The $9.48bn duty-free liquor market is staging a significant recovery this year after the damaging Covid period, but the pace of that rebound is not as fast or as even as many in the industry were hoping. The Chinese outbound travel market’s recovery has been sluggish since the country reopened its international borders at the start of 2023. High global inflation and the impact of the war in Ukraine are other pressing concerns for a business notoriously susceptible to short-term external shocks.

The latest figures from travel retail research firm M1nd-set and the Duty Free World Council illustrate the issue well. In Q2 2023, global international passenger departures were at 87% of their pre-pandemic level in Q2 2019. The Middle East and Africa outperformed other regions with departures at 103%, the former being the beneficiary of many long-haul airlines having to reroute flights via Middle Eastern hubs that would previously have flown over Russian airspace before the war in Ukraine.

The continents of Europe (94%), Latin America (97%) and North America (92%) all performed well over the same period but Asia Pacific – the traditional engine room for high-end duty – only managed 64%. China was the main culprit here. Outbound international travel from Asia’s biggest country has been slow to recover in 2023 for a variety of reasons that include high ticket prices, delays in processing travel visas, the country’s sluggish economy and geopolitical tensions.

Chinese rebound will take time

Many Chinese tourists are also opting to vacation closer to home. China’s domestic tourism market is expected to rebound to 90% of its pre-pandemic level in 2023. On the tourist island of Hainan, China’s most southerly island province, duty free sales totalled $4.01bn in the first seven months of the year, according to the travel retail media title The Moodie Davitt Report, a year-on-year increase of around 20%.

Despite the slower-than-expected recovery of the outbound Chinese travel market, many in the industry expect this key duty free shopper group to pick up later in the year and into 2024. According to recent research by business intelligence company Morning Consult, 52% of Chinese are interested in taking a trip abroad, up 24 points versus 2022. The Middle East and North Africa are high on their wish list but interest in visiting North America has dwindled.

“We need the Chinese to start travelling again,” says Luke Maga, the newly appointed managing director of Global Travel Retail at Scotch whisky producer Loch Lomond Group, the owner of whiskies such as Loch Lomond, Glen Scotia and Littlemill. “The expectation was there that we could just switch the button back on, but I don’t think the infrastructure was enough to be able to support the demand.

“I think Hainan is still a large opportunity and a very progressive market,” he adds. “But I think we will see a lot more Chinese overseas travel start to pick up into Chinese New Year and we may even see a slight spike as we come into the mid-autumn Chinese [Moon] Festival, which is not far away.”

Indian market shows promise

Amid the discussions over China’s misfortunes, it’s easy to forget that there is another very promising duty free drinks market in the making over the border in India. According to a recent report by Mordor Intelligence, the Indian travel retail market is expected to grow from over $1.67bn this year to around $4.44bn by 2028, at a very healthy CAGR of 21.59%. The business is unusual for travel retail in that it is dominated by returning ex-pat nationals who buy in arrivals duty free stores. At Mumbai Duty Free, located in Mumbai’s Chhatrapati Shivaji International Airport T2, for instance, liquor plays a pivotal role, accounting for 62% of the retailer’s overall sales.

Amit Butani, the operator’s vice president of marketing & strategic partnerships, says liquor sales at its 21 stores at the airport have recovered well from Covid this year but have still not reached pre-pandemic levels. “Encouragingly, the liquor category demonstrated significant double-digit growth in the first half of 2023, showcasing a promising rebound from the pandemic's impact.”

Scotch whisky accounts for a dominant 42% of Mumbai Duty Free’s liquor sales and the retailer stocks an impressive selection of more than 250 single malts– recent additions include the rare and exclusive Bowmore 1965, the Macallan M Decanter, and Ardbeg Smoketrails Manzanilla Edition.

“The Scotch Whiskey market is witnessing a shift, with a growing appreciation for single malts and travel retail exclusives,” says Butani. “Our customer base is dynamic, encompassing an emerging Gen Z demographic showing keen interest in wines and exclusive variants. This trend complements the evolving preferences of a distinguished social elite class.”

Premiumisation powers on despite inflation

Fears that the steepest inflationary spiral in history would derail the premiumisation trend in travel retail spirits appear to be unfounded. Despite the squeeze on travellers’ discretionary incomes, sales of premium-plus spirits in the channel have held up well in many markets. Moreover, in addition to a slew of the usual high-end malt whisky and cognac releases, traditionally underdeveloped categories such as rum and tequila are having success in tempting travellers to trade up to higher-priced lines.

In August, for instance, Diageo Global Travel opened a luxury pop-up activation for luxury tequila Don Julio 1942 at London Heathrow Terminal 5 in partnership with World Duty Free. Diageo turned to the talents of renowned DJ Kayper to create an Iconic Sounds of Summer playlist that travellers could access via a QR code at the activation to enjoy on their onward journey to their holiday destination. Diageo also collaborated with travel and lifestyle creator Ashlee Major-Moss to produce a bespoke online summer guide featuring recommended DJ sets, restaurant choices and selfie locations.

Big brands continue to open standalone stores

Another sign that travel retail may be impervious to the cost of living crisis is the number of standalone boutiques dedicated to premium-plus brands opening at airports this year. In May, for instance, Moët Hennessy Travel Retail unveiled its first-ever Hennessy boutique in the Americas at Jamaica’s Sangster international airport in partnership with Dufry. The 56sq m store featured a tasting bar and a selection of travel retail exclusive expressions, including James Hennessy, Hennessy XXO and Hennessy Pure White, which is exclusively distributed in the Caribbean and Mexico.

Similarly upmarket, in August, Pernod Ricard Global Travel Retail opened an ultra-prestige Royal Salute pop-up at Sydney airport with duty free concessionaire Gebr Heinemann. Among the rare, collectable expressions showcased there were the Royal Salute Coronation of King Charles III, a blend released to mark the recent coronation of King Charles III; Royal Salute Time Series II, a 51-year-old expression paying tribute to the passing of time; and Royal Salute House of Quinn by Richard Quinn, a collaboration between Royal Salute and fashion designer Richard Quinn.

“Meticulous planning has gone into creating the Royal Salute whisky zone– a space which features more than A$250,000-worth of Royal Salute for shoppers to discover,” said Pernod Ricard Pacific Global Travel Retail regional director Becky Holliday in a release, announcing the opening of the pop-up. “We feel incredibly privileged to offer such rare whiskies, particularly given the continued demand we see for collectability and luxury in the ultra-premium whisky category.”

We can expect more of these luxury activations in the future. According to the IWSR Drinks Market Analysis, the ultra-prestige spirits category in duty free – that is, products priced at $5,000 and above – grew at a CAGR of 17.3% between 2014 and 2021 and the IWSR believes this top product tier is set to continue its growth curve in the post-pandemic period.

Sustainability importance grows

Premiumisation may be thriving in travel retail but the ostentatious era of luxury spirits and fine wine packaging which was once synonymous with the channel is now increasingly being questioned by the industry as the need to be more sustainable becomes ever more apparent. Not only is this the right call for the planet, it also chimes with the sentiments of many Millennial and Gen Z travellers. According to research by M1nd-set, 35% of travellers are now buying more sustainable and ethically-produced products than they were before.

Diageo Global Travel is a prime mover in this area, removing secondary packaging for many of its Johnnie Walker expressions in travel retail. The initiative, which is part of Diageo’s broader Society 2030 Spirit of Progress Plan, has already saved more than 183 million cardboard boxes. Meanwhile, in the wine world, Accolade Wines has launched its Wise Wolf range of French wines in 100% post-consumer recycled (PCR) glass bottles. The wines feature labels made entirely from PCR paper; closures made from 100% recycled plastic; and outer cases made from 100% recycled paper pulp.

Operators are trying to do their bit too. For instance, Gebr Heinemann now has a ‘future friendly’ purchasing policy that aims for sustainable products to account for 50% of the company’s group turnover by 2030.

Products sourced for Heinemann’s ‘future friendly’ in-store product range, for instance, now have to meet two out of five of the company’s sustainability criteria: plastic-free, made with recycled material, 100% vegan, fair production, or of organic origin.

The travel retail sector has substantial challenges to becoming more sustainable. The business mostly operates in highly regulated third-party environments such as airports and onboard ferries and airlines. It has little control over much of the emissions and waste created in these settings but in areas such as supply chain, product sourcing and packaging, travel retail is making great efforts to clean up its act.