REVIEW OF THE YEAR 2007
By Generation Research, 14 July 2008
It was the year when Tony Blair ended his premiership after a decade leading the world’s biggest and most important travel retail market – the UK. It was also the year when Vladimir Putin secured an extension of his rule in Russia - one of the world’s fastest-growing nations for travel retail. And the year when Nicolas Sarkozy conquered our beloved (though some Brits may query that adjective) France – a country accounting for fully two-thirds of all merchandise produced and sold in the world’s duty free and travel retail shops.
2007 was the year when the value of the world’s duty free and travel retail market reached a new record: US$ 34 billion. Statistically, during 2007 global duty free and travel retail sales expressed in US$ grew by an impressive +17.2%. However, in real terms and local currencies, the global market increased by a more modest +11.8%, given that most currencies gained in value against the dollar. The industry has not seen genuine double-digit growth since 2004, so the 2007 numbers are welcome news indeed.
What with an ailing airline industry, banks short of cash (especially in the US), fears of a new war in the Middle East, NATO’s failure to restore stability in Afghanistan, political uncertainty in Pakistan after presidential candidate Benazir Bhutto’s assassination, protesting monks attacked by Burma’s junta, the US on the brink of recession, soaring oil and food prices, a weak US dollar and a slowing global economy - the fact that the global duty free and travel retail trade managed to grow by +17.2% in 2007 is in itself an achievement, as well as proof of the industry’s inherent professionalism and creativity.
Percentage-wise, the Middle East was the best-performing market, adding some US$ 400 million (+24.7%) in duty free sales to reach US$ 2.0 billion. Albeit from a small base, Africa added +20.3% to its duty free business, mostly through growth in the north.
Europe’s share of global travel retail grew from 41.8% in 2006 to 42.1% in 2007, but the region is still some way from the almost 50% of global travel retail sales it enjoyed pre-abolition in 1998. Overall passenger traffic at European airports increased by +6.5% in 2007 versus 2006. Some claim this as further evidence that European mobility is a continuing success story. If its travel market, including travel retail, is often considered mature, Europe nonetheless consistently outperforms predictions.
Asia Pacific did reasonably well – although some hoped the market would do a lot better - seeing turnover grow by +17.1% on average to over US$ 9.1 billion. Sales in the most important country, South Korea, failed to shine however, putting on +8.3%. As average household incomes rise rapidly, making air travel affordable to newcomers, many believe the Asia Pacific region will drive global travel growth over the next 25 years, and with it the growth of the region’s duty free industry.
Duty free sales in the Americas advanced +14.2% to just over US$ 8.0 billion, fuelled especially by excellent performances in South America. Much improved duty free retail standards, the arrival of political stability in some countries (in the past decade we have seen Brazil suffer political jitters and a financing drought, Argentina break its decade-long currency peg to the dollar only for its recession to deepen, and Venezuela face an abortive coup), the strength of local currencies against the weak US dollar and the higher priority airports now attach to retail are the prime factors driving growth in this region.
Among the product groups, Confectionery & Fine Food performed best at +21.6%; Fragrances & Cosmetics closed up +19.0%; Wine & Spirits grew a surprisingly strong +16.7% and Luxury Goods – suffering from weakened Japanese travel and spending – finished up +16.6%. The battered Tobacco sector ended 2007 at +10.6%, further reducing this product group’s market share to 8.5% (from 9.0% in 2006).
Airport shopping grew by +22.3% to nearly US$ 19.5 billion. Clearly, new airports with good shopping facilities and shops in older, refurbished airport complexes have attracted travellers and other potential shoppers. Inflightsales moved up an appreciable +14.5% to US$ 2.6 billion, whilst Other Shops & Sales gained +12.6%, reaching US$ 9.5 billion. Sales onboard ferries disappointed, edging up only +2.7% to US$ 2.4 billion.
And what does 2008 have in store? Although we’re already over half-way into the year, predicting the final outcome and the events that will shape it is far from simple.
China – undoubtedly the world’s leading power within 10-15 years - predicts that hosting the Olympic Games in 2008 will spur further economic reform, create a more stable society and boost economic growth by 0.3-0.4% in each of the next seven years. It is unlikely that the Chinese will revalue their currency the Yuan Renminbi, allowing it instead to appreciate gradually against the US dollar despite pressure from the outside world for a big upward adjustment.
But whilst we remain cautiously optimistic for global duty free and travel retail in 2008, the deteriorating economic climate since the last quarter of 2007 has reduced consumer confidence and put pressure on household spending, as well as travel budgets. The extent of any slowdown in tourism and its consequences for the sector will depend on how global and regional economies evolve and how consumers react in the context of fast-rising oil and food prices.
What was true in the past is still valid today: forecasts are best made in retrospect.