Life after the death of duty free - European Union integration has led to the end of duty free this week. Lisa Campbell reports on the industry’s belated response

’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.

’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

prices.



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

predicts, will:



- 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

offer.



Brand choice



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

worldwide.



’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

Calais.



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

1.



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

superstore.



’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

spokesperson.



’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

defensible.



’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

International editor-in-chief.



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,’

says Horne.



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

street?



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.



Problems galore



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

free.



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

worldwide.



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

Marketplace.



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

observer.



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

Johnnie Walker.



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

arena.



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

quickly.



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



DUTY-FREE SPLIT



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.



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