MACAU, China — While most fashion retailers are concerned about slowing luxury spending in China — a result of decelerating economic growth, a government anti-corruption drive and increasingly discerning shoppers — the DFS Group is in an enviable position. As the world’s largest luxury travel retailer, the company appeals to a demographic that is set to grow in numbers and spending power: the Chinese traveller.
In 2012, Chinese travellers spent $102 billion on international tourism (of which a whopping 65 percent was shopping related), a number some expect to double over the next ten years. And, according to DFS, their outlets collectively make up the largest retail destination for Chinese consumers outside of China.
Perhaps it was destiny that, in 1960, DFS was established by two American entrepreneurs, Robert Miller and Charles Feeney, in what was then the British colony of Hong Kong. At the time, tax-free shopping was in its infancy and, in 1962, the duo opened a single duty-free concession at the Hong Kong airport. In 1968, DFS expanded beyond airports and opened its first downtown duty-free store in Kowloon, Hong Kong. And in the years that followed, fuelled by the rise of affluent Japanese tourists, DFS continued to expand its presence throughout the Pacific Rim region, in cities including Guam, San Francisco, Los Angeles and Singapore.
Today, majority owned by LVMH’s Selective Retailing Division, the company boasts a global network of 420 locations in 10 countries and continues to operate a dual business model, comprised of duty-free stores at major airports and Galleria stores in the downtown districts of global travel hubs. But over time the company’s strategy has shifted away from duty-free stores and a value proposition built around price to full-priced luxury stores, culminating in the decision to rebrand the company’s downtown DFS Galleria assets as T Galleria by DFS (the T stands for traveller).
That’s not to say that DFS Group’s airport business has taken a back seat. It’s no secret that airside retail is now an increasingly lucrative and critical component of a successful luxury strategy and airport sales makes up roughly half of DFS’ overall business. In fact, the company recently completed six months of renovation at Hong Kong International Airport, where it has upgraded it presence and launched three new concessions. DFS has also upgraded its presence at Los Angeles International Airport, where it is the sole duty-free operator, and at John F. Kennedy International Airport in New York.
BoF sat down with Philippe Schaus, chairman and CEO of DFS Group, at the company’s annual Masters of Time event in Macau, to discuss the growing travel retail market, the spending patterns of Chinese travellers, the emerging opportunity in Southeast Asia and the evolution of DFS.
BoF: DFS began in 1960 with single location in Hong Kong. Over the years, how has DFS evolved to meet the demands of the travelling luxury consumer?
PS: Initially, the whole idea behind DFS stores was to follow the traveller, who at that time was Japanese. We had the airports and the downtown Galleria stores, which often had a bigger choice of merchandise, but were essentially another way to buy duty-free. Then, the Galleria model evolved as many locations were no longer duty-free, so they became more luxurious over the past 10 years. The customers changed from the Japanese to a mix of Asians and other nationalities. Today, we have 14 Gallerias and some are based on the old model, but most of them have grown into department store models.
BoF: Why do travellers choose to shop at DFS if price no longer plays a starring role?
PS: It’s absolutely not about prices as duty-free is less of a selling point for us. What we do best is offer travellers a neutral objective choice among the best brands with advice geared towards what works best for them. If you want to discover the world of luxury and understand what your options are, then DFS is a place with a complete offer. You don’t get this experience or service at brand boutiques and we are positioned very different from department stores which are targeted at local customers. We work with travel agents in client markets and do pre-departure marketing, so we can curate an offer that, according to our experience, is best for travellers in that area.
BoF: Why did you decide to rebrand your Galleria locations? Why now?
PS: Typically, people rebrand a retail concept then start changing the stores, but we’ve done it another way round. In the past few years, we have really transformed our stores into a luxury experience that offers unique services from a beauty concierge to private lounges complete with beauty rooms and children’s playrooms. This rebranding is really the end of a journey, as well as the beginning of a new one.
We chose the letter T, which is simple and modern, and stands for the traveller. The shape of the letter also reminds you of an airplane. While the DFS logo still appears, it’s institutionalised and less dynamic. It’s like a seal of trust rather than a logo.
BoF: Travel is becoming an increasingly lucrative component of a successful luxury strategy. What are the opportunities for growth?
PS: In the past, when people travelled it would be about buying souvenirs or getting a bargain. Today, the bargain side is much less visible and customers have an extremely high appetite for luxury products and go after the best. DFS had more than 200 million visitors in its stores last year with our biggest demographic being the Chinese. Last year, it was estimated that the Chinese spent over $100 billion and two thirds of that was on shopping. That number we believe will double in the next 10 years. The potential for growth is enormous.
BoF: In terms of demographic, how do DFS’ shoppers breakdown today?
PS: They are everything — young and old, women and men, from big cities or small cities. We’ve recently seen a rise in customers from South East Asia, Latin America and the Middle East, although it depends on the location of the store. In Macau, our top-spenders are the Chinese, while the Japanese are our biggest spenders in Hawaii.
In our airport locations, we have noticed a huge number of Europeans and Latin Americans. Overall, the Chinese, as a single nationality, make up our biggest group of buyers, followed by the Japanese, Koreans, Brazilians and Russians.
BoF: What are the most popular product categories?
PS: The business is split evenly across four categories: beauty and fragrances; fashion, which is dominated by accessories; watches and jewellery; and wine, spirits and tobacco, which is biased towards our airport locations. Each demographic buys differently into each category, so the Americans love skincare while in the Middle East we do very well with perfumes. Watches is a high performing category for the Chinese, which is why we host an annual Masters of Time event for collectors in Macau.
BoF: You mentioned that the Chinese are your biggest customer group. What are they buying?
PS: The Chinese shopper has far surpassed the Japanese in their shopping tendencies. Plus, there is so much more diversity in the Chinese customer than the Americans or Europeans. The type of customer can vary depending on the city they come from, its size, age or education. These factors make a huge difference in what they are looking to buy. While some of them are becoming more sophisticated, many are still seeking luxury for the first time. Those are the ones we need to educate.
BoF: There has been a deceleration in luxury spending in China. Have you noticed the same trend among travelling Chinese?
PS: First of all, the growth in luxury spending has not abated in the last few years. It’s always experienced waves, but the underlying trend is one of growth. However, we have seen some similar trends, including a more reserved attitude of consumers towards some luxury brands, but it’s not as prominent.
At the same time, it has been reported that Chinese are consuming less domestically, but continue to spend when they travel. There are several factors at play here, the biggest being the value and savings compared to home when purchasing overseas. Because of this our Chinese business is continuing to grow by double digits.
BoF: And what about the move away from duty-free to full-price luxury?
PS: Our price model depends on location. Okinawa is still duty-free, while other stores like Macau are not. Despite that, each location still has a value proposition. Even when we are at the same price level of the market, the market itself offers a price proposition, because the traveller still gets value when compared to the prices in their own country.
BoF: Other than China, what are the most important emerging markets for travel retail? What about South East Asia?
PS: We believe in Vietnam, where we have been for several years. I think Bali is interesting, because it has changed so much and upgraded in terms of luxury travelling. It’s almost like the Saint-Tropez for Asia. [The Indonesians] are also different to the Chinese, because they are more fashion conscious, which is an interesting category to explore. We are currently upgrading our store in Bali which is exciting.
BoF: And Europe?
PS: Europe will play a role, because it is the dream destination for many emerging market customers, from the Chinese to the Brazilians. Our travellers go to Europe and, through our research, we came to the conclusion that we have something to offer.
We are exploring opportunities and hope to open our first downtown store [in Europe] in the next three to four years. When we do open, it will be important to find iconic buildings and create a localised business. It’s not just buying world’s luxury brands, but offering a cultural experience. It needs to be more than just a shopping space.
Disclosures: Divia Harilela travelled to Macau as a guest of DFS Group. LVMH is part of a consortium of investors which has a minority stake in The Business of Fashion.