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Monitoring the impact on duty free: Global reaction to UK terror crisis – 11/08/06
Source: ©The Moodie Report
By Martin Moodie
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"We do absolutely everything by the book.
It is a totally compliant business."
John Brocklebank, Managing Director UK and Eire, The Nuance Group
UK/INTERNATIONAL. The short-term impact from yesterday’s terror crisis in the UK on several key categories in the global travel retail industry is likely to be severe. But analysts and industry executives are divided in their opinions regarding the longer-term impact.

Industry insiders are hoping for a swift return to normality, arguing the travel retail business is a highly-resilient and compliant one, subject to the strictest of scrutinies at every stage of the supply and purchasing chain. Executives such as World Duty Free Managing Director Mark Riches called for "cool heads" and urged against over-reaction.

Nonetheless, yesterday was undoubtedly the toughest day in the global duty free industry since 9/11 with spirits, wine, fragrance, cosmetics and consumer technology all bearing the brunt of the response to the alleged airline bombing plot.

Airports and airlines around the world operating US-bound flights stopped a number of categories from either being purchased or taken onboard. At the request of the TSA, duty free liquor and fragrance are not being sold to US-bound passengers anywhere in the world.

"We’re entering discussions with the airlines about whether it’s possible to sell product to passengers, then deliver it to the gates and have it put in the hold."
Frank O'Connell, Director-Retail, Aer Rianta Retail
In the UK, due to fears of liquid explosives being at the heart of the planned bombings, liquid-based items such as fragrance, spirits, wine and water were at the heart of the crackdown – mainly on US-bound flights but in some cases on a wider basis as retailers waited for guidelines amid widespread confusion.

Electronics sales were also directly impacted as consumer technology items were banned from carry-on. Yesterday afternoon BAA and World Duty Free stopped selling any retail items at all for carry-on by US-bound passengers in an effort to help their operational colleagues cope with the crisis.

But while airport stores cannot sell duty free liquor or fragrance to US-bound passengers, there appears to be no such restriction - yet - to inflight sales. Many carriers are still selling liquor and fragrance on US routes, product that comes from the same bonded stores as that sold in airport shops.

In this special report, which will be updated throughout the day, we present a snapshot of the latest developments and reaction from the world media. We also examine duty free's level of security and regulatory compliancy - vital arguments as the channel comes under unprecedented scrutiny.

EUROPE



British Airways has withdrawn its entire duty and tax free range on all flights. The duty free trolleys are now being used for catering purposes
Photos courtesy of British Airways
At the request of the US Government, no airport is selling duty free liquor or fragrance to US-bound passengers. The move appears to be open-ended, with no indication of when the restriction might be removed. With the exception of US flights, there are no sales restrictions in place.

Airlines have been largely unaffected but today British Airways revealed it had withdrawn its entire duty and tax free range on all flights. A spokesperson told The Moodie Report that the decision was made on logistical grounds as priority had to be given to serving passengers food and drinks. The duty free trolleys are being used for catering purposes. British Airways operates 39 flights to 14 US cities daily out of London Heathrow alone and five to six daily flights to the US out of Gatwick.

Dublin Airport Authority, which manages Dublin, Shannon and Cork Airports, is advising passengers transiting through the UK to check in hand luggage at their airport of departure.

Aer Rianta Retail is adopting a “wait and see” attitude to the restrictions, but it is already exploring ways to overcome them should liquor and fragrance remain unavailable to US-bound travellers.

Director-Retail Frank O’Connell tells The Moodie Report: “We’re entering discussions with the airlines about whether it’s possible to sell product to passengers, then deliver it to the gates and have it put in the hold. There are practical issues about how passengers get the items back and how we might provide a packaging service. But we need to start thinking along alternative lines now, rather than accept the status quo, especially if becomes a longer term issue.”

O’Connell points out that US-bound airlines can still sell liquor and fragrance onboard. “It’s the same product, from the same source and even the same warehouse, so the implication is that there is a problem within the airside area that doesn’t apply to airlines. That makes no sense to us.”

O‘Connell is also President of the European Travel Retail Council. He said he had received numerous calls and texts from concerned retailers across the region on Thursday. “The same measures are being put in place everywhere, but as an industry we need to emphasise that it only applies to US-bound flights. We have to ensure there is no confusion.”

HAVE YOUR SAY

How should the travel retail industry react to the current crisis? How bad is it? Is this a defining moment in the trade's history? Have your say - attributed or anonymous - on The Moodie Report Forum. Comment
He added: “Very often issues come along that create uncertainty in the initial days, but that settle down then. At the same time, as an industry we can’t just sit around saying how terrible it all is. We need to be thinking about how we can overcome these situations if they become long-term problems.”

THE AMERICAS

Many airports across North, Central and South America as well as the Caribbean stopped liquids or gels in containers of any size from being brought onboard by passengers. Click here for a round-up of the situation at the region's leading airports.

The International Association of Airport Duty Free Stores is seeking clarification from the Transportation Security Administration (TSA) on whether it can alter the delivery process from airport stores to aircraft, to satisfy the new rules.

"We would still have them delivered plane-side by store employees, but packages would be put in a secure area, and customers would be allowed to pick them up when leaving the plane at their destination," said IAADFS Executive Director Michael Payne.

Vancouver International Airport Authority (YVR) Manager of Retail Leasing Gerard Lim told The Moodie Report last night: “Transborder passengers can buy duty free (including bottles but they must pack them in the checked baggage and not carry them onboard). We are dealing with the situation and I am working till 11pm today to deal with any changes in the security policy that affects our tenants.”

All US airports applied a TSA order prohibiting all liquids and gels at the screening checkpoint and onboard aircraft. This includes beverages, shampoo, perfume, sun tan lotion, cream, tooth paste, hair gel, and other items of similar consistency.

"I think they will see that duty free is not the problem. We operate in the sterile part of the airport; we are regulated and our people are badged."
Miki Dinar, President Airport Division, Duty Free Americas
Lois Pasternak’s Travel Markets Insider quoted International Shoppes Perfume Buyer Marlene Friedman confirming that its stores at New York JFK and Philadelphia airports were operational: “We are not selling liquor, fragrance or treatments, but we are open. There is not much we can do, just wait to see what happens.”

Duty Free Americas President of the Airport Division Miki Dinar told Insider: “I am telling all my managers to stay calm, and do not make any rash decisions. This bomb plot they found in the UK is a very big deal. But I think they will see that duty free is not the problem. We operate in the sterile part of the airport; we are regulated and our people are badged.”

ASIA AND AUSTRALASIA

Leading Asia Pacific airports moved swiftly to comply with the US TSA order overnight, stopping gels and liquids from being taken onboard.

Airport Authority Hong Kong urged those bound for the US to allow at least three hours for check-in and issued the following advice: “The aforementioned passengers should not carry liquid or gels in their hand baggage except for baby food, prescription medicine and other essential medical supplies. Prohibited items should be packed in check-in baggage. Passengers are also advised to travel with minimal hand baggage.”

Dow Jones reported that Japan's two main carriers, Japan Airlines and All Nippon Airlines had banned gels and liquids on US-bound flights. It also quoted a Thai Airways International spokesman saying: “Passengers should refrain from taking [onboard] liquids, electrical appliances and any kind of gel.”

Leading Japanese travel analysts Travel Journal International (TJI) Online reported today in a special bulletin that Japan's Ministry of Land, Infrastructure and Transport had not not raised its alert level. The organisation said there is no information to suggest that any threat to Japan or flights to and from Japan has increased.

TJI said: "Amid Japan's peak summer holidays, it remains unclear how this latest development will affect overseas travel to the US and Europe, seen as two of the most popular destinations this season."

Sydney Airport announced that passengers departing for the US were banned from carrying laptops and mobile phones in their hand luggage as well as liquid gels such as toothpaste, lip gloss, sunscreen. Duty free alcohol was also prohibited as carry-on luggage. Qantas applied similar measures.

The Nuance Group Chief Executive Officer Australia & New Zealand Christian Strang told The Moodie Report this morning that he was still trying to get a clear indication of restrictions from various airports in which the retailer operates.

"Airlines are applying their own restrictions," he said. "[This] will affect business. We are trying to ensure that all Australians are aware that they can purchase on return at our arrivals stores or pre-order for collection on return. [But] This alone will not solve our problem."

MEDIA REACTION – EXCERPTS FROM COVERAGE OVER THE PAST 24 HOURS

The Chicago Tribune

"Right now it is having a significant impact on our business," said Duty Free Americas' Simon Falic, "and we haven't been told how long it is going to last." Falic said the ban on liquor and fragrance sales is unfair because airlines flying international routes still can sell liquor and perfume as part of their duty-free service. He said products at his store are cleared through security in the same way duty-free products sold on board the planes are.

Duty free shoppers at US airport stores are not permitted to touch their purchase until after it is delivered to the aircraft by the duty free operator. IAADFS Executive Director Michael Payne said the organization is attempting to obtain a meeting with TSA officials to propose altering the delivery process.

"We would still have them delivered plane-side by store employees, but packages would be put in a secure area, and customers would be allowed to pick them up when leaving the plane at their destination," he said.

The Wall Street Journal Europe

"We have a strong partnership with airports around the world and we will work together to find a solution"
Ed Brennan, Chairman, DFS Group
It isn't clear how long the [product] ban will last. But it could reshape the duty free travel retail industry – a major source of revenue for companies that run duty free operations, like French luxury-goods group LVMH Moet Hennessy Louis Vuitton, and for airport authorities that rent out their space.

"Alcohol, perfumes and cosmetics represent a substantial part" of the US$26 billion in overall duty free retail sales, said Michael Payne, Executive Director of the International Association of Airport Duty Free Stores in Washington, D.C.

"I believe we will be able to restore the ability to sell those product categories to departing passengers in a safe way again," said Ed Brennan, the Chairman of DFS Group. "We have a strong partnership with airports around the world and we will work together to find a solution."

Dow Jones International News

The restrictions being imposed on UK air travellers could be devastating for the airport retail industry if they are maintained in the long term, analysts said Thursday. "This is obviously bad news for the airport retail sector," said Richard Perks, retail analyst at Mintel Research, "but the damage depends how long it lasts."

Reuters

"If it's not the big news story in two days, I don't think it's going to be a big deal"
Britt Beemer, Head of America's Research Group
Britt Beemer, Head of America's Research Group, which surveys consumers, said… the impact would have been greater if the plan had not been thwarted. "If it's not the big news story in two days, I don't think it's going to be a big deal," said Beemer, speaking from an airplane via cell phone after having items such as shampoo and toothpaste confiscated before boarding a flight. "But if it is a big story in two days, it may have some impact."

"One of LVMH's biggest retail businesses is duty free so they are obviously impacted," said a London-based luxury goods analyst, who asked not to be named. "The whole sector really hurts from disruption to travel because it is estimated that about 40% of all luxury goods sales are related to tourism."

Centre for Pacific Aviation

Centre for Asia Pacific Aviation Executive Chairman Peter Harbison said: "This does mark a watershed in airport and airline security. In the past the focus has been on screening for weapons and similar implements. Here the problem has been elevated to another level, where a combination of substances can become life threatening. The main ingredient is a liquid chemical, as well as components which can be well disguised in a laptop, MP3 music player or camera.

"So it looks for the time being at least that there will be a blanket prohibition on any of these items on board – at least on flights involving the US and UK. Hand baggage will probably never be the same again – at least for UK, US flights. This promises to be a significant inconvenience for travellers, especially on long haul flights – as many flights are in the Asia Pacific region. (For the time being, only wallets and passports, in plastic see-through packets, are permitted, but laptops or MP3 music players are not).

"This could be a great inconvenience to passengers; a 15 hour flight is already a tough proposition and many passengers have their own preferred ways of passing that time, whether it is playing computer games, working on a laptop, listening to an MP3 music player, or even just reading a book.

"This imposition probably takes consumers through one more resistance level. They have already become uncomfortably aware of small seats and crowded aircraft, hassles at airports, unreliable in flight entertainment, reduced food quality, queues for fewer toilets etc.

"Although the threat appears to be very specific to the US/UK and specially to US airlines, the same logic and methodology is applicable to all air services. So we can expect that there will be lasting effects on airport security worldwide and changes in carry-on baggage rules. These will probably not be the blanket rules that are temporarily being applied, but we should expect significant lasting changes."

MARSHALLING THE INDUSTRY’S DEFENCE

More seriously, yesterday was the busiest day ever for The Moodie Report.com, attracting an incredible 6,738 page views (a +20.9% increase on our previous daily high of 5,572). We would rather it didn’t take such grim news to drive traffic but the anecdote underlines the intense industry concern and need for knowledge about the situation.

"We don’t know where every travellers’ personal items have been before they travel but we sure know where every duty free item has been"
Mark Riches, Managing Director, World Duty Free
A great deal of that traffic was generated by mainstream media such as US television channel CNBC seeking instant background on the duty free and travel retail industry.

We predicted yesterday that there would be emotional calls for the end of duty free as a result of the ban on liquids (and later gels, creams and electronics) on US-bound flights. That is already happening in some of the coverage and letters to the editor.

So how should the industry marshall its defences against any proposed longer-term crackdown? Should it say anything at all – or just lay low and hope this storm blows over as others have done? We think not.

Overall we think it has to be ready with a pro-active stance. If it does not do its own talking there is a danger that others, less knowledgeable, will do so for it.

The Duty Free World Council – and other trade associations – can play a key role here, offering strong background briefings on the merits of the industry to consumer and trade media alike (a more up-to-date website than www.dfworldcouncil.com is surely imperative right now). Individuals like World Duty Free's Mark Riches and Alpha's David King were extremely helpful yesterday, explaining in fine detail the vital minutiae of the duty free supply chain.

There’s a fine line between being alarmist and being pro-active but the reality is that duty free is today the subject of hundreds of articles across the world’s media.

Whatever consumers, and the media at large, think of duty free and travel retail, the industry’s credentials when it comes to security are actually impeccable.

As World Duty Free Managing Director Mark Riches pointed out yesterday to The Moodie Report, the airports industry is “steeped in security”, spending millions of pounds on security each year.

The duty free supply and purchasing chain is one of the most secure, regulated and compliant possible. Duty free products are initially held in bonded warehouses, delivered to airports in sealed vehicles, and those seals are checked upon the unloading of the goods. It’s a rigorous process and needs to be – after all airport retailers are under the constant scrutiny of Customs, health and safety and tax authorities. Onboard, concessionaires such as DFASS operate in the US to the highest TSA compliancy levels for both their onboard pouring and their duty free trolleys.

“We don’t know where every travellers’ personal items have been before they travel,” noted Riches, “but we sure know where every duty free item has been.”

"Duty free is one of the most highly-regulated businesses in the world"
David King, Executive Director, Alpha Airports Group
Added Alpha Airports Group Executive Director David King: “Duty free is one of the most highly-regulated businesses in the world. It’s almost all airside and it is in a highly secure zone. Everything that goes airside is security scanned.”

“We do absolutely everything by the book,” said The Nuance Group Managing Director UK and Eire John Brocklebank . “It is a totally compliant business.”

All of these senior executives went further than simply defending the sector – they each pointed out that the travel retail community actually welcomed sensible regulatory and security scrutiny.

“We have an ability as an industry to protect our travellers and we’re delighted to help,” said Brocklebank. “What happened is an example of a security system actually working well. The positive spin to the short-term disruption is that we all want a safe environment.”

Duty free, he argues, poses no threat whatsoever to that safe environment. Each of the executives spoken to understood the need for sweeping action on the day of crisis that therefore impacted on their various businesses. But they warned about any sort of knee-jerk reaction beyond that point.

As Duty Free Americas’ Miki Dinar said, “duty free is not the problem”. The danger is that it might be perceived to be, at least in part. And that perception may need to be countered.