Global market up 8% in 2005

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In an exclusive statistical preview and interview the Generation Group indicates that global duty free and travel retail sales grew by 8% in 2005 to around $27bn – three percentage points higher than the 5-6%

growth rate of international tourist arrivals.
This shows that each traveller is spending more, although there are many regional differences in industry performance last year. TREND and The Business' Managing Editor Doug Newhouse talked exclusively with Yngve Bia, President of Swedish industry analysts the Generation Group for his first impressions on this new data. (An executive summary appears at the end of this interview).

WHAT ARE THE MAIN CHANGES YOU HAVE NOTICED IN THE KEY PRODUCT AREAS DURING 2005?

Generally, I believe we are now seeing much more local merchandise in the stores at airports. Destination merchandise, local specialities and souvenir items have become interesting and important for the retailers trying to adapt and offer a local flair in their stores ? this is one way for them to differentiate and give their stores a local touch.
Many travellers complain that all the duty free and travel retail stores in the world look the same and offer just about the same products. But just look at Alpha Retail?s successes with Glorious Britain and A Sense of Place. I think this is an exciting development that we will see more of in the years to come.

WHICH PRODUCT CATEGORIES ARE PERFORMING WELL, MAINTAINING MARKET SHARE, OR STRUGGLING?

As expected, the tobacco category underperformed in 2005. In Europe it looks as though intra-EU sales are suffering especially. And tobacco will face continued challenges ? be they legal, health concerns, limitations on advertising, government resolutions banning smoking in restaurants and public places and similar.
Liquor, on the other hand, did surprisingly well and is well ahead of tobacco, for instance, in terms of sales evolution. Beauty had yet another good year in 2005. They just seem unbeatable, these guys. We estimate that beauty sales advanced by about +12% in 2005 against the results in 2004. If we should declare a winning category in 2005, it will probably be the beauty category.
Global confectionery sales rose by about +10% on average, just short of the progress of the beauty products, in both value and volume, but with some significant regional differences. Confectionery in the Americas and the Middle East did exceptionally well with results well over +20%, whilst results in areas such as the British isles and the Nordic areas were just about flat.
Electronics, watches, cameras, fashion, leather goods etc., all somewhat dependent on the Asian market, also did well generally, along with lots of new high-tech items that travellers just rip off the shelves, such as mobile phones of course.
Sunglasses also saw strong progress globally. In jewellery you only have to look at the current gold price. People are buying gold and gold jewellery as an investment and we see a very strong market for jewellery in the Middle East and Asia which is rising further.

WHAT IS THE CURRENT MARKET SHARE TO DATE OF AIRPORTS, AIRLINES, FERRIES/CRUISE LINERS AND OTHER SHOPS?

Airport shops represent about half of global duty free and travel retail sales. We see this share to have grown further in 2005. Border shops, downtown shops and other land-based shops had a fair year, no more.
Sales onboard ferries and cruise liners represent just short of 10% of the global market, but we believe this has dropped somewhat due to a very weak Nordic market, albeit marginally compensated by a strong cruise year ? up about +6% in the Caribbean.
The airline industry and inflight sales generally have suffered badly in the past few years, but it now looks as if this fall may have finally bottomed out.
There is an increased availability for low-cost travel and scheduled carriers are now catching up to pent-up demand for long-haul destinations where they usually do best in terms of onboard sales. The professionalism, if I may use this word, among cabin staff offering items onboard is increasing.
They seem to be listening to their customers more and thus improving on the range offered, as well as working more closely with suppliers. For instance, there is more creativity generally, both in product offerings and incentive programmes and more novelties onboard.
New technologies are available today to further boost sales and I very much hope and believe that the work and doings of some of the inflight industry champions, as I like to call them ? like Fernand Lang and Christine and Ray Martin ? who incessantly try to promote and develop this branch of global travel retail sales, have not been and are not in vain.

WHICH REGIONS ARE PERFORMING WELL AND WHICH HAVE THE FASTEST GROWTH RATES IN 2005 TO DATE?

The Americas was the top-performing region in 2005, no doubt. The Middle East is also continuing to do extremely well, including Dubai, Abu Dhabi and Bahrain. Asia Pacific had a bumper year in 2004 and here, as expected, the growth rate has come down significantly.
Europe ended 2005 only a touch higher than 2004. Western Europe including the British Isles ended 2005 probably just about flat. The European results were propped up thanks to good progress in some Mediterranean countries like Greece, and Eastern Europe of course.

WHAT ARE YOUR FEELINGS ABOUT THE IMPACT ON THE BUSINESS AS A WHOLE FROM THE HIGH PRICE OF OIL AND CURRENCY DIFFERENTIALS?

Airline fuel charges surged last year, but so far the airlines have largely held back from passing on the full amount of the higher energy charges to the passengers ? mainly due to the highly competitive environment in which they operate.
But if fuel prices continue to rise it will certainly be the tourists ? the customers in the world?s duty free and travel retail shops ? that will suffer the brunt of these increases. They will pay higher ticket prices and thus have less to spend in the shops. Another matter I find highly irritating are all these airport and other charges levied on me when I fly.
I often find that the sum total of security charges, passenger charges, airport taxes and other surcharges exceeds the actual cost of the ticket and yes, I do fly on low-cost carriers whenever I can.
No doubt, the value of the domestic home currency against other currencies abroad carries a significant weight when it comes to citizens? decisions to travel, their choice of destination and also whether they decide to shop or not. The weak US dollar has affected US citizen?s travel overseas more than anything else.
The depreciation of the US dollar has also affected those shops that buy their goods in other currencies, but then sell in US dollars at the point of retail. This is typical for stores in the Middle East, for instance. Yes, back in 2004 the exchange rates played a very significant role in our statistical analyses and I am not sure that everybody understood this.
All our sales data at Generation Research is measured in US dollars which we see as the only universal currency understood by most people. But we also show results in local currencies, in real value so to say, so as to get a better picture of the true evolution of sales.
Back in 2004 the global duty free and travel retail market soared +22% if measured in US dollar. But it actually grew by a more realistic +14.2% in real terms excluding the depreciation of the US dollar against virtually all other major currencies. This year we do not have the same problem, fortunately.
In 2005 the US dollar stabilised significantly, especially during the second half when it even made gains against other major currencies, and we can see only very minor gains or losses when comparing to annual average exchange rates for other major currencies. Among the strongest currencies was the Canadian dollar that gained +7.3% on the US dollar, but for the Euro, Swiss Franc and Pound Sterling, gains or losses were well within the one per cent margin in 2005.

WHICH PRODUCT CATEGORIES LOOK LIKE ENJOYING SUSTAINED GROWTH INTO 2006, PROVIDED THERE ARE NO ADVERSE EXTERNAL INFLUENCES?

I believe cosmetics will continue to grow, especially men?s skin care. Fragrances also. And let us not forget confectionery and destination merchandise. Electronics of all kinds should have a bright future in travel retail.

WITHIN YOUR STATISTICAL MONITORING IN 2005 IS THERE ANYTHING THAT HAS SURPRISED YOU?

Not really, although maybe the fact that liquor is holding on so well, despite many adverse factors that should rightfully have influenced sales. But the liquor people are responsible for more innovation than any other sector, and this creativity is now starting to pay off.
As we at Generation are getting closer and closer to the retailers and working with them on various projects like the TRAQ programme and so on, I am a bit concerned that some retailers are not as sophisticated as they might be expected to be in terms of their IT systems and similar.
Yes, many have made substantial investments in their IT systems in recent years, usually hiring SAP for data warehousing and other systems, and that I see as a prerequisite for them to further develop their business.
On the outside at the POS level, tools that look at recruitment and induction, at staff and shop supervisor manager training, at monitoring and coaching as well as rewards ? are also important. On the inside, tools that help staff to have access to real market data to drive the business forward are equally important.
And for the latter you must have IT systems of a fairly high standard. Retail is retail ? also at an airport. Retail is detail ? also at an airport. This is the essential message we try to get across whenever we discuss this.

WHILE I KNOW THE CONTENTS OF THE TRAVEL RETAIL PERFUMERY REPORT ARE CONFIDENTIAL, I UNDERSTAND THAT YOU NOW HAVE A VERY SUCCESSFUL AND SIMILAR LEVEL OF INPUT FROM THE CONFECTIONERY COMPANIES. WITHOUT GIVING AWAY ANY SECRETS, HOW IS THIS ARRANGEMENT WORKING OUT?

To the great satisfaction of those involved, and us, I gather. Ten of the world?s leading confectionery companies are participating in this, sending us their shipment data for our processing and analysis. They represent together about two-thirds of the global market.
We have introduced something called limited transparency, which means that we share sales and market share data among us, including company sales of course, but not to any third party. We measure quarterly sales in both value and volume. We meet and discuss issues of importance now and then at conferences, such as in Cannes and in Florida.
The TRIQ Confectionery Report has developed into a great tool and it is very useful for benchmarking and spotting opportunities. This is what we are told and I can provide you with a list of testimonials, if you like.
Sorry, but as matters stand today we can?t give out the market shares and percentage sales change for companies in the various markets because this violate the agreement we have with the suppliers. Aggregated data, however, we use for our various indices, of course.

IS THERE ANYTHING THAT CONCERNS YOU GOING INTO 2006, WHETHER POLITICAL, ECONOMIC OR OTHERWISE?

Well on the personal front there is the fact that I now have three small kids and I don?t know how I will get enough time to spend with them in our new home in London.
But seriously, business-wise I believe the biggest threat to international tourism as a whole, and on which the global duty free and travel retail industry is so very dependent, will continue to be these terrible events that profoundly undermine travellers? confidence ? such as natural disasters, wars and acts of terrorism.
Some countries are still ? one year after ? recovering from the impacts of the devastating Indian Ocean seaquake and the Tsunami and some are still suffering badly today in terms of significantly lower tourist arrivals.
Admittedly, on a global level these impacts are fairly negligible and lead ? at best ? to a shift in travel flows. But for the countries affected, the consequences can be devastating.
Look at Bali today and were it was before the October 2002 and 2005 bombings; Egypt had just started its recovery from earlier bombings when again terrorists hit Cairo and Sharm-el-Sheikh last year. Turkey ? that had such a brilliant year in 2003 with duty free sales soaring by about 60% against 2002 ? also had a decent 2004 with a growth of about 20%, and in 2005 as well.
But now, with bombings in Kusadasi, Istanbul and Ankara last year, and with bird flu having entered Europe through Turkey? Business had really begun to take off at places like Antalya. So we obviously don?t really know how this will all develop. I think there will be more alarms about deaths due to bird flu.

WHAT DO YOU BELIEVE WILL BE THE MAIN INFLUENCES ON INDUSTRY GROWTH DURING 2006 AND IF POSSIBLE, WHAT SALES TURNOVER DOES THE CURRENT RESEARCH INDICATE THAT THE INDUSTRY MIGHT HAVE ACHIEVED IN 2005?

Again, my main concerns as regards 2006 are the threats of natural disasters and terrorist attacks. Anything that affects the level of global travel will also affect our business and that?s for sure. I have no crystal ball but a continued growth of the industry at 7-8% in real terms in 2006 seems achievable.
Now looking at the year that has just passed, in 2005 we see that the global number of travellers is estimated to have grown by 5-6%, which exceeds the forecasted long-term average growth of 4%. I can confidently say that the global growth in duty free and travel retail sales in 2005 came out higher than that. Hallelujah, because this has not always been the case in the last few years.
I believe most traders will agree with me when I say that the only true measurement of our industry?s health, continued development and success is to look at the ratio between tourism growth, or more exactly the number of international tourist arrivals, and the growth in sales in the world?s duty free and travel retail shops.
In the 1980s and early 1990s we saw the growth rate in duty free sales widely exceed the growth rate in tourist arrivals. This was the case just until 1995 when our industry started to face numerous challenges ? be it the Asia economic crisis in 1997 and 1998; the abolition of intra-EU sales in 1999; 9/11 in 2001; the Bali bombings in 2002; SARS; the Iraq war.
So between 1996 and 2003 global duty free and travel retail sales stayed basically flat at US$20 billion, despite inflation, price increases and more travellers etc?
The turn for the better came, finally, to everybody?s relief in 2004. Then again, global duty free and travel sales jumped by a double-digit number, +14.2% to be exact in real terms. This was a growth rate that was unheard of since the early 1990s and which was significantly above the growth rate in international tourism at +10.7% in 2004, itself a bumper result indeed.
But remember that these numbers are global averages. Europe, for instance, is still struggling to keep the sales growth percentage number on par with the growth in travel.
For 2005 we see a global average growth of about +8% in statistical terms in US dollars, which is basically the same in real terms in local currencies, or if we had used a fixed rate of exchange of the US dollar against the other currencies in 2004 and 2005, as we had very small currency movements in 2005.
This means that 2005 sales would have reached some US$27 billion, or US$2 billion more than in 2004. To give and voice these figures as early as only three weeks into 2006 is risky, of course, but we have throughout 2005 monitored the developments and gauged the temperature of the business at close range ? with the kind assistance of airport authorities, concessionaires, associations, organisations and suppliers that share their factual data and knowledge with us.
In 2005 the best performing region was, without doubt, The Americas that finished up about +15%. Some hefty gains were scored in Latin America especially, whilst the Caribbean also did well. Both these sub-regions did better than the US and Canada.
Asia Pacific recovered significantly back in 2004 when sales soared +28.0% against 2003. Understandably, in 2005 the pace of growth levelled off somewhat with an average growth in sales of about +11%. Europe, on the other hand, added only about 2-3% on average to its 2004 sales. In many major European duty free and travel retail countries sales ended just about flat in 2005 against 2004.
As I told you earlier, beauty was the winner among the product groups fuelled by strong sales in cosmetics especially. The growth rate in skin care and make-up was about twice that of fragrances: +15% against +8%. Just behind beauty we find confectionery sales that added about +10% to its 2004 results.
Confectionery had an outstanding year in The Americas especially. Luxury goods marched on at an average rate of about +8%. Liquor pushed up a better-than-expected +5%, whilst tobacco closed 2005 at about +2% on 2004. Airport sales crossed the US$14 billion threshold for the first time, equal to a +9% in sales. A similar figure is found for the airline sector. Ferry sales and sales in land-based shops both advanced about +6%.
That?s what I can tell you at this early stage, Doug. But I don?t expect the final numbers will differ too much from those I have quoted here. How the figures will finally come out are best studied on www.travelretailnewsdigest.com, of course, where we continuously monitor and follow ? at close range ? evolutions in the industry using no less than seven industry indices.

EXECUTIVE SUMMARY HIGHLIGHTS:

THE MARKET: The global duty free and travel retail market grew by an estimated 8% to $27bn (+$2bn) in calendar year 2005, as calculated statistically in US dollars. The growth rate was also basically the same when calculated in real terms in local currencies, or by using a fixed rate of exchange of the US dollar against other currencies in 2004 and 2005. This was because there were very small currency movements in 2005. Importantly, the 8% global sales increase exceeded the international passenger growth rate of between 5% to 6%.

REGIONAL SALES PERFORMANCES: The Americas (+15%); Asia (+11%); Europe (+2-3%).

GLOBAL SALES BY OUTLET TYPE: Airports recorded a 9% rise in sales, passing the $14bn level for the first time; airline sales rose by around 9%; and ferry sales and sales in land-based shops both advanced by around +6% respectively.

GLOBAL SALES BY PRODUCT CATEGORY: Beauty sales +12% (skincare +15% and fragrances +8%); Confectionery sales +10%; Luxury goods +8%; Liquor +5%; Tobacco +2%.

Source: THE GENERATION GROUP

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