As the People’s Republic of China celebrates its 65th birthday on October 1, more of its citizens than ever before will be taking the opportunity to travel overseas. The seven-day-long Golden Week holidays, once hotly anticipated shopping periods for luxury goods and gifts, are now occasions luxury brands dread.
The Chinese New Year holiday earlier this is a case in point. Retail sales growth over Chinese New Year in 2014 slowed to 13.3 percent from 14.7 percent during the 2013 holiday, and luxury sales within China suffered the most.
President Xi Jinping’s ongoing anti-corruption campaign is certainly a factor. As the crackdown on illegitimate “gifting” and slower economic growth have weakened luxury spending growth on the mainland, the realization is setting in among brands, retailers, and landlords that Xi’s crackdown will be a long-term affair—not the speed bump they had hoped for. At China Market Research Group (CMR), we expect low-to-mid single-digit growth in luxury spending over the National Day holiday. Brands with products more linked to personal use such as ready-to-wear clothing, footwear, accessories, and jewelry will see stronger growth, while categories that have been more associated gifting like leather goods and watches can expect weaker growth over the period.
Meanwhile, international travel is flourishing. Again, the numbers from Chinese New Year are telling: Although traditionally a time for visiting relatives in one’s ancestral home, overseas trips from China grew by 18.7 percent over last year’s holiday to 4.73 million trips. Chinese are now the world’s top spenders overseas, eclipsing Americans in 2012 and spending US$110 billion overseas in 2013.
In the luxury world, outbound Chinese travel has been most closely associated with shopping trips to Hong Kong, Macau, Paris, Milan—chic locales where the shops are plentiful and the prices are well below those in flagship stores in Shanghai and Beijing. Chinese travelers typically economized on everything from food to hotel accommodations in order to stock up on luxury merchandise.
But shopping no longer plays such a central role in overseas trips. We have noticed a shift in consumer priorities over the last few years toward an emphasis on experiences over “stuff,” which in turn has led to changes in spending patterns both at home and overseas. Now, trips are increasingly planned around sightseeing and exploring, with a single day for shopping reserved at the end. And the choice of destination is made from an ever-expanding range of options as visa restrictions for Chinese citizens are relaxed in many countries.
Take China’s middle class, a key traveling demographic. In interviews CMR conducted with white-collar workers in major cities in the last 18 months, we found that travel, not luxury goods, was the top purchase they saved their salaries for, and that the majority plan at least one overseas trip per year.
This was a shift from what we had seen as recently as 2011. Rather than saving up one or two months’ salary to buy a handbag from LV or Chanel, many young white-collar women are instead choosing to get less expensive items from labels like Coach or Kate Spade and use the rest of their savings to travel.
Chinese travelers are skimping less on accommodations as well, and are opting for premium hotel stays at least for part of their trip. Many middle-class interviewees told us they planned to spend most of their nights at a budget or three-star hotel but planned to splurge on a suite at a fancy resort for one or two nights. This is creating opportunities for high-end properties around the world from groups like Shangri-La and Starwood.
Affluent Chinese travelers are still buying luxury goods abroad, but they are increasingly doing so in farther-flung places. Our research with wealth Chinese consumers suggests that they are unlikely to visit a destination they have visited before for vacation, so Paris and Rome are out for many. In instances when they do a repeat visit, they rarely stay at the same hotel twice. Indeed, in some cases they divide a trip between several different high-end properties to mix it up.
Winners and Losers
Which destinations stand to benefit most? Which will suffer?
Hong Kong, though still the closest, easiest trip to make, is likely to take a dip. A feeling of “been there, done that” and increasingly frosty relations between local residents and mainland visitors are making many look elsewhere.
Within Southeast and East Asia, Thailand has long been a popular option, however, we expect travel to dip during the National Day holiday out of safety concerns following the coup in May. In the long term, expect interest in Thai beaches and shopping to recover as the situation stabilizes. Likewise, we expect visits to the Philippines and Vietnam to suffer due to diplomatic rows with the former and anti-Chinese riots in the latter. Indonesia and especially Bali, where Chinese visitors can get visas on arrival, will be a more popular destination. We expect South Korea to benefit as well from Chinese planning a trip nearby but who are wary of instability or danger.
For longer trips, France and Italy are still popular, but increasingly visits are focusing on places that are more off the beaten path. For the wealthy especially, far-flung places are key. At this point, many wealthy Chinese have already visited most of the world’s tourist landmarks and are looking for (a) new places their friends have not been to (or heard of) yet, and (b) new experiences other people haven’t had. Bragging rights are important—wealthy travelers want their holiday WeChat feed posts to inspire envy in their peers and gain face. Locations viewed as more off the beaten path—New Zealand, Mauritius, South Africa, Dubai—are in demand, as are novel activities like high-end safaris and extreme sports. Brands looking to differentiate their VIP loyalty programs could do worse than to cater to this adventurous spirit in their perks for high spenders, including once-in-a-lifetime trips rather than Fashion Week in Milan.
The sky-high luxury spending growth levels of pre-2012 aren’t likely to return this year—or in the next three or five years. The “new normal” is a market where luxury growth will be driven by purchases for personal use rather than gifts, and experiences are a key factor. The key growth opportunities for brands at the high end in the future are going to be experiential.
James Roy is the Associate Principal at China Market Research Group.