The UN predicted that 100 million Chinese will become travelers by the year 2020, but that number was reached in 2016 — four years ahead of schedule. Thanks to China, travel retail has transformed every actor in the airport industry, turning airports into destinations unto themselves. Data shows that what was 70 percent “impulse buying” five years ago is now 79 percent “planned buying” today, meaning that travel businesses should be planning unique and exclusive offers to elite or frequent travelers rather than price-sensitive promotions for standardized products.
In 2020, one segment is forcing airports and retailers to elevate the travel experiences for the rest of us: the elite Chinese international traveler. Having already moved their focus from infrequent first-time travelers to the dominant spending patterns of elite worldwide travelers, travel retail actors are now compelled to mold their offers specifically for this powerful and growing Chinese segment.
A recent in-depth study by the Swiss strategic technology and payments partner Global Blue offers a unique point of view on the forces at play in luxury retail travel segmentation. One-third of global personal luxury goods spending is done by consumers shopping abroad — a total value of $99 billion — and within this value, the elite international shopper represents 17 percent of that tax-free spending amount.
What makes an elite international shopper?
Around 40 percent of this segment is from greater China, while 15 percent is from Southeast Asia. They spend an average of €55,000 at international, tax-free locations over roughly 12 transactions a year, equaling three trips a year or 15 days of travel, leisure, or business. But recently, we’ve noticed a pivotal change in this group’s travel tastes.
This segment began by traveling in Hong Kong, Southeast Asia, Europe, New Zealand, and Australia, but today, Africa and rural parts of Europe have become the new hotspots. More of China’s elite travelers are now interested in far-flung countries that offer more rural, natural, and thrill-seeking experiences. That includes safaris but also unique and rustic castles in the French or Italian countryside that are often hard to find or access.
Aside from mistakenly focusing on the infrequent travel shopper segment, marketers also wrongly assume that Chinese travelers still prefer to sightsee in groups. But today, they are much more independent. In 2015, Chinese consumers traveled wherever the exchange rate worked strongly in their favor, but now they look at travel and shopping overseas as more of a cultural experience.
Therefore, any destination that can provide a shopping opportunity with a cultural experience will win. Hong Kong, for instance, only offers them a familiar shopping destination, but Japan provides shopping opportunities within a unique local culture with a quick, affordable flight from China. The same goes for Seoul and Taipei.
Global Blue Singapore Managing Director, Jan Moller, explains the market’s potential, saying, “Most destinations are seeing an increase in Chinese arrivals. But the spending is not increasing, meaning Chinese are not only spending, [but] they are also going for experiences. [Today], seven percent of the Chinese population has a passport. But if you reach 15 percent, 120 million outbound [travelers] become 200 million, and they are first-time travelers versus experienced travelers.”
Successful traveler profiling
We tend to put all Chinese travelers in the same bucket, but they’re not homogenous. Standard profiling suggests two main types: the Status seekers (who must convey a certain image) and the Appreciators (who want an engaging experience). Both are traveling everywhere these days, and a lack of diversity from brands and their offers has created inefficiencies.
With data from a recent Global Blue report on the elite traveler, three new international personae have now been developed: Janice, a millennial shopper (60 percent come from China); Baya, a High Net Worth Individual (22 percent come from Southeast Asia); and John, a Silver shopper (49 percent come from America and are age 55 and up.)
Janice: an elite Chinese millennial shopper
The millennial group is the one that’s most represented within the elite Chinese shopper category at 34 percent, and they are reacting particularly well to creative co-branding collaborations like the LV x Supreme releases.
A 32-year-old only child with a strong education from Guangzhou, Janice is a young executive in the tech industry who spends 15 days of travel over 3 – 4 trips per year. 25 percent of millennials follow Janice and visit both Europe and Asia, and their favorite destinations are Japan, France, Italy, and the UK. Europe is a locale for 25 percent of Chinese millennials, while Japan is a landing spot for 50 percent of them. Although shopping is just a part of her cultural experiences abroad, she tends to purchase special editions or collaborations from luxury brands while traveling.
Janice’s tax-free spending amounts to approximately €50,000. She favors collaborations such as LV x Supreme, Chanel x Pharell, and Adidas x Yeezy. Watches and jewelry are her biggest purchases at 45 percent, followed by leather goods at 32 percent.
Baya: Indonesian Gen Xer and high net worth individual
Born and raised in Jakarta, Baya is a 43-year-old CEO who travels for 30 days over four trips per year, avoiding peak periods.
Baya and Southeast Asians represents 22% of HNWI shopping in Europe only. Seven days in Singapore is her favorite shopping destination, followed by six days in France and a long weekend in Japan.
Motivated by a broader selection of items and a higher quality of experiences, she spends an average of €210,000 on tax-free shopping each year, preferring watches and jewelry from brands like Richard Mille, Patek Philippe, and Hermes.
John: American silver traveler
An investment banker from New York City, John is a 60-year-old ‘Silver Shopper’ that travels for 20 over three trips per year, mostly in the summer.
While 48 percent of these US-based travelers shop in one unique country over multiple trips, they will visit at least two countries in Europe but will rarely travel to Asia. While John spends most of his time in the UK (six days on average), he will spend the most money in France (four days) and Italy (three days).
John’s tax-free shopping amounts to €53,000 while traveling, and he will spend €6,500 at luxury outlets — which isn’t considered a traveling experience — in Europe at stores like LV, Gucci, and Rolex, which he considers to be a part of the traveling experience.
There are some common behaviors in each of these Elite travelers segments:
Experiences trump shopping and transactions
Chinese HNWI travelers spend an average of 20 days on holidays. In 2014, their outbound trips increased by 17 percent. So Chinese millionaires are spending more time on holidays and are experiencing more leisure activities. Hurun recently released a report surveying 300 ‘super-travelers’ (those who spent $35,000 or more on luxury travel products).
These travelers need to be watched closely because their tastes will influence the rest of us. The average Chinese millionaire is taking 4 to 6 outbound trips per year and are spending less on luxury in China, instead of traveling overseas to get more cultural and culinary experiences. In addition to their luxury travel growth, this group is being seen on their travels a lot more via social media.
This explains the increase of outbound from this group, and the European market was ready for it, unlike America. Elite Chinese shoppers’ top destinations are France (36 percent), UK (31 percent), and Italy (36 percent). They will spend €42,000 in town and €20,000 in department stores (remember, there is a high luxury tax in China, so going to Gucci is 30 percent cheaper in the EU on top of a tax refund.)
Tax-free shopping happens in the city, and duty-free happens at the airport. Retailers in the city are competing with the airport’s duty-free stores, and some luxury brands want to capture the eyes of passengers in town since their selection of goods at the airport isn’t as high and is less of an ‘experience’ for travelers. Chinese travelers currently represent 35 percent of all retail spending in EU airports. Europe is already maximizing their efforts (and have for the last eight years), whereas the US is still collecting and analyzing data.
The French paradox
France is the top destination for elite shoppers, but it only captures 46 percent of international elite shoppers’ luxury spending while the UK has 60 percent of their spending, and only 30 percent of all greater China international elite shoppers even visit France. By developing and promoting specific end-to-end shopping journey experiences, France can start to convert the elite Chinese shopper, but what experiences they should focus on has yet to be determined.
Singapore leads the way, followed by… Beijing?
The hype and speculation about Beijing’s new airport can only be outdone by Singapore’s Changi airport-turned-experiential destination known as Jewel.
As a performance indicator, Singapore’s tax-free sales progression for the period between January and august of 2019 helps us understand the potential market to target. In Singapore, China and Indonesia lead the way in APAC spending, with 37 and 20 percent, respectively, of total tax-free spending, and strong performances by key markets like China, Indonesia, and Vietnam continue to fuel Singapore’s growth.
When doing deep-dive analysis of Singapore’s tax-free sales, fashion and clothing lead the way with 40 percent of total in-store sales (a 10 percent sales jump over the previous year). That segment is followed by jewelry and watches at 34 percent of total sales (a 9.6 percent sales progression), and Cambodia skyrocketed with an amazing 43 percent sales progression.
Garnering 37 percent of total tax-free spending, fashion & clothing continued to soar with Chinese travelers, accounting for 42 percent of their total spending (an average of $1,360). Department stores lost 2.4 percent of sales overall during the year, even while fashion and clothing still gained 12 percent.
The Indonesians, who came in second with 20.2 percent of total tax-free spending, were buying across categories and recorded a sharp increase in average spending, which was up 13 percent (roughly $834) compared to the previous year. While fashion and clothing led with 34 percent of total sales, the top category in sales progression was jewelry and watches with a 42 percent jump.
The rise of niche luxury travel agencies
Social media, particularly WeChat (no one uses email in China), allows travelers to easily access curated experiences while also spreading the word about them. These days, 94 percent of travelers use a travel app and most are on CTRIP or Qunar.
The influence of niche luxury travel agencies — there are only 12 of them for China — has grown a lot, too. Five years ago, there was very little in the way of luxury travel agencies, but today, over half of the best trips millionaires embark on have been confirmed via luxury travel agencies, most of which now offer an array of proper bespoke packages.
- Anticipate the next wave of downtown duty-free
A huge amount of duty-free shops — a major shopping channel for luxury brands — is in heavy development and should create a lot of competition for airport retail.
China’s duty-free sales are slated to grow at a staggering annual rate of 22 percent, reaching $24 billion by 2025, according to Morgan Stanley. China’s duty-free sector is expected to quadruple by 2025. Currently, downtown prices are roughly 15 percent higher than prices overseas, but we see room for this gap to narrow because downtown outlets have lower rental costs (15-20 percent of revenue) than airports (over 40 percent of revenue), lower labor costs, and higher gross margins. In fact, downtown duty-free prices already declined by 10 percent over the first half of 2019.
- Define your perfect elite Chinese segments
As Jan Moller explained in his report, the Chinese Elite traveler is the leading millennial segment. Focus on a segment that aligns with your millennial segment and have them influence each other or even meet at unique destinations. Then prepare offers that can turn Chinese travelers into new or elite travelers.
- Create end-to-end branded journeys
It’s not about being in the right place at the right time anymore. With contemporary art, cultural brands, and airport destinations all merging, brands should create experiential rewards that accompany travelers from place to place. Recent WeChat Index data showed that a leading cultural institution with Chinese was the British Museum, which has already collaborated with many cultural institutions and could be a very interesting player at airports.
Tanguy Laurent is Managing Partner of Creative Capital, Altavia Group Leading US Chinese retail branding agency. Follow him for more insights on Linkedin: https://www.linkedin.com/company/creative-capital-hk