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Whether you plan to stock up on your favorite luxury goods ahead of time, or simply can't resist your favorite bottle of scotch for a discount, the duty-free shops at airports seem to lure each of us in at one time or another.
As global travel increases over the next decade, the luxury companies in travel retail should enjoy a nice boost in that sector. One of the biggest opportunities for growth, though, lies with cosmetics maker Estee Lauder (NYSE: EL ) .
Why travel retail works
Estee Lauder (and many other luxury goods companies) uses travel retail to introduce itself to new customers in new markets. It's a particularly easy way to attract both high-end consumers who already love the brands, as well as middle-class consumers willing to try something new because, hey, they're on vacation -- why not splurge for the good stuff?
A great example is Diageo's (NYSE: DEO ) Johnnie Walker launch earlier this year in select travel retail stores. The exclusive new "Double Black" blend did exceedingly well, beating volume targets by 66%.
Why it's important to watch
According to a recent study done by the World Travel and Tourism Council, the total contribution of the travel and tourism industry to global GDP is expected to grow 4% each year by 2021. That's pretty significant, especially when you consider that the industry already represents 9% of global GDP.
The new middle class in emerging markets like China is expected to significantly fuel this rise. According to another study done by the Hilton Group and the School of Oriental and African Studies, the number of outbound Chinese tourists rose 20% in 2010 and will likely continue growing.
That means millions of new travelers will be passing through airports, ready and willing to spend their newly earned discretionary funds -- tax-free! That's definitely worth noting for Coach (NYSE: COH ) , whose international division is dominated by its travel retail sales.
Beauty isn't always pain
Estee Lauder estimates that 30% to 40% of travelers today browse in duty-free shops, but only about 10% to 15% are actually making purchases. Its new three-year strategy (outlined in the 10-K) aims to target those window shoppers with a strong brand portfolio and new interactive touches through mobile and social media.
With the company's new marketing focus, I expect the face of the duty-free shop will be undergoing a much-needed makeover, becoming more interactive to entice new customers, with Estee Lauder leading the way. The company has already started revamping its brands' websites and mobile apps, and implementing new interactive features at its department store counters. Extending that to its duty-free presence seems like the next logical step.
Travel retail already accounts for 10% of Estee Lauder's total net sales. Given the company's $9.2 billion in annual sales, this means almost a billion dollars of revenue flows are coming from this distribution channel that I expect will do nothing but grow.
Add to that the company's 13% annual sales growth in 2011, and you can see why it's at the top of my watchlist. I'm heading over to CAPS right now (our free online stock rating service) to give it a thumbs-up, and if sales numbers continue to rise in the company's travel retail sector, I'll be buying.
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