Travel Retail: Important but Difficult

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Though profits may have become smaller, travel retail still is an important sales channel for many cigarette companies – and one that helps curate a brand image, too.

By Thomas Schmid

Taiwan’s national tobacco company, Taiwan Tobacco & Liquor Corporation (TTL) may not be a member of the so-called “Big Five” but nonetheless enjoys considerable presence with its tobacco products, particularly in Asia. Travel retail outlets are a welcome opportunity for the company to increase brand awareness both at home and – perhaps even more importantly – outside of Taiwan.

”Duty-free sales and travel retail generate vital revenues for TTL not only abroad but also because we operate our own duty-free shops at Taiwan international airport and elsewhere in the country,” said Ms. Li-Ching Mao, vice president of TTL’s international business division.

As tobacco advertising is strictly banned in accordance with Taiwan’s Hazards Prevention Act, there is another benefit that travel retail outlets can offer, regardless of whether it’s in Taiwan or elsewhere. “Displaying [our] tobacco products in duty-free stores is a great way to build brand awareness among international travelers,” Mao said. “It’s a very crucial promotional tool for TTL.”

Strong in Asia… and perhaps soon beyond

Although TTL declined to divulge to Tobacco Asia the total annual revenue the company generates through travel retail, 90% of it is derived from sales across Asia, including Taiwan itself. Another 10% is contributed by travel retail outlets in the Middle East. Europe, the Americas, and other regions currently play practically no role, and with good reason: “Our cigarette brands, their flavors, and packaging designs have been custom-tailored to appeal to consumers in Taiwan and other Asian markets, and, therefore, that’s where our marketing focus lies,” Mao said.

However, she added that the company also noticed rising demand in the Middle East for some time, prompting TTL to develop some new brands and blends “for Middle Eastern consumers who may not be interested in our traditional brands and flavors.” Those bespoke brands apparently have in fact been holding up so well in terms of consumer acceptance that TTL is contemplating to perhaps explore further markets that so far haven’t been on the radar. “Our success in the Middle East has given us the confidence to penetrate other new markets in the upcoming future, such as Africa and North America,” Mao disclosed.

Clear age group preferences

The company’s long-standing flagship brand, LongLife, remains most popular within Taiwan but also is very well accepted in China and among overseas Chinese, according to Ms. Mao. “A famous Taiwanese pop singer even wrote a song about LongLife, which of course was fantastic brand PR for us,” she said. But while LongLife is the brand of choice among older smokers, the younger generation prefers “funkier” TTL brands such as 520 (perhaps due to its cute heart-shaped filter tip) or cantaloupe-flavored Mars. According to Mao, this customer breakdown by age group also is reflected in the company’s travel retail turnovers.

“Our research has clearly shown that travel retail customers don’t change their smoking habits or brand preferences just by seeing a price promotion for another product. They tend to stick to their preferred brand… unless the tobacco product they purchase is not for themselves but a gift for a friend or acquaintance,” Mao elaborated.

Travel retail will grow, but the pace is slow

A majority of travelers are routinely shopping at travel retail outlets because of the perceived price savings due to tax exemption. TTL anticipates that this trend is going to persist and even increase “as more and more people travel frequently, in the course visiting stores and shops not only at international airports but also other travel retail locations such as ports and train stations.” Mao added that, for this reason, “travel retail will become an increasingly important sales channel” for the company.

But she also hinted at the fact that customs limits put a certain cap on the amount of product an individual traveler can import legally without having to pay up for the applicable taxes. “For instance, as in most nations, travelers can bring a maximum of 200 cigarettes into Taiwan duty-free.” And that limit inevitably created competition between different brands and their manufacturers. “The buyer must decide whether they would rather buy a carton of LongLife or a carton of another competing brand. They cannot bring in both,” Mao pointed out. “Therefore I’d say, yes, travel retail sales keep growing, but the pace is very slow.”

Shelf space hard to come by and defend

Another issue is that according to Ms. Mao the “cost of doing business at an airport or any other travel retailer is considerably higher than it is in the city.” Operators of duty-free shops not only calculate higher profit margins into their sales prices but also are requesting “exclusive” (read: “greatly discounted”) deals from suppliers such as TTL and, in addition, set tight delivery deadlines.

“These arrangements may cause us losses,” said Mao, “but they are losses that we are willing to take for marketing and branding reasons.” Furthermore, when compared with other sales channels, it was much more difficult to enter the travel retail sector because shelf space is very limited and had to be contested by multiple suppliers through extremely competitive bids. “Travel retail operators aim at generating maximum revenues and very high profits, newcomers rarely being able to meet the strict demands,” Mao said. ”But as a state-run company and icon of Taiwanese culture, TTL remains committed to invest in this sales channel.”

“Made in Germany” at affordable prices

Moving half-way around the globe from Taiwan to Germany, we find, in the picturesque northern city of Lübeck, one of Europe’s oldest tobacco companies. Celebrating its 250th anniversary this year, Joh. Wilh. von Eicken GmbH has so far successfully resisted all buy-out attempts by the big multinationals, and indeed today is Germany’s last remaining independent cigarette manufacturer of any size worth mentioning.

Just as for TTL, travel retail likewise is a very important sales channel for family-owned Von Eicken. The company regards it as “a platform that connects global consumers with our international brands,” according to Peter Witzke, the firm’s head of export. “We follow the strategy to offer high-quality products ‘Made in Germany’ at affordable prices, which is an approach valued by a growing number of consumers around the world.”

Staying put while others falter

Von Eicken currently generates approximately 12% of its total annual turnover revenue from travel retail; and the trend is growing. “We see strong developments in Asia and Russia, as well as increasing demand pretty much everywhere in Europe,” Witzke revealed. While he believed that, generally speaking, the role of “Big Tobacco” in the global travel retail sector was gradually waning, he said there definitely still were opportunities for Von Eicken.

In an earlier email correspondence with Tobacco Asia, Witzke had cited information received “from several travel retail operators” that the multinationals “have started losing attention in this sales channel since the launch of track-and-trace requirements in Europe [as part of TPD2], which has led to increasing complexity and administration for them.” On the other hand, “Von Eicken – as a small player – can still grow [in travel retail] through expanding its distribution and launching new products,” he asserted. “We do provide valuable solutions with a wide range of track-and-trace compliant products that fulfill consumer needs in travel retail.”

Bespoke products for everyone

The company, he continued, also pursued strategies aimed at different consumer groups. Its posh filtered cigar brand, Chapman, for example, is positioned as “an exclusive niche product using top-quality flavored tobaccos and a distinctive pack design with a lot of attention to detail.” The brand, Witzke said, had proven popular with “both genders in the Russian Federation and also in multiple Asian countries.”

He added that Chapman was, in fact, the fastest-growing brand in the company’s product portfolio. Meanwhile, Von Eicken’s classic cigarette brand, Tradition, is adorned with “a shiny golden tipping paper ring” and features premium virginia tobacco, making it “highly appreciated among quality-seeking smokers in the Middle East and Asia, as well as Latin America.” Furthermore, especially female smokers both in Russia and across Asia like “the attractive pack and pleasant flavor of Allure Superslims.” And last but not least, Von Eicken’s travel retail top seller in Europe is Burton, a high-quality, value-for-money American blend product. “And it presently even makes further inroads east into Asia,” Witzke claimed.

The best place to reach traveling consumers

As a sales channel, Witzke opined, travel retail was “the best place to connect [our] international brands to global traveling consumers seeking high-quality products at affordable prices.” But Witzke also concurred with what TTL had pointed out, namely that shelf space is limited, thus hotly contested. “And there is the price factor to consider. Not every manufacturer is prepared to pay the high cost for furniture and shelf space,” Witzke said.