’Chaos’, ’a bureaucratic farce’, ’a disaster’. These are just some
of the reactions from the drinks, tobacco and retail industries to the
abolition of European Union duty free. Given that a major sales channel
- worth pounds 5bn in the EU alone - has been completely wiped out, the
reaction is predictable.
In the UK, manufacturers’ profits are predicted to fall by pounds 65m,
with warnings that liquor sales will face devastation. Cigarette
companies are already reeling from the ban on tobacco advertising while
retailers’ profits are predicted to fall by pounds 280m, according to
the Duty-Free Confederation.
Despite having had since 1991 to prepare for abolition on July 1 1999,
neither retailers nor manufacturers have a detailed strategy to roll out
to counter the loss of such a significant sales channel. The reason is
that an anticipated delay to the ban failed to materialise.
’We are ill-prepared to a certain extent,’ admits Massoud Esfandiary, RJ
Reynolds director of marketing Europe duty free. ’But this is because
all the signs that we would get an extension to abolition were there. We
were all very shocked that one country voted against it,’ he says.
The industry lost the fight despite a 14-1 vote supporting an extension
at the EU summit. Suppliers, retailers and operators have, however, been
too optimistic for too long. Even two weeks before abolition, Esfandiary
would not discuss plans in case of ’a minor chance of an extension’. He
is not alone. According to industry sources, the three major drinks
companies agreed not to publicly discuss a ’plan B’ for fear it
signalled an acceptance of the ban. But this tactic now seems to have
blown up in their faces.
Duty free is dead from today - with no strategy to fill the void.
’There is an enormous state of unreadiness,’ says one leading industry
figure. ’There are frantic internal debates going on at every supplier
and retailer as to how to deal with this. It’s a shambles.’
This is not entirely the industry’s fault. The ban is confusing and full
of loopholes, and because it does not detail a so-called ’successor
regime’, it is wide open to interpretation by all involved, including
different customs authorities.
As it stands, abolition only applies within the European Union.
Customers travelling outside the EU will still be able to purchase duty
free. Everyone else, meanwhile, will have access to duty paid goods, the
price of which varies according to the local duty - high in the UK, but
low in other countries such as France. This will lead to all kinds of
complexities over margins, wholesale and retail pricing.
’If we were to abide by the new rules, we’d have to change our prices
four times in one trip, as we crossed into UK and French waters. We
won’t work with this absurd situation and we won’t burden our consumers
with price changes throughout their journey,’ says a P&O spokesman.
It is expected that many cross-channel ferry companies will only open
for sale once in French waters to offer travellers the lowest
This is bad news all round: for the UK government in lost duty, for UK
wholesalers which will lose out to French ones and for the ferry
retailer which will have only half the journey to sell goods.
Airport retailers will also be hit. According to the report ’Airport
Retail Economics’, by Stirling University, between 70-85% of current
intra-EU duty and tax free sales within airports will be lost. This, it
- weaken the negotiating position with suppliers, reducing the ability
of airport authorities/retailers to offer value to the customer
- decrease margins, so decreasing the capital and incentive to invest in
the retail environment
- reduce the incentive for suppliers to trial brands and contribute to
marketing support, thereby reducing consumer choice within the retail
BAA denies it will have such a significant impact on its business. It
claims that its buying power is strong on the back of world duty free
and it has 5% of the dollars 20bn (pounds 12.5m) industry for duty free
’The airport will still be the clever place to shop from July onward,
with guaranteed value for money and a fantastic choice of the best
brands,’ says Brian Collie, BAA’s group retail director.
Ferry operators, meanwhile, are developing retail arms elsewhere to cash
in on duty paid sales. P&O is opening wine and beer warehouses in
Calais, Le Havre and Cherbourg and Hoverspeed is rolling out its Grape
Shops, currently operating in Ostend and Boulogne, to Dieppe and
Similarly, Eurotunnel plans to capitalise on duty paid goods by selling
perfumes and cosmetics in its UK store and tobacco and alcohol in France
where they are cheaper (see box). These changes will be managed by
retailer BAA, whose deal with Eurotunnel comes into effect on July
Eurotunnel also intends to promote shopping at the destination more
forcibly by developing its Calais-based City Europe shopping centre and
adding other stores including a factory outlet, DIY and gardening
’Ending duty free does not mean an end to value shopping. We are
broadening the retail experience with new store openings and promoting
them more extensively, with things such as mini-guides to Calais,’ says
Jeremy Close, Eurotunnel public relations manager.
This may also be to offset another scenario - booze cruises - in which
entrepreneurs exploit new loopholes. One plan is for an oil rig to be
converted into an offshore duty-free sales complex, complete with
casino, leisure and hotel rooms. The rig would be towed just outside the
12-mile limit of UK territorial waters. Other plans are under way,
leading to the claim by one observer that ’duty free shops will become
like pirate radio stations’.
’There are all kinds of scenarios,’ says a Duty-Free Confederation
’We are still trying to make sense of the confusion that exists and have
been asking customs for clear guidelines, but to no avail,’ he says.
How retail responds is key to how brands respond. ’We cannot announce a
clear policy until we see how retail reacts. It is all still very
unclear,’ says a spokesman for Gallaher.
’It’s a real mess,’ agrees Chris Ogden, director of trade and industry
affairs for the Tobacco Manufacturers’ Association. ’Marketers are
wondering how on earth they are going to cope with this on top of the ad
ban,’ he adds.
Within the drinks industry the situation is similar.
’We’re waiting to see what retailers do and are in discussions with most
of them. Once we understand their position we will announce our own
strategy, but communicating the various offerings will be a considerable
challenge,’ says Malcolm Davis, Allied Domecq director of marketing
resources, duty free.
The variations are complex. Shops will have to cater for domestic
passengers, intra-EU passengers and international passengers. The
question is not only how to target and segment them, but more precisely
how the intra-EU travel-retail channel will operate. How will it be
supplied and most important of all, at what price?
Many suppliers believe that the channel will effectively become a
domestic business, with domestic pricing. Yet others argue that
travellers in a captive environment beyond passport control represent a
separate and identifiable market, for which preferential pricing is
’The problem with this concept is that domestic retailers such as Tesco
will want similar deals to the airports and may mount legal challenges
to any preferential terms,’ says Martin Moodie, Duty-Free News
In an interview with the magazine, Vince Horne, UDV Global Duty Free
marketing director, conceded that instead of trading on price, suppliers
should trade on an enhanced product offering. Brands, not bargains,
should be the key driver. ’The ending of duty free should act as a
catalyst to compel a rethink on the part of the concession owner,
retailer and the supplier alike to rethink radically how we market.
’There is a major opportunity to reform merchandising, promotions,
product display and the entire environment to make it more interactive,
exciting and dynamic. People have talked about it - now we must do it,’
But how are brands going to encourage consumers to buy in the travel
environment now that they can get an equally good deal on the high
The answer lies in changing consumers’ mindsets so that they no longer
associate travel with cheap goods, but with exclusive goods.
Travellers are typically a captive audience with time on their hands,
open to seduction by an inspiring shopping environment, seeking presents
or last-minute goods. They are more likely to indulge in luxury items
here than elsewhere.
Simon Avison, managing director of strategic marketing consultancy New
Solutions, says: ’Top-of-the-range spirits and drinks presented in
exclusive formats and with possibly travel-related incentives will
justify a premium price. Gifting will be a key area of development.’
UDV is currently briefing agencies about new packaging, likely to
include special edition products along the lines of Decco - a Johnnie
Walker brand extension which is presented in a tall, clear glass,
sculptured bottle that looks more like perfume than whisky.
This will also be the route taken by Highland Distillers. ’We will be
developing a number of travel-retail exclusives and brand extensions,’
says Simon Sanders, corporate affairs director for Highland Distillers,
which has Famous Grouse among its brands.
Another strategy of UDV’s is to drive the drinks sector by focusing on
master brands. This process has already started within the whisky
sector, which is predicted to be the hardest hit by the ending of duty
According to a report in 1997 by business consultancy Pieda, Scotch
represents 27.8% of EU duty free liquor sales compared with the second
highest spirit, cognac, which has 8.8% of the total. The report predicts
that Scotch, struggling because of its failure to attract younger
consumers, will suffer a pounds 136m fall in sales.
UDV appointed retail consultants Marketplace last year to develop retail
merchandising strategies to boost malt whisky in duty free outlets
This saw a category management solution to simplify the confusing and
often intimidating selection of malts. A large ’journey of discovery’
fixture details the types of malt, where they come from and why they
differ in taste.
The agency has also created fixtures and merchandising materials for
Johnnie Walker, the first of which is at Heathrow’s Terminal 4. The aim
is to drive awareness of the master brand, using it to introduce
consumers to other products in the portfolio.
’Branding is going to become more important. One solution is to use a
high-profile brand launch or relaunch to coincide with something new in
duty free. This doesn’t mean key fobs and T-shirts but something much
more imaginative,’ says Andy Campbell, retail director at
UDV is thought to be developing a new look and advertising for Smirnoff
and is briefing agencies in the US about brand extensions, such as
luxury clothing and accessories.
Allied Domecq has run a ’Spirit of Adventure’ 10,000 square feet stand
and marquee at Cannes Duty Free Festival for the past two years. It’s a
theatre-like extravaganza involving theatre, tasting entertainment and
merchandise. Currently, A-D uses the ’Spirit of Adventure’ tagline as an
internal marketing tool. However, it is suggested that it may be used as
part of a branding strategy in its own right.
The intention seems to be for brands to play a much greater role,
perhaps to become retailers themselves. This depends first on having
sufficient product lines under a strong enough brand. An example is
Cadbury, which recently created a store at Gatwick through a partnership
with WH Smith.
Cadbury’s is the only branding visible, with WH Smith running the retail
operation behind the scenes.
’The question is whether big brands should work in partnership with the
existing retail structure or go it alone. They are nervous too many
product extensions will detract from the core brand, and if retailers
got wind of the move they may threaten to de-list products,’ says an
However, if the big brands joined forces, they may have a greater
likelihood of succeeding in retail.
A-D and UDV discussed plans earlier this month for joint marketing and
retail initiatives following the end of duty free (Marketing, April 15)
and it is understood that some items under discussion for Australian
airports, to tie in with the Olympics, include a Scotch Deluxe store - a
collaboration between A-D’s Ballantines, Seagram’s Chivers and UDV’s
Seagram is also looking into a number of direct marketing strategies to
lessen the impact of losing duty free. It appointed Claydon Heeley in
April to work on creating a database of European duty free customers -
believed to be one of the first data capturing exercises within this
Luxury goods are experiencing a slump in sales, a problem which LVMH,
owner of prestige brands such as Gucci, Givenchy, Dior and Kenzo is
trying to address with a new concept called Sephora. This is described
as a cosmetics supermarket, but with an upmarket appearance that doesn’t
offer discounts or promotions. All brands, including own-label and
prestige are treated equally as they are listed alphabetically. The
stores have been hugely successful in the US and parts of Europe.
Another initiative is a new travel retail contract which works along the
same lines as the Selective Distribution Agreement brought in by French
fragrance houses for the French market. This gives retailers the
authorisation to sell prestige brands. LVMH hopes it will allow it to
treat travel retail differently in Europe from domestic markets, without
facing law suits from local retailers.
’The contract will be based on the premise that travel-retailing is
unique and should be treated as such. It’s unique because travel
retailers have to pay concession fees, the shops are open 24 hours per
day and because they employ bilingual staff,’ says Givenchy
travel-retail manager Benoit Cuchet.
So the waters are still muddied, particularly between France and the UK.
But if the duty free industry isn’t going to be left nursing the biggest
hangover of all time, it had better get its act together. And
THE PRICE OF ABOLITION
- Overall effect of abolition would be a potential net loss of pounds
18m to the Treasury.
- Only 15-25% of current expenditure on liquor and tobacco duty and tax
free will continue in UK outlets after abolition
- The level of sales and profitability at UK retail outlets (airports,
airlines and ferries) will decline sharply. Overall UK retailers’
profits will decline by pounds 280m.
- UK manufacturers’ profits will decline by pounds 65m. Up to 30,000
jobs are at risk.
Source: Duty-Free Confederation
Perfume - 24%
Wines and spirits - 25%
Tobacco - 21%
Luxury goods - 30%
Source: Duty-Free Confederation.
Total annual sales pounds 4.5bn
HOW DUTY-PAID GOODS COMPARE
Packet of Benson & Hedges
UK - pounds 3.82
France - pounds 1.88
Belgium - pounds 1.96
50g pack hand-rolling tobacco
UK - pounds 7.85
France - pounds 2.42
Belgium - pounds 1.95
Source: Tobacco Manufacturers Association.