China travel retail: New economic realities for brands

As weakness in China’s duty-free market persists, once upbeat brands supplying the channel are now worried. Hainan’s poor performance last year, with sales down 29%, has only intensified these jitters. Although brands, especially those from large beauty players like Estée Lauder, L’Oréal, and LVMH, have continued to push their wares in China’s paradise province, Chinese consumers are no longer falling for the allure of glitzy stores or big promotions. Some are turning away and hunting for cheaper alternatives when it comes to fashion. According to research from consulting firm Oliver Wyman, “Younger consumers in China are increasingly favoring dupe apparel products over traditional luxury goods. This trend is particularly strong among millennials and signifies a transformative shift in consumer behavior, driven by economic considerations and evolving perceptions of value.” China’s duty-free channel is having to adjust to these new market forces. As a result, some travel retailers are taking a renewed interest in smaller luxury brands that were not previously on their radar, hoping they will appeal to those younger consumers who are dropping big labels. Italy’s Baratti & Milano, a chocolate brand established in Turin nearly 170 years ago and still family owned, is one such example. Paolo Berentzen from Multi Duty Free, which represents the brand in travel retail, tells Jing Daily: “We are talking to a major Chinese travel retailer. An important aspect is our heritage and the ‘Torino 1858’ labeling. This conveys both traditional quality — our milk only comes from Normandy, for example — and longevity.” The trend seems to be to launch high-end niche labels online before introducing them to stores. This is also preferable for smaller suppliers as the cost of market entry is lower. “We can assess the feedback and the sales before deciding on a physical presence,” Berentzen explains. Getting noticed Travel retailers in China are beginning to realize that they can’t rely on well-known luxury stalwarts alone; they need credible, lesser-known brands to stand out. They also need a firmer handle on the market. One of the most experienced non-Chinese players is France’s Lagardère Travel Retail. Despite having been in the domestic airport market for many years, Greater China accounts for only 4% of the company’s Q3 2024 revenue of €1.6 billion, with another 1% coming from the rest of Asia-Pacific. In 2019, the total Asia Pacific share including China was 12%. Séverine Lanthier, the retailer’s chief strategy and development officer and regional COO, says, “The traffic in domestic is there and growing, but we don’t see the consumption, so the spend per passenger is really down versus pre-Covid. Chinese confidence needs to improve so they will spend more.” Lagardère’s exposure as a retailer, rather than just a supply partner, across Chinese airports allows it to gauge conditions better than its competitors — and it’s responding with some drastic measures. “We’re renegotiating [contracts] with all airports to face the new economic realities. With traffic growing but the spend reducing, the traditional minimum guarantee doesn’t work as a business model,” notes Lanthier. Chinese airports have been open to this, partly because finding alternative retail partners willing to invest the required capital expenditure under current conditions is challenging. Moreover, brands have scaled back on opening new locations at airports across the country, making it harder for retailers to fill vacant spaces. Special measures LVMH’s in-house eyewear business Thélios, whose brands include Celine, Dior, Fendi, Givenchy, and Loewe, has locations with China Duty Free Group (CDFG), DFS, and Sunrise Duty Free. For now, the company is putting its trust in government measures. Christine Yan, senior travel retail manager for APAC, says, “Chinese spending has definitely dropped, but we hope the stimulus packages will have some impact.” While government stimulus in the final quarter of last year aimed to boost consumer spending, its impact has been uneven. Tangible benefits may be materializing in wider retail, but the duty-free sector may not see the same gains. Additionally, Trading Economics forecasts that China’s GDP growth will decelerate to 4.5% this year. “The stimulus was a bit too late, and I don’t know if it was enough,” says Lanthier. “It wasn’t directly geared to retail and consumption. There are still some tough months ahead.” The stock performance of CDFG’s parent, China Tourism Group Duty Free Corp, provides ample evidence: it has slid in the past three months, closing at 59.98 yuan ($8.18) on Friday — a fraction of its 2023 peak of 230.50 yuan ($31.44). Accounting for more than 80% of China’s duty-free market, CDFG is a bellwether. One potential saving grace is the government’s push for downtown duty-free shops, similar to those in South Korea. “Basically, it means that travelers now have the possibility to take their time to browse prior to departure as long as they have their air ticket. But I don’t think this will make a huge difference because it is coming at a moment when Chinese consumption is slow,” says Evelyne Ly Wainer, managing director of global travel retail at beauty house L’Occitane. Besides, opening more duty-free outlets does not mean consumers will rush out to buy. “People have plenty of avenues to shop: online, offline, at the airport. Downtown duty-free stores are not going to make them suddenly spend more,” Ly Wainer adds. Deciphering consumer demands There has been a post-Covid change in customer expectations, says Philippe Fontalba, former vice president of travel retail at the Middle East’s Chalhoub Group, who is well-versed in the Asia Pacific market. “That is even more true in China because of the influence of social media. Consumption attitudes of Gen Z have totally shifted, and this has impacted places like Hainan,” he notes. CDFG acknowledges this shift, stating in a white paper produced with Deloitte: “China is undergoing a transformation in consumption structure, influenced by intergenerational lifestyle shifts, changes in family structure, and innovation in retail channels.” In this uncertain environment, brands are still cautiously investing, if only to gauge interest and stay in the game. For example, Italian luggage brand Bric’s moved from an online presence last September to opening a one-year temporary store in Beijing — a toe back in the water after exiting the market during the pandemic. As CEO Attilio Briccola put it, “Even though China is such a tough market right now, we needed to have a physical store as a test.” Testing aside, brands need a better grip on consumer behavior. With the full return of Chinese travelers expected to take longer than anticipated, luxury brands, retailers, and hospitality players will need to adapt to changing spending patterns in this challenging economic environment.

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China travel retail: New economic realities for brands