The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
LONDON, United Kingdom — Global retailers are still reeling from the Chinese New Year shopping frenzy. Stores of every size and persuasion geared up for the week-long holiday just past, arming shops with Mandarin-speaking staff, boosting inventory and decorating windows with cheerful New Year wishes, for many of the Chinese tourists who streamed into cities like Paris, Tokyo and Bangkok had one thing on their mind: shopping.
The China Outbound Tourism Research Institute reports that outbound tourists spent 57 percent of their budgets on shopping in 2014. Despite China’s slowing economy, total spending by Chinese travellers on outbound trips hit over $154 billion in 2015, an increase of 9.6 percent on the previous year, according to research firm Euromonitor International. Indeed, after years of serving the Chinese consumer abroad, most global retailers and fashion brands have become adept at capturing their spending power at flagships in Europe, Asia and North America. However, there is another opportunity that most have yet to crack: the Chinese domestic tourist.
As of 2014, Chinese domestic travellers make up 71 percent of China’s tourism market share with an aggregated revenue of almost 3 trillion yuan (about $460 billion), according to a report published by the EU SME Centre, a European Union organisation specialising in China market research. But while the volume of Chinese domestic travellers is over three fold those of outbound travellers, the latter spend a significantly larger percentage of their travel budget on shopping. The centre estimates that domestic travellers spend about 10 percent of their travel budget on shopping.
One reason for this is that prices for luxury goods can be 30 to 40 percent higher in China when compared to abroad. Until this price gap is mitigated, domestic travel retail will never be as appealing for Chinese tourists as shopping overseas.
“It’s been years that customers have experienced luxury products being cheaper outside China [so] it would take years and a lot of effort to change the customer’s perception,” says Hong Kong-based fashion retail expert Eddy Tao.
Nonetheless, the domestic Chinese travel market is growing rapidly, and spending is growing with it. For the 2016 Spring Festival period, China’s Ministry of Commerce reported that national retail sales grew to about 754 billion yuan ($115 billion), an increase of 11.2 percent from the previous year. The EU SME Centre estimates that the overall domestic tourism market will continue to grow by around 16 percent per year until 2020.
The challenge for global fashion brands will be to convince Chinese travellers to allocate a significant share of their budgets to fashion rather than small gifts and other items. “Domestically in China, we don’t see that price difference so the trigger of where you shop is less about the price difference but the accessibility of product,” says Youchi Kuo, lead expert for the Boston Consulting Group’s (BCG) Center for Customer Insight in Asia-Pacific.
China’s travel industry focuses on two extended holiday periods known as ‘golden weeks’: Chinese Lunar New Year Golden Week, also known as Spring Festival, which takes place in January or February, and the National Holiday Golden Week, which celebrates the founding of the People’s Republic of China later on October 1. A handful of other holidays such as Labour Day occur throughout the year but are not as popular with Chinese travellers as they only provide a single day off work.
National Holiday Golden Week
An overwhelmingly crowded Nanjing Xi Road is a familiar sight for local Shanghai residents during the National Holiday Golden Week. Crowds are so large and dangerous that the Chinese government has tried to pressure employers to offer paid leave outside main holidays to alleviate crowds. But while some may see these crowds as posing danger, it means especially heavy foot traffic for retail stores.
China’s rapidly expanding middle class means that more people have disposable income that can be spent on leisure activities. Those who could once never travel, now can. By 2020, the number of households in this new upper-middle-class — defined as households with disposable income of $10,001 to $16,000 — will double to 100 million, with the fastest growth taking place in cities classified as Tier 4 or lower, according to BCG.
This suggests a newly wealthy demographic in China’s hinterland, many of whom travel to the nation’s main shopping capitals during periods like the National Holiday Golden Week. Data from the CNTA reflects this desire, as the top cities in China by tourist revenue are currently Beijing at 428 billion yuan (about $66 billion) and Shanghai at 341.6 billion yuan (about $52 billion).
“We won’t bother to hold special events, such as a trunk show or salon, as traffic is relatively higher during festival periods and there is no need to attempt to drive more traffic,” says a retail executive at MCM Worldwide, luxury leather goods brand.
Some Chinese stores and malls have mastered leveraging discounts around these holiday periods to boost sales. Shanghai-based department store the No. 1 Yaohan offers 15 to 30 percent discounts every Chinese New Year’s Eve during an all-night shopping frenzy reminiscent of Black Friday. Customers queue for hours outside the mall, and items like gold jewellery and watches sell out within minutes. This past Chinese New Year’s Eve, the department store reported 640 million yuan (nearly $100 million) in sales in the one evening alone.
Following the example of stores such as the No. 1 Yaohan, retail market experts suggest that fashion brands have an opportunity to target the growing upper-middle-class who are experiencing cities such as Shanghai and Beijing for the first time. It is an important period to build brand awareness, and perhaps trigger shopping via e-commerce when they return to their hometowns. “It’s a way for consumers to expand their exposure,” says BCG’s Kuo.
Chinese Lunar New Year Golden Week
According to the Shanghai Statistics Bureau 2011 census, 9 million of Shanghai’s 23 million residents are long-term migrants. During Chinese Lunar New Year Golden Week, residents tend to return to their hometowns across China to spend the holiday season with their families.
This means that during the Lunar New Year, shopping capitals like Shanghai and Beijing appear like a ghost town, and consequently, many retail stores are closed. But the weeks leading up to the mass exodus present a potentially lucrative selling period that is currently under-served.
“People who live in big cities go to their hometowns or villages, they buy something and they send or bring it to the parents. That’s kind of how it’s been with people in China. Rather than buying locally [at their destination], they will buy it from big cities and then transport it to the hometown,” says David Zhao, founder and chief executive officer of Shangpin.com, a Chinese retailer selling fashion brands like Lanvin and Topshop.
E-commerce could play a larger role during this period as the convenience of having items shipped directly to their hometown would be appealing to some Chinese consumers, Zhao says.
But in order to capitalise on this opportunity, global brands must treat domestic Chinese travellers with equal care and consideration as they do international travellers, experts note. Many brands invest heavily in attracting the international Chinese traveller, launching advertising campaigns to educate the consumer on what to buy before they have even left China. But few international brands have done the same to trigger domestic retail for what can be a very specific traveller within China.
While many Chinese will return to their homes during the Spring Festival, wealthier Chinese have the option of taking luxury family vacations to a preferred domestic resort destination, such as Sanya in Hainan Province. International destinations like Hawaii and Thailand remain important, but Sanya, marketed as China's South Sea "paradise," provides a relaxed and familiar environment to shop. Hoping not to miss out on the opportunity, over 300 brands including Prada, Louis Vuitton and Rolex have set up shop in the favoured getaway.
With two purchasing points — the CDF Mall, the largest duty free mall in the world, and the Meilan International Airport — the island is one of the most accessible and valuable duty-free opportunities in China. Since local authorities lifted the limit on duty-free shopping on February 2 this year, travellers to Hainan can spend up to 1,600 yuan (about $2,450) per visit, twice a year. In just one week, around the 2016 Chinese New Year period, the Meilan International Airport saw 30,000 customers spend more than 60 million yuan (about $9.1 million).
But Sanya’s duty-free sale points are an exception on the mainland. Until the price gap for consumer goods between the domestic and overseas market is narrowed, the overall value of China’s domestic travel market for global retailers will be less attractive than the market driven by the enthusiastic outbound Chinese tourist.
Indeed, international Chinese travellers account for a larger percentage of retail sales, but China’s domestic travel market is significantly larger. If fashion brands become better aware of who the domestic traveller is, what motivates them and how to influence their purchases, then China’s golden weeks could become an even more golden opportunity than they already are.