Financial Journalist

Wine & Spirit International October 1999

For all the sabre rattling, intra-EU duty free has ended not with a bang, but a whimper. Gerard O’Kane reports on the uneasy silence in travel retail lounges

The EU can hardly have been unaware of the possible effects of the end of European duty free. Some of Europe’s biggest companies, backed by an army of hastily-assembled but well-financed ‘research companies’, warned of the end of civilisation as we knew it: there would be thousands in the unemployment lines and national industries would crumble, while the narrow-eyed, thin lipped advisors of the EU, led by Mario Monti, looked on at their dream’s culmination.

Since the abolition of duty free within the EU, which came into force on 1 July 1999, the hyperbole has ceased. The whining from the engines of power within the British Airport Authority (BAA) has stopped, the ferries still run and there have, as yet, been no job losses.

At least that is the story being put around by the EU and the press. In actual fact, the truth is somewhere between the apocalypse and utopia.

The abolition of duty free is forcing companies to create new marketing strategies in airports and on ferries. But there is no escaping the ferry routes that have been axed, the brand names being subsidised, that airport charges are on the increase or that ticket prices are set to rise.

The UK was expected to be one of the countries worst affected. But few job losses have been reported as yet, and there seems not to have been hikes in ferry or airline ticket prices. All of which is surprising, since the figures published prior to abolition pointed to a catastrophe.

A survey by research company Euromonitor estimated abolition would bring about the loss of 127,000 jobs.

It pointed out that intra-EU sales accounted for over 70% of the EU duty free market. The European Travel Research Foundation (ETRF - an industry-supported research company) estimated that the airline, airport and ferry duty free market was worth US$5.6 billion, or 52% of global duty free sales.

So what has happened since this cash cow was led to the abattoir? Publicly the same answer keeps coming up.

“To be perfectly honest the answer is no-one yet knows,” says Quentin Rapoport, director with the UK’s Wine and Spirits Association (WSA). “We do see the drinks market a key one for ferry companies although in the airline business there are other factors. But so far no-one seems to have drawn any conclusions.”

Under the new EU rules governing for ferry companies, operators can sell goods with the duty paid at the same rates as one of the countries it is leaving or at which it is arriving. But it can only do so while it is in that nation’s territorial waters.

This ruling has created several problems: confusion among the passengers, (a similar confusion among some airlines), a reduction in the attractiveness of traditional duty free goods, primarily spirits, and the virtual disappearance of cheap booze sales on certain routes.

As Richard Stocks of the UK Duty Free Confederation mused, will the ferry companies be able to sell enough in the 20 or so minutes a cross-channel boat remains in French waters to make it worth their while stocking it?

“As for the airlines, it seems they are no longer selling tobacco or alcohol,” says Stocks. “There’s confusion about the laws when there’s stopovers or refuelling.”

Lower duties
The cheaper duty-paid countries of Spain, Holland, France, Greece and Italy, meanwhile, look like being able to hold on to some profit from the duty abolition. Certainly Stocks sees it coming at the expense of trade traditionally done by UK firms, a view supported by the WSA’s Rapoport, who points out that over 10% of all wine now purchased for UK consumption now comes from across the channel.

But the duty paid issue is not even as straight forward as low rates good, high rates bad. Greece and Italy, for instance, both have low rates of duty on wines, yet seem to have been hit pretty hard. “It is important to realise that 75% of our duty free sales were to other EU people,” says Tomas Tsourinakis, treasurer of the Hellenic Tax and Duty Free Association. “In July, we saw a 70% drop in spirit sales.”

Still, though it is hard to pinpoint the trends that are driving the figures. Even though the Greek association is one of the few which had solid figures for July, Tsourinakis is careful with interpretation.

“It was confused month, many tourists did not even enter the shops, not understanding they could buy good value duty-paid goods,” he points out. And the difficulties do not end there. Because of national law some ferries running between Italy and Greece cannot even sell duty-paid goods; that requires new permits.

While most in the industry officially claim that it is too early to say what the ultimate effect of abolition will be, privately, the consensus is that the whisky, gin, vodka and Cognac markets will be the worst affected. Figures from the ETRF indicate that the scotch industry alone could lose £136 million and Cognac producers are unlikely to be sleeping any easier.

“My feeling is that the areas most vulnerable are the premium products; people tend to trade up when buying duty free,” concludes John Wakely, European drinks analyst with Lehman Brothers.

Logic would suggest trading up is bound to be affected. Right across the EU the duty on spirits is much higher than other beverages, and the attraction for ferry companies or airport outlets to hold spirits now that they are duty-paid will obviously be reduced.

“The question to be asked is did duty free cause you to drink more or is it a replacement market?” says Wakely. “There have been no studies on this but my feeling is that it created additional volume.”

With financial inducements removed, why should the consumer buy that better brand of whisky or gin? For a start it may not be on the shelves any more, but if it is, the chances are that it costs so much more than wine, for example, or standard spirits within that category, that trading up could be wiped out at a stroke of Monti’s ideological pen.

According to ETRF figures whisky, has a price elasticity of -1.9, meaning that a 10% increase in price would result in a 19% reduction in consumption. Whisky accounted for 27.8% of EU duty free liquor sales; cognac was next at 8.8%.

And those running the shops admit that spirits sales will plummet. “With duty free gin cost about FF90 - now it would be F180; I don’t even keep it in the shops any more,” says Bob van Tussenbroek, general sales manager at Charles de Gaulle airport.

Van Tussenbroek has reopened four of his 17 duty free shops to handle duty-paid goods for intra-EU travellers. He makes no secret of the fact that the new outlets differ from traditional duty free shops.

“We’ve seen a drop in revenues but we think we can get them back after six months. We need publicity to get people used to the idea of duty paid,” he says.

But his product line has changed as well. Because he is selling products at French duty paid prices, he concentrates on products that will have a much lower price than in many other European Union states.

“Things like schnapps are more expensive than Germany, but our sales of wine, champagne and cognac are working very well,” he boasts.

In part van Tussenbroek says he can achieve success by marketing the products better than in the past. Playing the heritage card - ‘take of piece of France home’ sort of thing. But he admits it has been at the cost of choice.

“We have very few foreign spirits on the shelves now,” he admits. “We’re more likely to keep the odd 25 year old spirit.”

Less success
What is apparent is a difference in how Charles de Gaulle airport has handled the new situation and how the British Airports Authority has managed.

As had happened with some of the larger ferry firms, the BAA had been preparing for duty free abolition before it happened. It formed World Duty Free, moving into the US duty free market and with a company large enough to force better prices from manufacturers. Like some ferry routes, the BAA swallowed the price increases on alcohol, at least for now.

At the same time it won the duty free concession on Eurotunnel (the rail link between the UK and continental Europe). Though it is estimated that Eurotunnel will lose £100m a year from abolition, the BAA consortium is studying ways to retain retail sales and is increasing retail sales area by 15% throughout its airports.

Paradoxically, while most were wringing their hands and mourning the death of duty free, the BAA announced increased profits. But this increase was in part due to increased passenger numbers from low cost airlines such as EasyJet and having done the maths for the coming year it obviously expects revenue to fall.

In the last week of July it announced a hike in landing fees at its seven airports.

“These price hikes are also happening at Copenhagen and Dublin and more are likely to follow,” says Wendy O’Conner at the Airports Council International (Europe). “It is even worse for regional airports where we estimate that up to 60% of their revenues came through duty free.”

According to O’Conner, each airport has their own strategy to deal with the losses but all seem to be keeping their cards close to their chest. Most are surely hoping tat new marketing techniques, specialist shops and fashion might save retail income. Even so, O’Conner expects airport redundancies early next year.

One possible light at the end of what is otherwise a pretty dark tunnel could be the French moves to create ‘espace voyageur’. Still in early days of planning, the French have put forward an idea which would see areas in airports and ferries where a pre-agreed EU-wide duty rate could be charged.

Given EU politics, it seems likely that such a scheme will run into objections from other member states, but as the question of travel prices and redundancies become more transparent, political pressure may push doubters into finding a solution.

According to Sue Kirk with Stena, the ferry line already had to make 600 people redundant by closing a Scandanavian route. And from Autumn it will reduce services to concentrate on freight. “We’re also absorbing some of the price increases on certain lines but we don’t bother selling tobacco any more,” says Kirk.

While the nature of duty paid between the UK and Ireland remains a problem, the company is selling goods to Holland and France at their national rates. “We’re looking for lower margin but higher volume sales,” she says.

In terms of new marketing, Kirk says the company is reviewing refurbishing the ships and the need for encouraging a better level of retail services. For Stena duty free contributed to about 28% of revenues.

For P&O services from the UK to northern Spain there is no talk of redundancies nor price increases, but the routes of Scandanavian Seaways, now known as DFDS Seaways, routes have seriously been hit. “In February we closed the Harwich/Gothenborg route and we’re looking at 10-15% increase in ticket prices,” explains John Crummie, DFDS managing director.

DFDS, however, has gone further than many others to offset the losses of duty free, reducing its commission to travel agents and setting up a new route to Gothenburg via Norway, where the company can still sell duty free.

“We are seeking to increase the volume of passengers, use new retail concepts. I believe that there hasn’t been enough creative imagination in overcoming the loss of duty free,” argues Crummie. He does concede, however, that the company “can never hope to replace that level of profit from duty free”.

The fact remains the effect of the abolition of duty free is yet to be felt. Ferry services will close and indigenous spirit industries will suffer.

Traditional days out such as German “butter boat tours” have disappeared. Airline ticket prices will increase and regional airports may disappear.

It may not be quite the disaster scenario predicted by an industry desperate to keep a big-earning sector, but it’s not a pretty picture either. Only time will tell just how bad it is.

Europe, duty free, regulations, change