LONDON, United Kingdom — With two-thirds of Chinese luxury purchases now made outside mainland China, the whole world has become a Chinese luxury shopping mall. Every major market seems eager to welcome Chinese tourists and their spending power: the UK has overhauled its visa application process, as have Australia and several Southeast Asian countries. The USA has also eased its visa process.
Several factors are re-shaping the map: first, a vast price handicap in China caused by high tax and import duties, combined with a weak euro; second, booming outbound Chinese tourism; third, the explosion of Chinese luxury e-commerce and daigou websites; and forth, a series of geopolitical developments.
For one, growing tensions with Hong Kong are making the territory a less attractive destination for mainland Chinese tourists, who are turning to alternative destinations in Asia. Japan, which has the added attraction of a depreciating yen, and South Korea are emerging as the front-runners. Singapore, which suffered following the disappearance of flight MH370, also seems to be on the rebound.
In Macau, which once thrived on the Chinese super-rich, gaming and luxury sales are suffering as China’s anti-corruption campaign bites deeper, driving the “Las Vegas of Asia” to respond by changing its skin to cater for the rising Chinese middle class.
South Korea, which has the advantage of proximity, is benefitting from the waning popularity of Hong Kong, as are Japan and Taiwan. The ratio of Chinese tourists who visit Hong Kong versus South Korea has dropped from 14.4x five years ago to 7.7x in 2014. Chinese visitors are enthusiastic buyers of Korean skincare and cosmetics brands and styles and Korean department stores have responded by developing very effective duty-free locations in downtown shopping districts.
The UK has suffered from not being part of the Schengen Area. But despite this — and the strength of the pound — Chinese travellers are the biggest single group of tax-free shoppers in the country, accounting for one quarter of total tax-free sales. This is due, in part, to the fact that the UK government was one of the first to relax visa requirements for tourists and business visitors from mainland China.
The Chinese account for only two percent of total foreign tourists to Italy, measured in number of stays, far behind the traditional patrons of Italian tourism: the Germans (18 percent), French (10 percent) and Americans (10 percent). However, of all the countries on the itineraries of Chinese tourists, Italy is where they say they spend the most: on average over CNY 20,000 (about $3,200) per person. Moreover, Italy is second only to Russians in terms of tax-free shopping and factory outlets have become an increasingly popular destination.
The USA is a relatively new destination for Chinese tourists, but the country is making up for lost time: Chinese tourist arrivals are forecast to rise by 18 percent a year in the next four years, faster than any other destination. The US has the advantage of being second only to Hong Kong in terms of Chinese migrants and its universities are a big attraction for Chinese students. American exposure should continue to be a bonus for the luxury players, but shifting tourist volumes, at least in the short-term, might temper the boost. Due to a strong dollar, America has become far more expensive than Europe: a Burberry trench coat costs five percent more in New York than in Paris; a Louis Vuitton Speedy 30 is 32 percent more expensive.
The development of online luxury will increase price transparency across regions. Thus far, efforts to lobby the Chinese authorities to reduce tax and import duties on European luxury goods have been in vain. The prospect of a duty-free agreement between the EU and China — like that signed between Switzerland and China last year (which will benefit Richemont and Swatch) — is remote, given the scope and complexity of the many industries involved.
It is conceivable that luxury goods players will have to address the widening price gap between China and Europe in the medium term. But outright price cuts in China are likely to be the exception. Instead, the leather goods mega-brands will probably increase prices in the eurozone, but simultaneously introduce more lower price-point products to avoid locking out European domestic consumers.
Within China, the growth of luxury retail space is set to plateau — and possibly even shrink — in the short term. All indicators point to more and more Chinese luxury spending moving outside mainland China. This will further drain mainland Chinese stores of traffic and negatively impact sales densities, starting from already relatively low productivity levels. As a consequence, European luxury brands will most likely take advantage of their relatively short-duration leases to trim their local retail networks.
Luca Solca is the head of luxury goods at BNP Exane Paribas.