By and  on October 26, 2007

CANNES, France — A number of beauty executives toasted the 60th anniversary of the travel-retail industry with an equal measure of soul-searching and unwavering confidence in the channel's resilience.

While the cosmetics and fragrance category chalked up a 12.9 percent increase last year to total sales of $8.6 billion, the self-congratulation competed with a creeping feeling of unease.

During conversations in many booths scattered through the cavernous Palais du Festival at the five-day Tax Free World Association trade show here, starting Monday, beauty executives spoke proudly of how the travel-retail industry has recovered time and time again from one catastrophe after another. Attendees, which reached on Tuesday 4,833 visitors, up 9 percent versus the same day in 2006, reminisced about the abolition of intra-EU duty free, to the attacks of Sept. 11, 2001, to the SARS epidemic in Asia, to financial meltdowns in Latin America.

The latest setback came a year ago with the alleged terrorist attempt in August 2006 to explode airplanes scheduled to fly from the U.K. with bombs fashioned out of everyday liquid products. That resulted in the ban of carrying onboard liquid- or gel-based cosmetics or fragrances in bottles larger than 100 ml.

The problem was partly solved when governments allowed travelers to carry onboard such liquids in see-through plastic bags.

Many companies already have seen a rebound in the market. Eric Henry, chief operating officer of Beauté Prestige International SA (Shiseido's fragrance arm), for instance, noted that, since August, his company has posted a double-digit increase in travel-retail sales. And the momentum is gaining.

However, difficulties remain overall, partly because airports outside of the EU lack guidelines that would be consistent with EU legislation regarding transfer passengers. This could be solved by application for government clearance, but there are political disputes around the world regarding aviation law.

So far, only five governments have applied, according to Frank O'Connell, president of the European Travel Retail Council, during TFWA's opening speeches. He added that it should take two to three years to develop a detection machine to be able to scan liquids fast enough for practical use in crowded airports.

There also was a worry that cosmetics and fragrances were taking the backseat to liquor and candy when it comes to in-store merchandising, a specialty the beauty industry once pioneered. There was a call, as well, for stepped-up creativity and innovation in product development, and above all, to make shopping a pleasurable, exciting experience, rather than what many now see as an exercise in drudgery.The TFWA conference's host, business presenter Juan Senor, rhetorically asked, "Are we driving with all we can in this industry to reach our potential? Or are we sitting on our laurels, and have we been sitting on those laurels for too long?"

U.K. retail guru Mary Portas got to the point. "There's no excuse for not pushing boundaries," she said. "Retailing tomorrow is not going to be about product; it will be third or fourth down the line. The shopper of the future will take great product for granted."

Experience is what will count, explained Portas, whose speech centered on the importance of providing more service, entertainment and variety in stores. She suggested the possibility of "pop-up" shops, which would change every three days. Portas also discussed how curating a retail mix is key to success.

She stressed the need for localization of offerings to get away from cookie-cutter formats, and highlighted Apple, Louis Vuitton, Barneys, Top Shop and Abercrombie and Fitch among examples.

Portas' call for adopting an experiential approach to merchandising struck a chord with one of the most influential retailers in the travel-retail world, Mark Riches. The managing director of travel-retail operator World Duty Free seemed so much in agreement that he noted he could have written large portions of Portas' speech.

"If we can't spoil the customer in the time that we have with him, then we've missed an opportunity," said Riches. "It's not about the lowest price. It is about the whole experience we have to provide. We have to provide more than he expects. Make it a gift. We don't sell anything people need — we don't sell bread or milk. We sell desires and aspirations."

That was the goal while conceiving the World Duty Free store in the new Terminal 5 in the U.K.'s Heathrow Airport, which promises to be the state-of-the-art travel-retail venue. (See related story, page 7.)

Among the beauty brands to be present in Terminal 5 is MAC Cosmetics, which comes with its mission of providing service for customers of all ages, races and genders. Parent the Estée Lauder Cos. Inc. showcased MAC at its customary Monday-night party at the hotel Majestic Barrière. (See related story, page 7.)It amply demonstrated the fantasy and story-telling capabilities of MAC, which is only in 64 travel-retail doors worldwide. Lauder executives say it requires a minimum amount of space.

"We don't want to compromise on the brand experience," said Olivier Bottrie, president of travel retailing worldwide for the Estée Lauder Cos.

Point-of-sale merchandising may be a hallmark of cosmetics, but it is not the category's exclusive property.

Vincent Boinay, L'Oréal's managing director of travel retail worldwide, who next week starts a new job as vice president of the French beauty giant's luxury division in Japan, said, "Other categories are getting better and reducing the gap with us. Confectionary is looking much better. They get inspiration from what we do and are a challenge for us. We need a second acceleration in the beauty industry."

Boinay, who will be replaced in his travel-retail position by Eric Tarral, said travel-retail executives could take a cue from the service-orientation of certain restaurants and hotels. However, he bullishly asserted, "there's no other place in the world with such time-poor and cash-rich people" and lauded the channel for its steady air-traffic growth of 6 percent to

7 percent annually.

He noted during his two-and-a-half-year tenure in the channel that a big development was the shift from a competition between travel retail and local markets to the two working in sync. Boinay said most recently that, for the launch of Diesel Fuel for Life fragrances, advertising on the high street and in airports worked together to drive sales and increase customer reach overall.

Another source of possible inspiration for travel-retail executives is bookstores, in the view of Hartwig Langer, global president of P&G Prestige Products.

"The shopping experience for fragrance leaves a lot to be desired," said Carolyn Tastad, vice president of global prestige products, market development organizations, who added that P&G is conducting a study on the retail situation.

The company's 15-year-old prestige fragrance division has been growing at a high-single-digit, low-double-digit clip. According to industry sources, P&G Prestige Products' business stands at $2.5 billion today compared with $40 million in 1992."We're one of the leading fragrance companies," said Langer, who added that among P&G's blockbuster brands is Dolce & Gabbana. D&G's recent launch of Light Blue Pour Homme has pushed both the men's and women's side of that brand into the top five globally.

But, despite the success, Langer is troubled by the fragmented state of the fragrance category, particularly the mushrooming prevalence of product introductions.

"It's an issue I think really confuses consumers," he said.

Langer maintains that it is important to "find a balance" between the new and the old. As an example, he pointed to the 12-year-old Hugo men's scent, which P&G recently redressed with a new graffiti-inscribed edition and promoted with TV advertising. The result was a 20 percent sales spurt.

Langer said such a move must have consumer relevance and be planned out two to three years in advance.

"It's more than just a promotion," he explained. "It should build the commercial equity of the brand."

Tastad added that it has to be a "consumer-driven idea."

Agreement to that point came from Art Spiro, president of Liz Claiborne Cosmetics. He said the worth of a product would win acceptance even for American celebrities in Europe. Spiro was marketing his Usher masterbrand as well as Juicy Couture for Men, which will bow in the spring.

"If you pigeonhole what a celebrity is, it still has to deliver an interesting scent with a great package," he said, adding that the celebrity is just part of the equation.

Philippe Benacin, chairman and chief executive officer of Inter Parfums SA, applauds the efficiency of the travel-retail channel.

"Each time you spend 1 euro, you get feedback," he said. That's against the backdrop of the entire fragrance category, which suffers from sluggish sales growth and waning profitability.

Benacin said the goal of the industry should be to increase the creativity of new fragrances, meaning with higher price points and cost of goods.

"The object is to give the consumer something special again," he said, adding, "The strategy is to be more creative and luxurious."La Prairie's managing director of travel retail worldwide, Maike Kiessling, believes the travel-retail channel has gained the necessary sophistication to sell truly luxurious products. The company's Pure Gold serum, priced at 420 euros, or $599 at current exchange, ranks fourth in Cathay Pacific's in-flight sales. La Prairie's Skin Caviar Luxe Eye Cream, selling at 205 euros, or $292, comes in first after being offered for three weeks onboard there, as well.

Coty Prestige also is bulking up its in-flight business, driven by the hot reception of Marc Jacobs' Daisy women's fragrance.

"It is about experiencing the joy of perfume once more," said Jean Mortier, senior vice president, commercial, for Coty Prestige, which has carved a specialty-store identity based on the powerful brands of Jacobs, Calvin Klein, Vera Wang and Chloé.

In travel retail, Coty Prestige has developed back walls and gondolas for its products to heighten awareness. The company also is conceiving newfangled marketing. For one of its Calvin Klein scents, it created a push media campaign using Bluetooth technology to summon consumers to the counter for a contest giving away iPods.

Kay Spanger, Gebr. Heinemann's member of the board for all product categories, said a key to successful travel retailing is a finely edited line-up of beauty products.

"We should take more care with secondary and tertiary lines, the width of the assortment," he said.

Spanger also maintains that beauty products created exclusively for travel retail must be genuine exclusives, rather than promotional artifice.

"Everyone talks about travel-retail exclusives. We still shouldn't cheat the consumer," he said. "We should give a real makeup palette or a real miniature coffret."

Shiseido has built its set business into a specialty. For instance, in DFS, about 30 percent of Shiseido's business comes from coffrets.

Among the stalwarts at the convention, there was at least one new face — Andrea Barbier, president of YSL Beauté, who previously had run L'Oréal's consumer products business in South America.

"I think the luxury market in travel retail is a major actor," he said. "It has got lots of potential."L'Oréal's Boinay agreed, adding, "The sky is the limit."

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