By and  on October 27, 2006

CANNES, France — Beauty's travel-retail business is flying high, with the Asia-Pacific region showing 19.4 percent gains last year and the global business appearing to be on track to yield an 8 percent to 9 percent increase in 2006, despite the gnarling complications from ongoing terrorist threats.

The industry's manufacturers attending the five-day Tax Free World Association trade show here, which ends today, seemed determined to carry on. They continue growing their brands in airports and in-flight with new ideas for merchandising techniques and ways to cater to consumers.

Vincent Boinay, L'Oréal's managing director of travel-retail worldwide, has been at the forefront of a relatively new movement to put more stress on brand-building and customer relations than on discounting. That effort is paying off, and the rewards should be reflected in this year's results for the French beauty giant, said Boinay, without breaking out specifics. However, he indicated L'Oréal is "trending above the market," which he estimates will grow 8 percent or 8.5 percent for beauty this year.

The travel-retail category stays on a roll. It is expected to register gains of 9.2 percent in 2006 — the best of any of the channels' core categories, according to Yngve Bia, president of Swedish industry tracking firm Generation. Last year, the global travel-retail business finished at $7.248 billion, a 12.3 percent on-year increase. By zone, the Asia-Pacific region clocked 19.6 percent growth; the Americas, 15.5 percent; Europe, 6 percent, and the rest of the world, 13 percent.

For some beauty firms, all the zones are performing. "There is a good balance between the regions of the world," said L'Oréal's Boinay, adding that, for instance, "Europe is in better shape than it was two to three years ago." Further, he cited his company's dynamic fragrance business. "It is on a par with cosmetics," he said. That's a key factor, since fragrance makes up 60 percent of the volume in travel-retail's beauty business and 65 percent in the local European markets.

However, Boinay noted that the travel-retail industry was seriously affected for two months by the Aug. 10 terrorism scare in the U.K. He estimated that the company lost 1.5 percent off its growth for the year.Other manufacturers reported that business fell off between 35 percent and 65 percent during the week following the scare. One manufacturer said his business was surging through Aug. 9, then the bottom dropped out, and his company lost $4 million to $5 million in sales.

"Business is back to normal, but we still have some [problems] to fix," Boinay said, alluding to the initiation of new airport security legislation on Nov. 6, which will limit the carry-on of liquids to 100-ml. containers sealed in transparent plastic bags.

At the Estée Lauder Cos., Cedric Prouvé, the group president of Lauder responsible for the company's travel-retail business, views the security shocks as a passing crisis that the very resilient travel-retail industry is capable of eventually overcoming. Speaking of the sharp drop in business in August, he said, "It came back in a week. It's a very reactive channel. We do not believe this will have a material impact on our fiscal year."

Nicholas Ratut, executive vice president and chief operating officer of Zirh International Corp., said, "You deal with it. You move on and find a solution. We will have to live with terrorism for the foreseeable future. I think it is less of an atomic bomb than abolition was," referring to the abolition of intra-European Union duty free in 1999. "You still have millions of passengers in airports," he added.

A detailed explanation of the solution that the industry has worked out with the European Commission thus far was made in a Wednesday-morning workshop, led by Frank O'Connell, president of the European Travel Retail Council. He began by declaring that the issue at hand meant "a very significant change for the industry and a very complicated change." He then painstakingly outlined the complex compromise regulations that permit shoppers to buy as usual, provided their purchases are sealed and notated in a clear plastic bag at a travel-retail shop and then carried onto the plane. The regulations are complicated due to the differing layouts of the airports and where stores are found within them.

Also, strategies had to be hammered out for numerous kinds of travel habits and concerning liquids brought on aircraft originating from many locations outside of the European Union or U.S. that would have to be confiscated.O'Connell warned that the new measures could mean the regulation of the business. "We could be subject to audits," he said, stressing retailers and operators have to adhere strictly to the rules to demonstrate to the EU officials that the industry is serious about security. He also took umbrage with criticism that the industry was caught napping as the crisis ballooned.

"The industry performed brilliantly," he said. However, some industry executives speculate the challenges caused by security concerns might have dampened enthusiasm. If the mood was dented by all this, it didn't show up in the preliminary attendance figures, however. By the end of the third day, the number of visitors had increased 7 percent over last year to 5,064 attendees.

One big plus, however, was the arrival on Thursday of L'Oréal's new chief executive officer Jean-Paul Agon, who was visiting the trade show for the first time.

L'Oréal's Boinay, like others in the industry, tends to see the industry's current dilemma as an opportunity rather than a threat. Among other brainstorming ideas, he said his company is considering producing small-sized travel kits for business day-trippers.

If anything, Boinay is prone to new thinking. His response to the security crisis fits in with his overall disposition of wanting to capture new business by dealing with passengers under his "Three S" regimen, which consists of "surprise," "seduce" and "serve." Boinay continues on a mission to woo passengers who are not already patronizing his brands in airports by setting up information kiosks in airports. Here, employees engage customers and spell out the attraction of the products. In turn, they also find out what consumers are thinking.

L'Oréal opened its first Kiehl's airport shop in Hong Kong in early June. Measuring about 300 square feet, the new installation ranks among Kiehl's top five international stores in the world, said Boinay.

He explained only 25 percent to 35 percent of passengers buy merchandise in travel-retail shops. "It's a captive audience — they are all in the airport. Why aren't they shopping?" he said. "We have to start thinking about business from another angle."

Many beauty manufacturers say airport operators have been good at tailoring their retail concepts to suit travelers' needs. "I think travel retail is in the process of refining the in-store experience," said Carolyn Tastad, global prestige products, market development operations at P&G Prestige & Professional. "How do you translate what the consumer wants in store into an environment? We're seeing a lot of discussion on that. People are trying to make that experience unique."Hans Wohmann, P&G Prestige & Professional's director Asia-Pacific and global travel retail, said that some 20 years ago, airport operators used to look to high street shops to learn about brand-building. Now, the reverse is largely true.

"There have been improvements in the layout of stores, how they reinvent the retail story," continued Isabelle Herbreteau, the newly minted president of Clarins France and the former head of the company's travel-retail division. "In a way, they are a lot more proactive than local retailers, at least in Europe. In duty free and travel retail, they are able to reinvent themselves every three to four years. The time of superpromotions and superdiscounts are over."

"I always call it an echo chamber," continued Lauder's Prouvé, referring to the travel-retail market. "We can tell a lot about how things do there. It amplifies the trends."

Further, the segment has by no means peaked, he said. "The travel-retail market is one of the fastest-growing in our industry," he said. "I don't think we've seen anywhere near the top of that market." Prouvé added that the Dubai airport does $500 million in travel-retail sales yearly and can easily double that figure.

Prouvé views the travel business as a matrix with five axes: brand diversification, product variety, geographic balance, channel differentiation and infrastructure implementation.

When it comes to emerging markets, such as Brazil and India, Prouvé's game plan is to build an infrastructure capable of handling a business two to three times larger than the present reality, while waiting for the retail network to develop. "In India, we want to build brand equity as best we can," he said. "It's about explaining the brand to the consumers." He noted with satisfaction how MAC stunned the industry by opening a store in Mumbai in June 2005.

Prouvé was about to take a trip to Turkey, where Lauder has established an affiliate. He said the market is developing rapidly there, with the advent of Harvey Nichols in Istanbul. And Prouvé, along with other industry executives, lauded Russia's development in the beauty business. He said a whole range of markets is emerging, as reflected in their relationship with the World Trade Organization (WTO). "China is in the WTO, India is about to be in the WTO, and Russia is trying to be the WTO," he said.Lauder has reentered Argentina, which the company had pulled out of after the last economic collapse. Prouvé said Lauder's Argentinean market is being operated out of Chile with an eye on the bottom line. He sees Latin America as a great opportunity, owing partly to Lauder's lack of penetration there. "The Monroe Doctrine doesn't apply to our company," he jested.

Like other companies, Coty Inc.'s Lancaster brand has opened within the past two weeks its first counters in Shanghai and Beijing, following its debut in Singapore. Michele Scannavini, president of Coty Prestige worldwide, said, "There is enormous potential in China. The Chinese are using much more fragrance than the Japanese. Traditional Japanese don't like anything that invades their private sphere. China does not have this cultural barrier. Today, sales of fragrance in China are equal to that in Japan."

Asia is also helping drive L'Occitane's travel-retail business, which currently makes up about 5 percent of the firm's total sales. "It is the fastest-growing area for us," said Benjamin Beaufils, regional director for L'Occitane.

Shiseido is also making inroads in the East. With extensions in its travel-retail distribution in Bangkok and Singapore and expectations of entering a newly constructed Terminal 2 in Hong Kong at the end of this year, Shiseido executives are highly optimistic. They do not break out figures, but it is known that the company's fledgling travel-retail business has been growing rapidly since its founding in 2001. Industry sources estimate the firm is booking about $45 million of sales in the channel this year.

Ariel Gentzbourger, travel- retail director of Shiseido, described some new retail concepts in downtown locations in Hong Kong and Macau. "That's the future," she said.

Taking the long view, most travel-retail executives remain bullish on the business that has not dimmed by the fallout of the Aug. 10 bomb scare. Lauder's Prouvé expressed a belief that the travel-retail business is so important, it is inconceivable that airport retailers and manufacturers won't join together to find a solution to the security riddle. "No one is prepared to see that revenue go away," he said.

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