Byline: Soren Larson / With contributions from Janet Ozzard, Paris

NEW YORK — The hourglass is draining fast on the European duty-free business.
The industry is facing the final countdown to the planned abolition of intra-European Union duty-free sales in June 1999, and retailers and vendors are scrambling for last-minute strategies that will allow them to maintain their businesses beyond the millennium.
“Say you’re set up in an airport and all of a sudden the duty-free privileges have been removed,” surmised Peter Midwood, executive vice president of Elizabeth Arden’s international business. “This is going to lead some of these retailers to try other ways to attract the business they’ve always had. They’re not just going to walk away. In the next one to two years, a lot of things will change dramatically.”
The possible demise of the European duty-free industry will no doubt be a hot topic at the Tax Free World Exhibition 1997, to be held in Cannes, France, from Oct. 20-24.
The Tax Free World Association — the industry group that runs the exhibition — is lobbying heavily to either postpone or cancel the proposed dismantling. At stake, according to the association, is over 20 percent of worldwide duty and tax-free sales.
However, according to a sampling of vendors and retailers, most of whom will be in Cannes, hopes are not high that anything can be accomplished. As a result, alternative plans are being formulated.
“It looks to me like there is not going to be a reprieve,” said Midwood. “Of course we’d all like there to be, because we’re comfortable in doing what we know how to do.”
Abigail Rowland, retail communications manager for BAA PLC, which owns and operates 11 air terminals in the U.K. as well the Pittsburgh and Indianapolis airports, said she doesn’t expect the campaign to be easy.
She added, though, that the fight is not yet over, despite skepticism from Mario Monti, the European single-market commissioner.
“You were given seven-and-a-half years to prepare for the end of duty-free sales to travelers within the single market,” Monti told lobbyists in Brussels at the end of September, in remarks reported widely in Europe. “It’s high time you used this time constructively instead of trying to turn back the clock.”
But BAA’s Rowland said she’s not deterred.
“It’s not his decision,” she said. “It’s up to the EU. What we need is the 15 finance ministers to overturn or not oppose the vote.” Meanwhile, the industry is already changing. Suppliers and stores are shifting their focus from the duty-free business to a more enveloping, generalized travel retailing standpoint.
“We’ve always run a very basic business in duty-free. We were not promotional; we sold basic product,” said Sandie Heppenheimer, senior vice president and general manager of the international export division at Calvin Klein Cosmetics. “In duty-free, price was the primary incentive, and we always focused on in-store consistency.
“Now, with travel retailing, where pricing is not the primary attraction, our aim is to tailor specific programs for the different categories of business,” Heppenheimer added, calling it “an evolution.”
“Today, the only way duty-free is going to expand is to recruit new consumers, and to do that we need to have a different price range,” said Gil Leurent, who directs L’Oreal’s travel and duty-free division. “More and more people are traveling, and they don’t all have a lot of money. You also have to diversify your offering.”
One possible survival route is for duty-free retailers to convert their businesses into standard, domestic outlets. DFS Group, the world’s largest duty-free retailer, already has a huge presence in downtown districts throughout Asia and has several shops in U.S. cities.
“It will be interesting to see what happens when duty-free retailers start showing up in nontraditional environments. This is a sensitive issue, but the borders are going to be pushed out,” said Arden’s Midwood, who noted that in these situations, keeping control of pricing is a major issue.
For BAA, other areas of activity include developing its newest concept — beauty centers in terminals. There are three now in London — two in Heathrow and one in Gatwick — where travelers can stop for such treatments as haircuts or manicures.
“Those have been very popular and we will definitely develop them,” said Rowland.
The wave of consolidation that has splashed over both the department store and mass markets has touched the duty-free industry as well. Most striking, of course, was January’s $2.47 billion purchase of DFS by French luxury goods conglomerate LVMH Moet Hennessey Louis Vuitton.
In addition, BAA bought Duty Free International for $674 million, creating the second-largest duty-free retailer — replacing Allders International, which in turn had been bought in 1996 by the Swiss Air-owned Nuance International.
These larger retailers may be able to squeeze more concessions out of their vendors, and in the DFS case, ownership by a competing manufacturer may lead to rocky relationships, some suppliers fear.
Others are determined not to be negatively affected by the mergers and acquisitions.
“We’re not as concerned about who owns whom — we’re worried about whether we can form strong alliances,” said Heppenheimer of Calvin Klein. “We need to have strong store activities and a consistent image. What we’re concerned about is execution. Every retailer we work with has to understand and address our mission statement.”
DFS itself is going to be minimally affected by the European goings-on, noted Myron Ullman, chairman of DFS, because its main markets are elsewhere, primarily in Asia.
“Some of the people who do have a large presence in Europe will likely be coming to our areas,” he said. “They’re welcome to try.”
For Ullman, the pressure is coming from different sources. Concessions paid by stores to airports, he said, are expecting “too much” from the retailers.
“It becomes not profitable,” he said. “If it’s not profitable in the long run, it’s just not going to work.”
DFS is focusing on international travelers, he said, with an emphasis on large, downtown units. The company will maintain a strategy of upscale assortments coupled with “a proper amount of service.” DFS has committed $250 million to building 12 more gallerias in the Asia/Pacific region, he noted.
The Asian market, meanwhile, will continue to grow, as economies develop and consumers become more sophisticated.
“The long-term trend in Asia will be increased growth, at a higher rate than the rest of the world,” said Ullman.
“This business was started many years ago as an impulse business,” he continued. “What it boiled down to was having the best brands at the lowest prices. But I don’t think you can sell by price alone anymore. It’s about value, not just price. Service is a big differentiator for us.”
While the future is uncertain, beauty purveyors are continuing to enjoy a robust worldwide duty-free business and continue to pump more energy into duty-free marketing.
Overall duty-free sales topped $21 billion in 1996, up from $20.5 billion the prior year. Of that total, fragrances and cosmetics generated $4.6 billion, or 22 percent, an increase of $85 million.
In addition, the World Tourism Council reported a 5 percent increase in international tourism, meaning that the consumer base continues to grow.
Among the new wrinkles in duty-free and travel retail outlets:
Revlon has created a manicure cart for people on the go. For around $10, air travelers who have about 10 minutes to spare can get their nails done.
“The price of the manicure is redeemable for Revlon products,” said Revlon’s Maureen Case. “The universe for such a cart is limitless. We hope to be able to bring it to the gate, or where the airport traffic is.” The 4-foot-by-3-foot foldable trolley will be tested in U.S. airports later this year.
Clinique has launched a two-week educational event in duty-free outlets called Minimum Daily Requirements. Trained sales staffers explain to customers how to get “maximum results with minimum fuss.” The shops in the U.K.’s Gatwick and Heathrow Airports recently staged the two-week event, which has also been introduced in Singapore, Malaysia, Spain and Hong Kong.
L’Oreal is orienting more toward pre-packs and exclusive products, according to Leurent. The company will also introduce Natural Sea Beauty, a line of 19 face and body treatments, at Cannes. It will also have some new eye and nail products and gift sets for the Harley Davidson fragrance.
Leurent said he is introducing a new display system that has a more sophisticated look and allows for more products to be displayed.
Calvin Klein Cosmetics is marketing full-size fragrances attached to travel-size versions. The set was created with a self-service environment in mind, and purchasers can keep it together or use the travel-size as a gift, according to the company. The firm has also placed Klein’s advertising images on the packaging.
Another hot spot is pre-ordering, in which orders can be placed when picking up a plane ticket or boarding for a later pickup.
“The pre-order system is a big part of the future of the business,” said Peggy Elsrode, a vice president in the international export division at Calvin Klein Cosmetics. “It allows for a bigger product — you don’t have the space constraints because it doesn’t have to fit on the [in-flight] cart.”
Klein has also created a coaster that can be attached to the in-flight product cart to promote new launches.
“It allows them to be more flexible and to step out of the brochure,” said Elsrode.

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