August 10, 2006

Airline security changes may hurt luxury, drinks

By Jessica Wohl

CHICAGO (Reuters) - Sales of luxury goods could decline if
travelers cancel trips or cannot buy items such as liquor at
duty-free shops due to new travel regulations put into effect
on Thursday, industry watchers said.

But U.S. retailers could actually benefit if consumers who
travel less use their vacation money to shop at home.

New rules such as a ban on liquids, including drinks, on
U.S. commercial flights went into effect after British police
foiled a plot to blow up aircraft mid-flight between Britain
and the United States.

Airport duty-free shops in New York, Dallas and Chicago
quickly stopped selling liquor and perfume, while in-flight
duty free sales continued. In the past, manufacturers like
Estee Lauder Cos. Inc. have seen their earnings hurt when sales
at duty-free stores declined, though shares of the cosmetics
and perfume maker rose on Thursday.

"Airports are just trying to sync their procedures right
now," said Michael Payne, executive director of The
International Association of Airport Duty Free Stores, a trade
association. "Right now they are not allowing any liquids on
board airplanes."

Trash cans in Chicago's O'Hare International Airport
quickly filled with toothpaste, shampoo and lotions as
passengers ditched liquid items from carry-on luggage to get
through tight security on Thursday morning.

Overall air travel declined following the September 11,
2001 attacks on the United States, and then travel in Asia and
Canada was impacted by the SARS outbreak in 2002 and 2003.


Britt Beemer, head of America's Research Group, which
surveys consumers, said the ultimate impact on the retail
sector remains to be seen, and that the impact would have been
greater if the plan had not been thwarted.

"If it's not the big news story in two days, I don't think
it's going to be a big deal," said Beemer, speaking from an
airplane via cell phone after having items such as shampoo and
toothpaste confiscated before boarding a flight. "But if it is
a big story in two days, it may have some impact."

Retail industry consultant Kurt Barnard said upscale
retailers like Coach Inc., Neiman-Marcus and Saks Inc. might
see some small disruption to their business, but predicted any
disruption would be fleeting.

"The worst that can happen to them is a short-term impact,
which is likely to fade from the top of the mind very fast," he


Several European luxury goods stocks fell on Thursday.

"When there are terror threats luxury goods firms always
fall," said Vanessa Laurence, an analyst with Oddo Securities
in Paris.

LVMH shares fell 2.3 percent to 75.20 euros, Christian Dior
fell 2 percent to 76.25 euros and PPR, owner of Gucci Group,
slipped 1.1 percent to 100.6 euros.

"One of LVMH's biggest retail businesses is duty free so
they are obviously impacted," said a London-based luxury goods
analyst, who asked not to be named. "The whole sector really
hurts from disruption to travel because it is estimated that
about 40 percent of all luxury goods sales are related to

Liquor, perfume and cosmetics comprise about 50 percent of
sales in a duty-free store, Payne said. Worldwide, duty free is
about a $26 billion industry, with about $7 billion of those
sales in the United States, based on data from 2004. In-flight
sales are not a big percentage of overall duty-free sales.

"Anything that affects travel will affect duty free," said
Steve Dixon, manager of the Global Beverage Fund at Arnhold &
S. Bleichroeder, which owns shares of Fortune Brands Inc.,
whose spirits include Jim Beam Bourbon. "Duty free is a
meaningful amount of (spirit) company sales."

Retail and consumer industry watchers said the impact of
the current situation will depend on how long the U.S. ban on
liquids lasts. Retailers could actually benefit, one said.

"I see people going to the malls instead of traveling and
using their discretionary dollars on merchandise, or sitting at
home on line," said Tom Leritz, fund manager for Argent Capital
Management, which oversees $650 million. "It could be a
positive for retailers rather than a negative. I would argue
it's not a negative for retailers, as long as it doesn't affect

(With reporting by Brad Dorfman and Lisa Haarlander in
Chicago, Anupama Chandrasekaran, Chelsea Emery and Martinne
Geller in New York and Nicholas Antonovics in Paris)