W&S HIT BY -16.6% SALES DROP IN 1Q 2009

By Generation Research, 3 September 2009

In an interview in TREND in July 2009, Phil Humphreys, Diageo Global Travel & Middle East Managing Director, describes the last 12 months as 'the most challenging of my working life'. He also underlines, however, the extent of the opportunity for the global duty free and travel retail liquor industry that he believes is there.

"The liquor business has been affected as most other categories by the general downturn in the business that started in about September last year", says Yngve Bia, President Generation Research. "Whilst we see an average slump in the business of all product categories of -14.2% in 1Q 2009 versus 1Q 2008, liquor is at a -16.6% decline performing only slightly worse".

In recent months there has clearly been a slowing down of the contraction in the business, but the losses to the overall duty free and travel retail industry are so far still significant. In the first quarter of 2009 alone, the industry sold about US$ 1.5 billion less duty free and travel retail merchandise – including some US$ 300 million worth of liquor sales – to the world's travellers as compared to the same quarter in 2008. "The consequences of intra-EU duty free sales abolition in 1999 included the loss of some US$ 2.2 billion worth of sales – mostly liquor and tobacco. Even if we have a relative strong second half in 2009, it will inevitably be compared to a weak second half in 2008 and where like-for-like comparisons come into play, I would not be surprised if this year's recession results in similar or additional losses to those experienced in 1999 / 2000", says Bia.

The trend in global sales – in US$ – is marginally down -1.9% over the past 12 months. In the most recent six months period between October 2008 and March 2009, sales have dropped -10.7% on average, however, suggesting that the rate of decline in the liquor duty free and travel retail business is accelerating.

Trading conditions continue to be challenging in Europe where sales declined in the first quarter of 2009 by -21.3% if measured in US dollars equal to a decline of -9.9% in the Euro (following the depreciation of the € against the US$ during the period of -12.7%).

"Ten years ago we saw the creation of the important duty-paid liquor sector in Europe that coincided with the abolition of intra-EU duty free sales and the ending of vendor control", says Bia. "In recent quarters it is this duty-paid sector of the business that has been hit the hardest, whilst duty free sales to extra-EU travellers are still keeping up relatively well".

The business in Asia Pacific has been affected at a similar level as that in Europe, whilst the Americas is doing better. Sales in the Middle East have actually advanced slightly in 1Q 2009 versus 1Q 2008.

The global duty free and travel retail liquor market is dominated by two companies, Pernod Ricard World Trade and Diageo, that together represent nearly half (46.4%) of the global business.

Among the World's Top 12 W&S companies, four performed better than the average evolution of the market (-16.6%) in 1Q 2009 vs 1Q 2008, thus gaining market shares. They were in order of market share percentage growth: 1) Diageo; 2) Pernod Ricard World Trade; 3) LVMH and 4) Campari International.

"As we have seen in the past many quarters, the two industry giants are not only consolidating, but also further strengthening their market lead", says Bia.

Bacardi International, Rémy Cointreau, William Grant, The Edrington Group, Beam Global Spirits & Wine Inc and Brown-Forman all saw their market shares diminish slightly.

In 1Q 2009 the world's No.1 liquor brand Johnnie Walker further strengthened its market share in value terms to 8.8% (8.4% in 1Q 2008). Also the World's No. 2 brand Chivas added to its market share, to 6.4% in 1Q 2009 from 6.3% in 1Q 2008. Additional market share gainers included Absolut, Hennessy, Martell, Baileys and Smirnoff. Slight declines in market shares were recorded for Ballantine's, Rémy Martin, Glenfiddich, Jack Daniel's and Camus.

Arguably, the biggest challenge to the global duty free and travel retail liquor industry happened in 1999 when intra-EU duty free sales of liquor were abolished, effectively wiping out well over US$ 1 billion worth of annual liquor sales overnight. Another challenge came with SARS and the current swine flu influenza might also represent yet one more sales hurdle, although these aforementioned two threats have and will impact on all categories about equally.

Back in 2003 Nestlé International Travel Retail's dynamic Stewart Dryburgh challenged the confectionery category collectively to double confectionery's global sales over a five-year period up to 2007. Impossible and far too optimistic, many thought. But with results on hand [sales rose from US$ 1.3 billion in 2002 to US$ 2.3 billion in 2007 equal to a growth of +77.0% at a Compound Annual Growth Rate of +12.1%, Ed's note] he was not too far from being correct in his optimistic forecast. Clearly he had an agenda to achieve this ambitious goal for the confectionery category.

But not only did he receive full collective support from the confectionery suppliers themselves, but also from the retail trade. Several category management programmes were introduced at the time with suppliers working closely with the retailers. Among the results achieved it is notable that retailers have since given confectionery far more space and opportunities for suppliers to arrange in-store promotions, personalise wall bays, units, gondolas and podiums – resulting in more appealing shops. With confectionery sales growing continually in the past several years, retailers have had to rethink shop layouts in an attempt to maximise the space available for confectionery, taking into account the mix of passengers and their destinations.

Now Phil Humphreys, in an interview with TREND in July 2009, expresses his belief that the liquor category can double in size from US$ 6.3 billion in 2008 to US$ 12 billion in five years.

"This would mean an annual compound growth rate of +13.8% over the next five years up to 2013", says Yngve Bia. "Certainly an ambitious target, especially as it is a very long time since the liquor category could even boast annual double-digit growth numbers".

But just like Stewart Dryburgh, Phil Humphreys seems to have several ideas and plans on how to achieve this ambitious target for the liquor category. He says there are several areas where there is room for improvement, including the following: lack of customer penetration; low conversion levels; increased consumer / customer research including identification of main drivers for buying; incentives to retailers; lessons to learn from other successful categories [beauty and confectionery especially, Ed's note]; more need for transparency between industry partners; implementation of 'best practises' in the liquor industry; and standardized trading terms – amongst others.

In order to reach a doubling of travel retail liquor sales within five years, he emphasises that this will also need a considerable amount of innovation, creativity and determined will from all parties involved.

With liquor sales worth US$ 12.0 billion in 2013, this would equal a market share for this category of 24.0% [17.1% in 2008, Ed's note] based on a forecast of global sales (all merchandise) reaching US$ 50 billion in this year. Not since 1995 has the liquor category represented about one quarter of global sales. Thus a mighty turnaround might be in the pipeline for liquor that has seen nothing but diminishing market share numbers for the past some 50 years. If Phil Humphreys' forecasts and beliefs are correct, that is.

Rather more than adopting a defensive position over the last 12 months, Phil Humphreys says Diageo has done the opposite by looking for possibilities to drive the category, as well as the brand agendas.

There are probably other companies in the industry that have also deployed similar intelligent strategies and as the old saying goes… 'The best time to prepare for good times is in the bad times'.
 
Source to above data: TRAQ Beverage; Generation Research, Sweden