HOW ARE TODAY'S OF THE GAME? - Roland Berger · land's outbound tourism industry grew from 10...

APRIL 2014

TRAVEL RETAIL IN ASIAWhat's the changing face of Chinese shopping abroad?

BEYOND MAINSTREAM

HOW ARE TODAY'S LEADERS ADAPTING

TO STAY AHEAD OF THE GAME?

Focus on brand heritageUnderstand your customers

Balance store quality & quantity

98 millionNumber of Chinese tourists who travelled abroad in 2013 p. 3

90%Percentage of Chinese outbound trips to countries in Asia-Pacific p. 4

1:4 Ratio of Chinese tourists to total tourists in Asiap. 9

ROLAND BERGER STRATEGY CONSULTANTS2

THINK ACTTRAVEL RETAIL IN ASIA

increasingly

competitivep. 10

THE BIG 3

1

2

3

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ROLAND BERGER STRATEGY CONSULTANTS

In recent years, flag-waving tour guides shepherding groups of mainland Chinese tourists through shopping malls have become a familiar sight across Asia, from Hong Kong to Seoul. These tourists are part of the more than 100 million Chinese citizens who travel in-ternationally for tourism every year. But as the main-land's outbound tourism industry grew from 10 million outbound trips in 2000 to over 98 million in 2013, light regulation, combined with cutthroat competition among agencies, made the sector notorious for its myriad underhanded practices. For example, Chinese tour operators have been caught seducing young or modest-budget travelers with rock-bottom sticker pric-es only to surprise them with "extra fees" once abroad and forcing groups into pricey and kickback-lucrative shopping excursions. Effective since October 1st, 2013, China's new tourism law aims to improve the quality of the industry by mandating minimum salaries for tour guides and prohibiting agencies from attract-ing tourists with "unreasonably low prices," among oth-er significant measures.

With close to 90% of Chinese outbound travel tak-ing the form of tour packages, how will the new regula-tions affect the outbound tourism sector? Can Asia's airport and in-town duty-free retailers sustain the rapid growth they have enjoyed in recent years? In this edi-tion of think:act, we take a deeper look at the changing face of Chinese tourism and the ways in which today's leaders are changing to stay ahead of the game.

China's new tourism law1

19%19% p.a. growth in Chinese outbound trips between 2000 and 2013Source: UNWTO

90%90% of Chinese outbound tourism takes the form of organized tour packagesSource: UNWTO

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With tour prices as much as doubling from their pre-October levels to comply with new cost-transpar-ency requirements, the magnitude of change has been enough to cause sticker shock for many consumers. In South Korea, same-month growth in mainland arrivals slowed from 71% in September to 30% in October. In Taiwan, arrivals from the mainland fell 30% year-on-year following the new regulations. Retailers were not spared either, with sales growth for some travel retail-ers in Singapore slowing by half.

While the fall in outbound travel numbers in Q4-2013 was significant, China's new regulations are un-likely to significantly affect the industry's growth pros-pects in the medium term. Indeed, with China's middle class projected to grow from 400 million people in 2012 to close to 750 million people by 2020, and with Chinese outbound tourism still at an early stage of de-velopment, the sector's natural growth will likely trump any short-term regulatory effects.

China's middle class will double in size between 2010 and 2020

As agencies updated their prices in October, Chinese trav-el forums were awash with young travelers seeking alter-natives to pricier tours, whether backpacking within China or self-organizing shorter itineraries in Europe. Despite talk of record spending by Chinese tourists year after year, a surprisingly large proportion of outbound travelers are still, in fact, of relatively modest means. In 2010, for ex-ample, over 40% of outbound travelers had incomes be-low the traditional middle-class threshold of USD 10,000 p.a., underscoring the historical importance of low-cost tours for China's outbound tourism sector. A

A disappointing end to 2013, but don't count China out

2

1) Though multiple definitions exist, we consider middle class individuals to be those with incomes above USD 10,000 p.a.

A

CHINESE OUTBOUND TOURISTS BY INCOME BRACKET UNWTO (2010) 1)

5%

11%

26%

30%

18%

9%

2%

USD/year。

5



191

But while the end of cut-rate tours may lead to fewer departures in the short run, the actual impact of Chi-na's new laws on travel and spending patterns is likely to be transitory, swamped by the rapid expansion of the country's own middle class. B C

As growth shifts from the traditional coastal bas-tions of industry towards second and third-tier inland cities, China's traveling middle class is set to swell. Be-tween 2012 and 2020, not only will 17 new regions reach per capita GDP levels in excess of USD 10,000 p.a., 14 million households will also join the ranks of the middle class each year, ensuring that—price hikes or not—upwards pressure on outbound travel and con-sumer spending will remain high in years to come.

Chinese tourists are still shopping

For years, China's outbound tourism sector has been marred by complaints about the widespread abuses of

forced shopping "excursions", with some travelers even reporting being locked in stores until they had spent enough. The end of such practices will surely come as a relief to Chinese travelers who routinely devote up to a third of their travel budget to shopping and are among the world's biggest spenders on tourism shop-ping. D E

In 2013, Chinese tourists spent over USD 110 bil-lion worldwide. This impressive figure is partly the re-sult of a record number of Chinese traveling interna-tionally, but also reflects rising per-capita spending by newly affluent individuals. Indeed, spending by Chi-nese tourists is expected to exceed USD 1,800 per trip (excluding transport) by 2020, 50% more than in 2013 and twice the figure for 2009.

While China's domestic luxury sales growth slowed to just 2% in 2013, in part due to Beijing's highly pub-licized frugality and anti-corruption campaign, spend-ing on luxury goods continues to be a bright spot for

F

DOMESTIC-TO-INTERNATIONAL TRAVEL RATIOS IN SELECTED COUNTRIESOxford Economics, Roland Berger analysis

581

381

15.21

14.91 11.5

1

India

China

Japan USA

Austr

alia

Cana

da Peru

New Ze

aland

Russ

ia

Franc

e

Polan

dIta

ly

Indon

esia

Greece

Spain

German

y UK

Portu

gal

Netherl

and

Belgium

Austr

ia

9.91

9.61

3.61

3.51

3.41

31

2.71

2.51

2.21

1.51

1.51

1.11

1.01

1.01

0.41

travel retailers. Indeed, even as luxury sales growth in China approached ten-year lows, purchases by Chi-nese tourists overseas rose 18% year-on-year.

"Same-good luxury pricing tends to be around 10-30% higher in China compared to other Asian markets, so most Chinese luxury spending already takes place abroad," says Yannig Gourmelon, Partner at Roland Berger Greater China. "[The government policy] might have a short-term effect on sales, but we'll probably simply see luxury spending shift overseas even more. For travel retail, that's an opportunity to capitalize on."

Chinese outbound tourism is still underdeveloped F

With China's outbound tourist departures growing ten-fold between 2000 and 2013, growth figures are im-pressive. That said, tourism in the Middle Kingdom re-mains in relative infancy. Indeed, while China's international-to-domestic travel ratio, a development indicator for outbound tourism, has risen from 1:71 in 2000 to 1:36 in 2012, China still has significant room for growth before reaching developed market bench-marks like the United States (1:19), Australia (1:15), or Japan (1:15).

58%58% more spent on luxury by Chinese citizens compared to other Asian nationalitiesSource: MasterCard

10-30%10-30% price difference for luxury items between China and other Asian marketsSource: Roland Berger analysis

C

MIDDLE CLASS HOUSEHOLDS IN CHINA (2012-2020)Oxford Economics, Roland Berger analysis

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135,500

249,500

2012 2020

China National Statistics Bureau (2013), CLSA, Roland Berger analysis

ADMINISTRATIVE REGIONSWITH PER CAPITA GDP GREATER THAN

USD 10,000 P.A. (2012-2020)

B

USD 120USD 120 billion spent by Chinese tourists worldwide in 2013Source: Nikkei Asian Review

114114 million new households with incomes greater than USD 10,000 p.a. by 2020Source: Oxford Economics, Roland Berger analysis

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8



E

D

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YEAR

USD/TRIP

790916

9561,033

1,226 1,2441,325

1,4071,488

1,5701,652

1,7331,815

CAGR

7.2%

12% Accommodation

12% Food

27% Other

8% Entertainment

7% Excursions

5% Local transport

30% Shopping

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Hong Kong (HKG)

Bangkok (BKK)

Singapore (SIN)

Kuala Lumpur (KUL)

Seoul (ICN)

With strong underlying trends easily overcoming the effects of the latest regulation, it is time to invest, not retreat, and to position for the continued wave of Chi-nese outbound tourism and shopping.

A growing market isn't without its challenges, however.

Tastes are changing and segmentation is becoming more complex

In 2013, stagnant growth in China for top-tier brands like Louis Vuitton and Gucci provided the clearest indication yet that Chinese consumers' luxury tastes are evolving.

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"Increasingly, Chinese consumers are moving away from ostentatious displays of wealth that have charac-terized the market in recent years," says Gourmelon, highlighting a shift in taste towards more accessible and subdued statements of luxury. "Accessible luxury continues to do extraordinarily well. Coach sales grew 25% in the first quarter [of 2014]."

For travel retail, consumer segmentation is poised to become more complex as sophisticated tier-one city travelers begin to overlap with a new generation of nouveau riche from tier-two and tier-three cities. In this new travel retail environment, successful retailers will be those whose point-of-sale strategy allows them to

A

Invest in travel retail, but be mindful of shifting sands

Brand

Bottega Veneta

Burberry

Chloe

Chanel

Coach

Dior

Fendi

Gucci

Hermès

Louis Vuitton

Miu-Miu

Prada

Tory Burch

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B

FASHION BRANDS AT HONG KONG INTERNATIONAL AIRPORT (2006–2014)Hong Kong International Airport, Roland Berger analysis

efficiently integrate traveler data contained in board-ing passes, bank cards, and CRM systems to deliver an experience seamlessly tailored to the very different profiles of today's travel shoppers.

For example, Lotte in South Korea has smartly es-tablished a robust e-commerce platform to serve Chi-nese customers in the region, providing a pre-ordering service and pick-up at airports. This service saves time for consumers while enhancing Lotte's brand profile and market penetration. This type of platform is not yet common in the industry and it has proved challenging for travel retailers to implement, therefore serving as a competitive advantage for those who get it right.

Airport retail is increasingly competitive A

As travel retail has grown in Asia, international brands have invested heavily to gain a foothold in the region's largest airports. In major travel hubs like Hong Kong's Chek Lap Kok Airport, for example, the number of fash-ion brands with concourse retail space has almost doubled since 2006. B

As top-tier brands like Versace and Gucci vie with mid-size competitors like Jimmy Choo and Agnès B. for a share of the 80 minutes passengers spend airside, merchandizing is more important than ever. Successful retailers will therefore also need to complement point-of-sale strategies with high-impact marketing tactics, such as:> Leveraging generous store footprints and high ceil-

ings to create innovative product displays> Altering product displays or running promotions to

take advantage of peak travel times for target buyers> Developing "travel exclusive" offers to invite impulse

purchases based on exclusivity and scarcity"When you consider that five or six years ago, the ma-jority of Chinese consumers couldn't identify more than one or two high-end luxury brands," says Gour-melon, "it's clear retailers have to adapt to a market maturing faster than anybody expected."

New retail spaces opened since March 2006

Alexandre Zouari

Bally

Burberry

Chanel

DAKS

Emporio Armani

Ferrari Store

Gucci

Hugo Boss

Juicy Couture

Lacoste

Longchamp

Mont Blanc

Ports

Ralph Lauren

Shanghai Tang

Torino Lamborghini

Versace

Zara

Agnès B.

Alfred Dunhill

Bottega Veneta

Cerruti 1881

Coach

DFS Galleria

Ermenegildo Zegna

Giorgio Armani

Hermès

Jimmy Choo

Kurt & Curwen

Loewe

Loro Piana

Pal Zileri

Prada

Salvatore Ferragamo

Tie Rack

Velentino

Vertu



HOW LEADERS WILL COMPETE GOING FORWARD

To gain more insight into how travel retailers are adapting to this ever-evolving environment, we sat down with Nicole Teng, Market Intelligence Manager with DFS Group, the world's largest luxury travel retailer with hundreds of airport and downtown duty-free locations concentrated in Asia and Oceania.

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ROLAND BERGER: Two new policies enacted by the PRC government are relevant to your sector. First is the crackdown on official gift giving, and the second is a ban on below-cost package tours. How significant do you think their effect was on travel retailers in 2013?

DFS GROUP: The crackdown on official gift giving has actually been more of an issue for the luxury indus-try within China than overseas, but we are keeping a close eye on it. The policy of cutting official spending has caused a great decline in Chinese outbound MICE travel (meeting, incentive, convention, and exhibition). The travel law has also led to a decline in outbound Chinese group travel in Q4-2013.

Analysts expect the crackdown to continue, inten-sified, through this year. Is this a significant consider-ation for travel retailers? What about package tours?

Yes, this trend is expected to continue in 2014. Package tours remain the major mode for Chinese travelers, even though prices increased in 2013. It is expected that the price of package tours will gradually get back to normal levels step by step in 2014. Follow-ing the travel law, the Chinese travel market will be-come more standardized to realize healthy and sus-tainable development. Also, package tours will grow more affordable for the masses.

One of our sources suggested that the PRC gov-ernment may seek to stimulate growth by relaxing import duties on luxury goods in the mainland, a move proposed several times in the past. Is this seen as a significant move?

Yes. For example, the Chinese government signed a free trade agreement with the Swiss government in Au-gust 2013, which has led to a slight drop in Swiss luxu-ry watches' retail prices in Mainland China. However, for luxury goods in general, retail prices include three types of duties: import tariffs, VAT, and consumption tax. From our calculations, the decline in import tariffs will not significantly impact retail prices because the VAT and consumption tax percentages are still so high.

Turning toward the marketing side, how are you and other retailers adapting your offerings to address the different desires of various nationalities, particularly mainland Chinese travelers?

As DFS Group operates hundreds of airport duty-free stores and downtown gallerias, we certainly evaluate shopping preferences – store locations, product mix, promotions, etc. Chinese customers made up 29% of worldwide luxury consumption in 2013 and are expect-ed to make up 34% by 2015. They are clearly a key target consumer group. To give you an example, we signed a strategic cooperation agreement with China UnionPay (CUP) in September 2013 and have accord-ingly launched in-store promotions for Chinese cus-tomers who use UnionPay cards for in-store transac-tions. This has been a good move for us.

Much has been said about brand fatigue and rapidly evolving consumer tastes in China. What are the major changes you have observed in the last couple of years? How has your company sought to position itself to capitalize on these changes?

Chinese consumers' recognition of luxury brands is indeed becoming more mature. Consumption is chang-ing from a "herding" effect to a pursuit of "personal style". More and more Chinese luxury consumers are looking for less flashy and more understated goods.

It's important for travel retailers to focus on brand and assortment enrichment to respond to this change. Customer service in stores, especially focusing on the high-end customers, is also crucial. Luxury retailers should focus on upgrading brand profiles and heri-tage-building to present distinctive brand connota-tions (through logo designs, in-store displays, etc.) to enhance penetration into the mainland chinese con-sumer group.

In retail, we see luxury companies moving towards an educational model, wherein being able to teach the consumer about refined products (e.g. wine tast-ings) is an increasingly strong sales tool. How do you view this for in-town locations? For airports, with trav-eling consumers typically more pressed for time, do retailers need to adapt differently?

Young and middle-aged consumers from Chinese cities are mostly well educated on luxury brands and usually have some experience abroad. Second- and third-tier city consumers are less educated from this perspective, but rapidly increasing disposable income

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levels of consumers in these cities have been bringing them more practice in luxury goods purchasing, through which they are learning to appreciate luxury brands by knowing more about underlying brand cultures.

Downtown locations have more ways to reach con-sumers and promote an extra-ordinary "shopping ex-perience" by way of brand advisors, customer service, in-store advertising, the galleria's layout, and so on. From this perspective, there's less flexibility at air-ports, as consumers are pressed for time and tend to want to just grab what they came for.

Changing tastes may be a boon for more subtle luxury brands. Will travel retail become a battle-ground for smaller luxury houses? If so, what mod-els do you think will be adopted?

This is definitely a trend for Chinese consumers, to want more subtle luxury brands. So it could be a good business idea to introduce and present niche luxury brands to customers. There could be several ways to achieve this: M&A, JVs, or getting exclusive dealership of a brand. But the models will vary with different cas-es for sure, so it's hard to say which would be the com-monly adopted model.

Airports offer a lot of information about consumers that isn't typically available (e.g. frequent flier status, destination, etc.). Are retailers capitalizing on this? How so?

Yes, it's a valuable treasure to gain and master this kind of "big data" about these consumers. In China, passenger information is not very easily available for external companies in most cases, so it's important for travel retailers to build their own CRM excellence.

To sum up, do we still appear to be in an explo-sive-growth phase for travel retail in Asia (at least the part driven by PRC tourists), or are we entering a pe-riod of slower growth?

In 2013, we saw 98 million outbound Chinese trav-elers, up 18% from 2012. And for 2014, it's still ex-pected to grow 16-17% to reach 114 million outbound passengers. Within Asian destinations, we are expect-ed to witness steady growth in Chinese outbound tour-ism because of more relaxed visa policies for Chinese citizens, higher attraction to island tours and beach

29%Chinese customers made up 29% of worldwide luxury consumption in 2013 and are expected to make up 34% by 2015.

Q4The travel law has also led to a decline in outbound Chinese group travel in Q4-2013.

18%In 2013, we saw 98 million outbound Chinese travelers, up 18% from 2012.

16-17% for 2014, it's still expected to grow 16-17% to reach 114 million outbound passengers.

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resorts (like Phuket and other islands in Southeast Asia), and new transportation modes like cruise tours to Japan, Korea, and Taiwan. Island and cruise tours were hot travel products in 2013, so to track these de-veloping trends —the most popular destinations as well as how the market is moving — is an important factor to take into consideration before planning one's business footprint.

Shopping is always a key item on Chinese travelers' agendas during these outbound trips!

Whether or not Chinese consumption continues at historical rates, there is no doubt that competition is intensifying in a rapidly maturing luxury marketplace. What is the next frontier for brands as they compete for the attention of Chinese travelers?

We see many areas of focus for brands. We just summarize them as these Top 3:1. Focus on the core: Build on heritage and differenti-

ate from others.2. Build a good CRM system: Do better customer seg-

mentation to understand Chinese consumers, then cater to the needs of your target consumers. Also, plan different strategies to cater to middle-class and ultra-wealthy Chinese.

3. Strike a balance: Strive to achieve a good balance between store numbers and quality. Many players think about how to extend the network, but quality and exclusivity should be key considerations, too.

15ROLAND BERGER STRATEGY CONSULTANTS


Roland Berger Strategy Consultants

Roland Berger Strategy Consultants, founded in 1967, is one of the world's leading strategy consultancies. With around 2,700 employees working in 51 offices in 36 countries worldwide, we have successful operations in all major international markets.Roland Berger advises major international industry and service companies as well as public institutions. Our services cover all issues of strategic management – from strategy alignment and new business models, processes and orga-nizational structures, to technology strategies. Roland Berger is an independent partnership owned by around 250 Partners. Its global Competence Centers specialize in specific industries or functional issues.At Roland Berger, we develop customized, creative strategies together with our clients. Our approach is based on the entrepreneurial character and individuality of our consultants – "It's character that creates impact".

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HOW ARE TODAY'S OF THE GAME? - Roland Berger · land's outbound tourism industry grew from 10...

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