Canada, Denmark/Germany) business will likely bounce back more quickly than international air travel – and brand owners are already targeting these areas.

Jeff Bond, senior regional manager, GTR EMEA, at Accolade Wines, believes holidaymakers will focus on shorter journeys and less interaction with other passengers. “We are really excited about the ferry channel in particular, which is sure to make gains as air travel gets slowly back to its feet,” he says. “It has genuine growth potential for wine.”

Cottrell agrees that consumers would currently rather travel by car than plane. “I suspect that the borders will benefit from this,” he says.

The crisis has also prompted stakeholders to make strides in the digital sphere – an area in which travel retail has historically underinvested. “It’s a divided industry, so it’s hard to bring everything together,” explains Cottrell. “A successful digital marketplace has to start with data and data sharing. But data sharing within the travel retail industry is difficult because many retailers monetise their data.”

Now there are signs of change. “The pandemic has certainly accelerated the digital revolution of the omnichannel,” says the Beam Suntory spokesperson. “Communication and engagement with our shoppers must be addressed on the digital channel, and solutions like QR codes at the point of sale to avoid touching surfaces are now generally implemented across all of our locations.”

Whyte & Mackay has publicised its new Dalmore, Fettercairn and Jura retail ventures in Taiwan with a digital video campaign using the country’s leading whisky influencer, with over 350,000 views as of mid-April 2021. “Concepts such as this are going to be a big part of our business going forward to drive penetration and spend,” says Daniels.

Singapore’s Changi Airport has gone further, converting GTR turnover into domestic turnover by investing in domestic alcohol ecommerce through its Get It by Changi Recommends portal, which offers subsidised ‘duty free’ pricing.

However, replicating the initiative elsewhere is challenging because of the limitations of local excise legislation allowing home delivery – and will Changi duty free retailer Lotte be happy about the venture continuing once passengers return to the airport in larger numbers?

Lotte took over at Changi when long-time retail licence holder DFS walked away in 2020 – an illustration of the difficulties of the channel’s traditional ‘travel retail trinity’ business model. This model sees airport authorities charging high rents to retailers, who pass the cost onto suppliers.

Brand owners have accepted this in the past, conscious of the marketing opportunity that GTR offers – but now their calls for change are becoming louder. “The Covid-19 pandemic has highlighted the need for flexible investment across the trinity of airport authority, retailers and suppliers,” says Bond. “We should be cognisant that there are many factors that can halt travel at any time, be it financial crises, natural disasters or global pandemics – and there is definitely a need for change in contract structures to reflect that.”

Bourdier agrees, highlighting the existential threat that Covid-19 has posed to the entire industry. “One can only hope that out of this unexpected time comes a recognition of (and an appreciation for) the fragility of commerce within the travel retail channel,” she says. “Ultimately, we are all inter-dependent upon one another not only for success – but for mere existence.”

But, whatever actions the channel’s stakeholders take, full recovery will require not just individual countries emerging from the crisis, but a slow normalisation of the global travel environment, allowing consumers from key markets such as China, the US, the UK, Russia and India to travel extensively once more.

Then, and only then, will travel retail truly bounce back to its pre-crisis status as a prized and valuable revenue stream for premium spirits, Champagne and wine brands.

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