China’s gains ‘instil confidence for industry rebound’

By Luke Barras-hill |

CDFG’s Haitang Bay shopping mall.

Duty free and travel retail leaders are unanimous that China’s impressive travel rebound offers distinct optimism for the future of the global industry as it charts a course to recovery.

Attendees to the first session of TFWA’s virtual ‘China Reborn’ conference (1-3 December) heard from TFWA President Alain Maingreaud, China Duty Free Group (CDFG) President Charles Chen, Lagardère Travel Retail North Asia CEO Eudes Fabre and Ant Group President of International Business Group Angel Zhao.

Entitled ‘Changing Market, Changing Consumer’, TFWA Managing Director John Rimmer offered some opening thoughts acknowledging the ‘untold damage’ caused by coronavirus (Covid-19) to the global industry this year.

Yet against this sombre backdrop, China’s domestic travel markets and duty paid and offshore duty free sectors continue to flourish as the country moves to support industries with a variety of economic stimulus packages.

CHINA ‘PRIME EXAMPLE OF ACHIEVEMENTS’

TFWA President Alain Maingreaud commented: “The extent to which our world has changed would have been unimaginable twelve months ago; the resulting impact of Covid-19 has been something we have all faced directly since March.

“China’s duty free and travel retail market is a prime example of what can be achieved when stakeholders proactively embrace change in a supportive and regulatory environment.”

Alain Maingreaud, President, TFWA addressed attendees on day one of TFWA China Reborn.

Although it seems like a long time ago, DF&TR finished on a positive note in 2019, according to Maingreaud.

Total sales grew by 9.9% to US$86.4 billion [Source: Generation Research], although that growth swiftly turned to decline this year. China was the first country to emerge from the slump and continues to spearhead the industry’s recovery efforts.

“Few predict a fast recovery following weakened demand for air travel in August and September,” warned Maingreaud, in doing so referencing IATA’s recent downward revision to its air passenger traffic guidelines to reflect a 66% slump this year versus 2019.

Chinese consumers accounted for approximately 40% of duty free product purchases globally in 2019. This is despite China’s duty free market accounting for a mere 8% slice of the global duty free business. Click to enlarge.

Maingreaud said the forecast is entirely plausible given airports’ international traffic fell by 64% in the first six months of 2020 year-on-year.

Notwithstanding this, new dynamics are emerging between retailers, brands and landlords as the traditional orthodoxies of doing business are reinvented, Maingreaud suggested.

The strength of China’s recovery has helped spark substantial sales from Chinese travellers to downtown and offshore duty free stores.

The surge in domestic tourism has supported footfall to these outlets, but the tripling in the the offshore duty free allowance to RMB 100,000/$14,063 this year and associated expansion of available categories to purchase, as reported extensively by TRBusiness, has played a ‘decisive role’ in buoying the market.

Competition has also increased through the awarding of three new competitive licences, including two on Hainan Island.

Charles Chen, President of CDFG described the radical pace of growth being witnessed in China’s duty free and travel retail market.

More than 1.7 million people visited Hainan’s duty free stores in the four months to October 31 (+59%), with sales reaching $1.71bn.

CDFG’s Haitang Bay Complex has been at the epicentre of that result and has harnessed strong digital elements to bring to life installations for brands such as Ray-Ban and Shiseido of late.

Virtual reality and livestreaming tools have broadened the reach of travel retail to customers on the ground, attendees heard.

Meanwhile, the tie-up between Alibaba and Dufry has afforded a huge gateway for brand development and magnified the opportunities therein.

However, Maingreaud stated: “We should not forget that bricks and mortar still has a role to play.”

 

During the national holiday and Mid-Autumn festival, the number of domestic tourists in China reached 637 million while domestic tourism revenue totalled $66.7bn, a year-on-year recovery rate of nearly 70%. Click to enlarge.

He continued that a blend of digital and physical would ‘probably be the formula for future TFWA events’ such as TFWA Asia Pacific scheduled to take place next year in Hainan.

“We are keeping an open mind as to the format of this event, taking into account the wishes of our members and the wider industry as well as conditions in the region as we make our plans,” said Maingreaud.

DOMESTIC PAX VOLUMES AT 98% IN Q3 

In an insightful address, CDFG President Charles Chen outlined his thoughts on the restart of China’s DF&TR industry.

He began by acknowledging the heavy blow dealt to global DF&TR as a result of Covid-19.

However, effective countermeasures instigated by China’s government have brought the pandemic under control and afforded a guarantee that the country’s DF&TR sector will continue to recover.

Chen pointed to China achieving an average annual growth rate of 8% in GDP over the past decade, with economic development boosting the income levels of residents.

Drawing on data from Bain & Company, Chen stated that in 2019 luxury goods purchased by Chinese consumers domestically and abroad totalled around €98.4 billion/$112.4bn, accounting for one third of total global luxury consumption. This proportion is tipped to increase to 50% by 2025.

In the same year, the sales volume of China’s duty free business reached RMB55 billion/US$7.9bn – a year-on-year increase of +39%.

Global duty free and travel retail sales had enjoyed a healthy 2019 before growth turned to decline in 2020.

Interestingly, Chinese consumers purchased about 40% of duty free products worldwide, despite China’s duty free market accounting for 8% of the global duty free business.

“This shows Chinese consumers have strong purchasing power and there is great potential for the future development of the China travel retail market,” said Chen.

Turning to Hainan, Chen said the tripling of the offshore duty free allowance on 1 July, among other measures, have ‘effectively promoted the return of tourist shopping and eased demand for the Chinese consumer for duty free consumption’.

He reminded webinar attendees that in the four months from 1 July to 31 October, total sales reached RMB12.01bn ($1.7bn), a staggering 214% increase year-on-year. The total number of goods purchased reached 12.896m (+139.7%).

Hainan tripled its offshore duty free allowance on 1 July. Click to enlarge.

During the Golden week national holiday from 1 October to 8 October, sales reached RMB1.04bn, a year-on-year increase of +148.7%/$115m.

Over the national holiday and Mid-Autumn festival the number of domestic tourists reached 637m, with domestic tourism revenue totalling $66.6bn, a year-on-year recovery rate of nearly 70%.

In the third quarter of this year, domestic airline passenger volumes in China recovered to 98% of previous levels.

CDFG BUILDS CRITICAL MASS

Chen went on to speak about CDFG’s nimbleness and agility in adapting to new and innovative business models in the face of the pandemic, working closely with the Chinese government, customs and different brands.

“By concentrating superior internal resources directly, connecting all business links and promoting the implementation of business planning, we have spared no effort in reducing the impact of the pandemic on our operation,” he said.

By promoting and integrating the mechanics of the Hainan operation, CDFG has managed to create efficiencies across its different functions, from marketing and logistics, to supply chain management, he continued.

Eudes Fabre, CEO North Asia at Lagardère Travel Retail: “There is strong pent up demand for travel and overseas travel. Once international borders reopen there will be a strong appetite for international trips and shopping, but it will take time.”

There exists great potential to develop China’s travel retail and duty free market, Chen continued, with CDFG continuing to improve its core competencies and corporate management.

At present, it operates four duty free stores in Hainan at Haikou Meilan International Airport, Haikou Mova Downtown Duty Free Shop, Bo’ao Downtown Duty Free Shop and its famed Sanya International Duty Free Shopping Complex.

CDFG also has duty free operational rights at a number of China’s airports, including Beijing Capital International and Chengdu.

The company has 10 million high-end members covering core cities and continues to build its integrated online and offline marketing systems, including a focus on a ‘digitalised CDFG’ leveraging elements such as smart payment options.

“The China market will continue to grow vigorously and we have strong confidence and faith in this,” said Chen. “CDFG has confidence in the future of the Chinese duty free market. Let’s share the prosperity.”

Eudes Fabre, CEO North Asia at Lagardère Travel Retail then discussed the ‘breathtaking’ return in domestic air travel before revealing that the travel retailer is set to open a new shop in Hainan this month, as reported earlier.

The TFWA China Reborn online event takes place on 1-3 December.

Lagardère Travel Retail, which possesses an impressive network of more than 400 stores across approximately 26 airports in China, said the recovery ‘hotspots’ have been larger for airports that have rebounded quickly. In Southern China, the pace of the recovery has been swifter whereas in Northern China it has been slower.

“We have some locations outperforming 2019 numbers. The demand is there, there is always some weariness with winter and the resurgence of localised (Covid-19) hotspots where there may be a temporary dampening effect on travel. Overall, it is a story of robust recovery and a strong appetite for travel, whether for leisure or business.

“There is strong pent up demand for travel and overseas travel. Once international borders reopen there will be a strong appetite for international trips and shopping, but it will take time. We see a strong appetite for luxury goods in China across categories. That said, China is not an easy market for brands, trends evolve quickly and increasingly customers define brand perceptions. We at Lagardère Travel Retail are working to expand our network.”

Asked by moderator John Rimmer about how brands have responded during the crisis, Fabre said the initial reaction was positive but he stressed the need to look to the future to create more value and establish strength and relevance in the channel.

He said Lagardère Travel Retail would experiment with new business models, be more flexible, reactive and willing to take risks and seize new opportunities.

“I really hope as an industry, be it brands, operators and landlords can build on momentum,” he added.

TFWA China Reborn will host the following sessions in the coming days: Chinese Travel: Today and Tomorrow (Wednesday 2 December, 10:00-12:00 CET) and China and the World (Thursday 3 December, 10:00 – 12:00 CET).

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