Thursday 18 December 2014

The Changing Face of Chinese Travelling Consumers

There have been two really significant developments in China within the past two years that are thought to be impacting the spending patterns of Chinese when they travel.  At the end of 2012, China's paramount leader, Xi Jinping, imposed new austerity measures on Chinese government officials to crack down on bribery and corruption. Associated with this austerity drive has been the enactment of new anti-corruption laws covering the purchase and use of luxury cars, the use of public funds for official dinners (including what can be served at these dinners), the handing out of special privileges such as VIP memberships, traffic permits and passes and the use of public funds for travel.  This drive has resulted in the gradual disappearance of evidence of ostentatious consumption from public view and has now moved beyond its initial target of extravagance and is affecting more basic practices in Chinese society, even funerals, as reported by Bloomberg News. 

In October 2013 the Chinese government passed the National Tourism Law outlawing the sale of tours below cost.  These below cost tours forced travellers to shop on their trip, and the tour operator was compensated through commissions paid by the retailers.  Outlawing these tours obviously changes the amount of pressure felt by travellers to shop on their trip and, therefore, potentially changes the amount they will spend.

The effects of these laws at home have been clear with growth in the luxury goods sector slowing to its lowest point since 2000, larger numbers of wealthy people saying that they will not be giving very expensive gifts (valued at $826 or more) this Chinese New Year and high end hotels in China reporting a drop of 50% in business.  

A key question is how these changes at home are affecting the behavior of Chinese when they travel.  We can answer this question with our data by looking at the changes in consumer behavior between the first two waves of our study.  Our first wave of data was collected at the end of 2011 and the beginning of 2012, right before the implementation of the austerity drive and the National Tourism Law. Our second wave of data was collected at the beginning of 2014, more than a year after the changes began occurring.

The picture is not pretty.  First, overall spending on merchandise while travelling has declined by 600 euro from an average of 2170 euro in 2012 to 1560 euro in 2014. Second, there are some significant changes in what Chinese are spending money on.  Those items that tend to be higher priced are hardest hit in terms of the number of people buying them.  Lower priced items are holding up better in terms of purchase penetration.



Some good news:  while fewer travellers are buying some key categories, there doesn't seem to be any trade down to less expensive items among those who are buying.  In fact, for watches, there has been a significant increase in the average that watch buyers are spending.



Importantly, there seems to be a substantial effect on the desirability of certain luxury brands.  In our study we asked travellers to tell us which of a selected number of luxury brands they desire to buy when they travel.  The two most desirable brands in 2012 Chanel and Louis Vuitton have declined significantly in desirability.  Chanel is still the most popular brand, but Louis Vuitton has now fallen to 5th most desirable brand, with Hermes, Burberry, Dior and Chanel ahead of it.

Finally, we see are beginning to see changes in the priorities Chinese have when shopping while they are on a trip.  The table below shows the relative proportions of different shopping style segments among Chinese travellers.  The most frequent shopping style among Chinese is what we call the "Brand Shopper" who is focused on buying the latest styles and designs from the world's most famous luxury brands.  While not significant, there is a decline in the prevalence of this shopping style from 38% to 34%.  At the same time there is an increase in the style we call the "Practical Shopper."  The Practical Shopper is one who is constantly assessing the value of what they might buy when they are travelling - if it makes practical sense, they will buy, otherwise they won't.  They want to buy the latest styles and designs from brands that are familiar to them, but they are less likely to let their emotions dictate their purchases.  They expect to find many good products at great prices when they are travelling, but if they don't, they are less likely to be tempted.  We also see a slight increase in what we call "Destination Shoppers."  These are shoppers who are sensitive to the reputation of the locations they are visiting.  So, they might buy Louis Vuitton or Chanel or Hermes in Paris, and Prada or Gucci in Milan but they are less likely to buy any of them in Hong Kong. 

  


 

Monday 15 December 2014

Where Does the Money Go?

Where do travellers spend when they travel and how big is "the market?"  The way that some companies are structured means that it is only meaningful to understand what travellers spend in airport duty free shops when they travel, but we all know that this is only a fraction of what travellers spend on merchandise when they are travelling.  We also know that the competition for airport duty free shops in capturing a share of the travelling consumer's wallet is not non-airport duty free shops or shops in other airports, but shops in the places they visit.  This goes even for those categories that are typically thought of as the key categories for duty free shops - alcohol, cigarettes, beauty, confectionery - where the majority of their spend is also outside the airport environment. 

So, where do travellers spend and how big is "the market?"  We answer this question based on our surveys of travelling consumers, tracking their spending during the entire course of their trip, from the time they get to their home airport on their outward journey, to the time they pass their final buying opportunity on their way home, which may actually be in their home airport. Worldwide in 2014, international travellers spent $453 billion on merchandise. To put this in perspective, the global market for handbags and purses is estimated to be only $101 billion and the global market for chocolate is estimated to be about $100 billion, so the total market for merchandise bought by people when they are travelling is estimated to be worth more than four times these well established and popular categories that include some of the world's most famous brand names.  

Of the total spent by travellers, only $55 billion, or 12% is spent in airport duty free shops.  Interestingly, almost that much is spent in other duty free shops, which includes inflight duty free as well as border stores and off-airport duty free shops.  The largest amount is spent in boutiques, brand and specialty shops, which includes brand boutiques for the world's most famous fashion brands as well as specialty shops, for instance for watches and jewelry.  Almost as much, 22%, is spent in department stores. 


Keeping track of what travellers spend in duty free shops in airports is relatively easy because it is a closed market - everyone buying here is an international traveller who is qualified to buy in a duty free shop.  Estimating the impact of travellers on any other category is much more difficult because travellers are not identified systematically or as precisely as they are in airports.  Other means of estimation, such as by using tax refund requests or analyzing credit card information, must be used.  As a result, the global market for what people buy when they travel is not usually captured and tracked in the same way.  But, it is clearly big, and really important for many businesses in many locations, not just those in airports catering directly to international travellers.  Further, if you look at the global travel retail market in its entirety, not just the bit that is easy to measure, what you realize is that, despite all the attention that airports get, not much is really happening there.

And, this market is growing.  As reported in an earlier post, average spending by international travellers is down, but the total size of the market is growing because of the increase in the numbers of international travellers.  From 2012 to 2014, the market has added $19 billion in revenues.  During that time, department stores have added $7 billion, duty free shops have added $6 billion, as have grocery stores and discount outlets.  Non-duty free shops at airports have been the biggest losers, declining from $47 billion to $37 billion, which means that spending on merchandise at airports overall is actually flat.



Which areas of the world are the most lucrative for the travel retail market?  The map below shows where in the world travellers spend their money.  This map is based on our knowledge of the journeys travellers are making and their spending along the way from their home airport to the airports they fly into and out of, and the destinations they visit.  What is noticeable in this map is that North East Asia (China, Japan, Korea, Hong Kong, Macau), Europe and North America seem to be magnets for spending whereas South America and Africa are not.  These figures reflect both the frequency of international travel to or within these regions and their desirability as places to shop.  Those geographical locations that account for smaller amounts of spending tend to be regions where international travellers are fewer in number and where their preferences are to spend outside that particular region.



What do travellers actually buy when they are travelling?  The graph below shows the latest figures.  Men's and women's fashion capture the largest share of their spend, followed by alcohol and then leather goods and beauty products. 





What is interesting about this pattern is that very little of it is spent in airports.  The two graphs below show the proportion of each of these product categories that is spent in airports.  Only for cigarettes is a majority of spend in airports.  But, even for alcohol, which generally has such a strong presence in duty free shops in airports, it is still less than a majority of spending that happens there.  For the other most popular categories - men's and women's fashion, airports play only a minor part in capturing consumer spend.  Even for chocolate, which is also prominent in airports, only one third of spending is there.  The key implication of this for any airport or airport retailer is that the big win would be in capturing spend that is currently going elsewhere.  From an earlier post, we already know why this is happening - airports are convenient but they are not cheap and they don't offer much to choose from.  It is instructive that two of the categories that have the best performance at airports - cigarettes and spirits - both offer significant price differences at airports relative to non-duty free locations and, in the case of alcohol, have for years differentiated their offering from non-duty free locations so that it is quite possible that the only place in the world where you can buy certain products is at an airport.







Tuesday 9 December 2014

Traveller Insights for Incheon Airport

As Incheon Airport calls for proposals for the duty free contracts that expire in February of 2015, in this post I analyze the consumer behavior of the nationalities who travel through Incheon to provide some insights that might benefit those firms readying their bids.

To do this analysis, I have adopted the approach I described in a previous post on Sydney Airport - we produce a composite profile of consumers by combining the data from different nationalities according to the number of travellers each nationality contributes to the overall traffic to Seoul.  Koreans are also singled out for closer scrutiny because they are the "locals" and because they are so numerous relative to the other nationalities.

Here are the key insights that bidders might take into account as they develop their proposals for Incheon:
  • Koreans love duty free shops in airports, visitors to Korea don't.
  • There are more Destination Shoppers, Practical Shoppers and Brand Shoppers among travellers in Korea and fewer Cultural Explorers, Memento Shoppers and Bargain Shoppers.
  • Koreans are spending signficantly less when they travel and those nationalities visiting Korea significantly more than average.
  • Distinct merchandise strategies are required for visitors to Korea compared to local Koreans.
  • Koreans plan their purchases more thoroughly than visitors to Korea.
  • Chanel, LV, Gucci, Burberry, Prada, Hermes and Bulgari are more desirable than elsewhere in the world and Hugo Boss, Calvin Klein and Giorgio Armani, Tommy Hilfiger and Ralph Lauren are less desirable fashion brands.
  • Visitors to Korea who buy alcohol are looking more for special edition products and less for discounts off products they would buy at home.
  • Travellers in Korea who buy beauty products interact more with beauty consultants and they want the consultants to tell them what is new and what is trending. 
  • Chanel, Lancome, Burberry, Bulgari and Biotherm are more popular beauty brands in Korea than elsewhere
  • Dunhill is about twice as popular a brand of cigarettes among Koreans as it is among visitors to Korea.  The opposite is true for Davidoff and Kent.
  • There is a much greater appetite among buyers of tobacco to buy brands that are different from home
  • Travellers in Korea are more likely to buy boxes of chocolates than any other product type, including bars, blocks and bags.
  • Hershey and Godiva are more popular among travellers in Korea and Toblerone, Lindt, Cadbury and Mars are extremely weak compared to other parts of the world. 
 For more detail and background on each of these topics, or to explore their implications please contact me directly: cesa@market-research.com

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