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Travel Retail Is in Trouble. How Bad Will It Get?

As the coronavirus outbreak intensifies, Chinese outbound tourism comes to a standstill and retailers begin to assess the damage to business beyond China.
Schedule board displaying flight information in the departure hall of Shanghai Pudong International Airport | Source: Shutterstock
By
  • Liz Flora

NEW YORK, United States —  Two weeks after the end of the Chinese New Year holiday period, specially designed festive items sat unsold at uncharacteristically tranquil boutiques on New York's Fifth Avenue. According to staff at several stores who spoke to BoF on the condition of anonymity, Chinese customer numbers had noticeably decreased in the wake of a travel downturn caused by the coronavirus outbreak.

“It’s going to be horrible” for the travel and travel retail industries, predicts David Tarsh, a spokesman for travel analysis firm ForwardKeys. According to the firm’s recently released figures, outbound travel from China fell by 57.5 percent in the three week period after the imposition of government travel restrictions. Flight bookings for March and April combined are currently 55.9 percent of what they were at the same time in 2019, but that number will probably go down, according to Tarsh.

“It’s quite possible that by the time we get to the beginning of March, it’s even worse. Given the progress of the disease, it’s more likely we’ll see the trend of cancellations continuing,” he adds.

First and foremost a human tragedy, the crisis has industry leaders expressing their concern for China.

The combination of travel restrictions, cancelled flights, and broader travel anxiety means that retailers beyond China are now feeling the effects of a public health emergency that has claimed the lives of 2126 people. China’s domestic retail sector has already been hit in a profound way, as the coronavirus outbreak has impacted all areas of the Chinese economy, with ratings agency Moody’s recently revising its Chinese GDP growth forecast for 2020 to 5.2 percent, down from 5.8 percent.

First and foremost a human tragedy, the crisis has industry leaders expressing their concern for China which remains the epicentre of the crisis. "It's very difficult for people to understand the scale of disruption to daily life in China and the resilience of people in the face of this epidemic and the measures that have been imposed to stop the spread of the infection," says Andrew Keith, president of luxury department store group Lane Crawford, which has stores in Hong Kong, Beijing, Shanghai and Chengdu.

“Cities have been locked down, people are scared, and are focused on survival. The basic necessities of daily life — food and personal care staples, and the ability to go out, socialise with friends and relatives — have become luxuries.”

Severe Travel Slowdown

The latest statistics from the International Civil Aviation Organisation show that around 70 airlines have cancelled all flights to and from mainland China, and 50 more have cut back on flight numbers. Beyond China, it estimates that Japan’s tourism sector will be hit the hardest, with a prediction that it will lose US$1.29 billion in the first quarter of 2020.

Chinese travellers took 166 million outbound trips in 2019, according to the China Tourism Academy, making China the world’s largest source market for tourists. What’s more, Chinese consumers account for an estimated one-third of all global luxury purchases, according to Bain & Company, with 73 percent of that spending taking place outside mainland China. Now, with international leisure trips virtually at a standstill, retailers dependent on the Chinese traveller market are feeling the effects around the world.

Augustin de Romanet, chief executive of Groupe ADP (the French international airport operator), told investors in a February 14 earnings conference call that that the coronavirus could have a “real material” impact at Paris’ two airports. He stated that the airports see 2 million passengers from China per year, which accounts for 15 percent of total spending.

The repercussions are enormous... not only for airlines, tourism sites, and hotels but for the luxury industry as a whole.

“If by the end of March, the coronavirus subsides and flights from China resume, we can absorb that. However, if it continues in April and May, this is going to affect us, and we will have to draw the conclusions from that in our forecast,” he said.

“The repercussions are enormous,” says Chloe Reuter, founding partner of Shanghai-based Reuter Communications, “not only for airlines, tourism sites, and hotels but for the luxury industry as a whole, which had come to rely on the ever-growing number of Chinese looking to purchase luxury items.”

The slowdown in travel has also spread to outbound tourists from neighbouring countries. Last week “was the first time we saw travel retail impacted outside of China,” says Tarsh, with outbound bookings from Asia-Pacific locations excluding mainland China and Hong Kong seeing a 10.5 percent decrease.

Earlier this month, Singapore’s Transport Minister Khaw Boon Wan said that where Chinese tourists account for a third of retail sales in Changi Airport, “the one-third has evaporated.”

Duty Free and Outlet Sectors

The travel retail channels likely to be hit especially hard are duty-free and off-price outlets which rely heavily on outbound Chinese travellers.

The travel retail industry "is acutely aware of its potentially huge impact on the industry's commercial performance," says Alison Farrington, the associate editor for Duty Free News International, noting that "several duty free retailers, airports and cruise lines have put in place preventative measures such as travel restrictions and store closures" that are "painful decisions commercially," yet necessary.

While store closings are still concentrated in mainland China, disruptions to retail operations have occurred in neighbouring markets which attract duty free shoppers from the mainland: South Korea's top retailers Shilla, Lotte, and Shinsegae have all reduced their opening hours, and Shilla closed its Seoul and Jeju stores from February 3 to 7.

The travel retail channels likely to be hit especially hard are duty-free and off-price outlets.

It is difficult to overstate the importance of outbound Chinese travellers to these retailers. Chinese customers accounted for a third of global duty-free sales in 2018, according to Morgan Stanley. More than half of Chinese visitors to the UK are estimated to visit luxury retail outlet Bicester Village, while McArthurGlen has previously stated that Chinese travellers represent a third of total international spending at its locations.

According to the World Health Organisation (WHO), there have been 75,724 cases of the coronavirus across 27 countries, although most have been in China. According to yesterday’s briefing from the Director General of the WHO, Tedros Adhanom, "The data from China appears to show a decline in new cases. This is welcome news, but it must be interpreted very cautiously. It’s far too early to make predictions about this outbreak."

Brand Executives Take Stock

“It’s like a ghost town,” said a salesperson at the counter of one French luxury beauty brand in a Fifth Avenue department store, who asked not to be named as she was not authorised to represent the brand on the record. “Just look around,” she said, pointing to the nearly empty beauty floor.

Brands are bracing for the worst of the travel downturn. Burberry stated in an official update on February 7 that "the spending patterns of Chinese customers in Europe and other tourist destinations have been less impacted to date but given widening travel restrictions, we anticipate these to worsen over the coming weeks."

Estée Lauder’s fiscal year 2020 second-quarter earnings release stated that “global travel retail, localities most affected by the virus outbreak, and destination markets favoured by tourists are expected to experience the greatest negative impact in the coming months followed by a gradual recovery later in the fiscal year.”

Jean-Paul Agon, chairman and chief executive of L’Oréal, said that the decrease “will have a temporary impact on the beauty market in the region and therefore on our business in China and travel retail in Asia, even if it is too early to assess it.”

The outbreak is having a wide-ranging effect on fashion, as closed factories have disrupted supply chains and companies.

According to Fitch Solutions, brands that have the most exposure to Chinese customers will be the hardest hit. It cites Hong Kong as one of the worst off as Chinese nationals made up over 78 percent of visitors in 2019, even as their numbers dropped due to political upheaval. “About half of Chinese outbound tourists are actually travelling to Hong Kong and Macau, which are practically closed to Chinese tourists,” says Wolfgang Arlt, the chief executive of the China Outbound Tourism Research Institute.

“While the current situation is unprecedented with months of social unrest in Hong Kong followed by an epidemic across Greater China, we have experienced both, separately, previously and we will be prepared to do so should a situation arise again,” said Lane Crawford’s Keith in a statement, referring to the SARS epidemic which hit the region from 2002 to 2004.

Keith added that the department store is “not as exposed as other businesses to the fluctuation of mainland tourists because we have a very strong, loyal customer base.” He does note, however, that online sales are picking up as people refrain from travel. “What we are seeing overall is an even greater reliance on e-commerce in China,” he says. “We’ve seen a triple digit spike online in our Lane Crawford China business.”

However, it is a mixed picture for e-commerce. Alibaba Chief Executive Daniel Zhang, warned that the coronavirus will dampen business “across the board” for the company in the first three months of 2020, including Tmall and Taobao.

The outbreak is having a wide-ranging effect on fashion, as closed factories have disrupted supply chains and companies including Burberry, Tapestry Inc., and Capri Holdings have released revised sales outlooks. Events both inside and outside of China are being cancelled, including Shanghai Fashion Week, and some international trade shows.

Recovery Based on Pent Up Demand

The outlook for a rebound remains unclear, with many industry stakeholders taking an optimistic tone for now.

“The April-May period is always slow,” says Sage Brennan, co-founder of China Luxury Advisors, who notes that even the Chinese New Year travel period is “nothing like the summer or even Golden Week in October” in terms of visitor numbers and spending. He predicts that when people do start traveling again, it is “going to recover quickly” because the Chinese government will likely invest in spurring travel and there will be pent up consumer demand for travel.

Alexander Glos of Shanghai-based travel marketing agency i2i Group says, “We anticipate a substantial amount of pent up demand because many people did not travel during Chinese New Year,” saying that his company’s data indicates rebookings are taking place for April through June. “Speaking to several travel resellers in China during the past week, they actually are very optimistic that business will not only come back, but that actually the business over the medium term will be very robust.”

The outlook for a rebound remains unclear, with many industry stakeholders taking an optimistic tone for now.

“We are quite optimistic that outbound travel will quickly rebound after this crisis,” says Shanghai-based communications firm WE Red Bridge Managing Director and Head of Strategy Nicky Wang, who notes that the firm has seen an increase in search volume for Chinese Labour Day travel at the start of May. The firm formerly counted luxury outlet village player Value Retail as a client in China.

But analysts remind retailers to keep a more cautious outlook. Predictions right now about when exactly the crisis will abate are “mighty speculative,” says Tarsh. “At this stage, we truly don’t know what’s going to happen with this viral outbreak.”

Brands’ marketing efforts for now are likely to switch focus to other traveller markets. “This is a moment to fill the void by studying alternative origin markets and focusing promotional efforts on them,” says Olivier Ponti, the vice president of insights for ForwardKeys.

This does not mean ignoring China, but rather taking a step back from commercialised messaging in the Chinese market for the time being, says Reuter. “While now is not the time for active promotion, it is a time for active involvement,” she explains, by highlighting the donations made by the world’s leading luxury and beauty conglomerates to charities and hospitals. When it comes to Chinese tourists, she says brands and tourism boards should also “ensure that they remain sensitive to the situation and offer empathetic messages, otherwise it could risk having a longterm adverse effect,” especially amid reports of xenophobic incidents worldwide.

“When this is over, I think people will want to celebrate life. They’ll fall in love again with beautiful things and crave social experiences that have meaning and make them feel good about themselves, and they will want to travel after being isolated,” says Keith, who notes that the same happened after the SARS crisis. For now, the question is whether that will happen later rather than sooner.

Updated 14:37 GMT on February 27 2020: This story misstated that Value Retail is a client of WE Red Bridge. Value Retail used to be a client of WE Red Bridge in mainland China.

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China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent casey.hall@businessoffashion.com.

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