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As Chinese Tourism Booms, Travel Retail Soars

Despite global geopolitical turmoil, the category is on a steep growth trajectory.

CANNES, France — Despite global geopolitical turmoil stoked by protests in Hong Kong, the uncertainty around Brexit, trade wars and currency fluctuations, the travel-retail industry remains on a high growth trajectory, driven by beauty sales and the Chinese consumer.

Overall, the channel clocked 12.9 percent gains in 2018 to $79 billion, of which $31 billion was rung up by beauty products — by far the largest category — that registered a 23 percent sales rise versus 2017, according to Generation Research.

Skin-care made up about 45 percent of the category’s revenues in travel retail, up 35 percent on-year; makeup comprised about 25 percent, with 30 percent growth, and fragrance represented some 30 percent, advancing 3 percent, Generation said.

The continued uptick in beauty sales shows no signs of slowing, due in part to the constant increase in passenger footfall — expected to reach 3.5 billion travelers soon — and airport facility developments, according to beauty brands and retail operators at the TFWA World Exhibition and Conference held in Cannes, France, from Sept. 29 to Oct. 4.

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Passenger traffic is said to be increasing by about 6 percent annually, driven by the growth of the Chinese middle class. Already the numbers are quite large: According to statistics from Shiseido, there are 22 million Chinese female frequent travelers who purchase prestige beauty in the travel-retail channel at least two times a year, and 55 million who are traveling once a year and buying.

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Given that conversion rates have stayed steady at about 16 percent, brands are bullish from both a sales and recruitment standpoint.

Travel-retail executives have become accustomed to crises. “The travel-retail business is volatile by region, but strong globally,” said Jean-Christophe Babin, chief executive officer of Bulgari. “What we lose in one region, we recover in another.”

“You see these cycles coming and going,” agreed Txema Marquiegui, senior vice president travel retail at Coty Luxury.

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For many companies, travel retail’s importance extends far beyond sales. “It’s not just about business and profits — it’s about the role of travel retail in educating consumers,” said Cedric Prouvé, group president, international of The Estée Lauder Cos. “We think 59 percent of our Chinese consumers buy our brands for the first time in TR. It’s very big for awareness and building brand equity.”

The channel remains one of the key growth levers at Lauder, with the company citing Generation Research in naming it the top-ranked prestige beauty company in the channel for 2018 versus archrival L’Oréal, with the Estée Lauder brand number one in terms of sales and La Mer number six.

Lauder’s performance is echoed by other luxury marketers across categories. “We are currently growing at plus 27 percent,” said Laurent Marteau, head of travel retail worldwide at La Prairie Group, which is implementing its new store design globally.

Groupe Clarins, too, is booming, with Christian Laurent, president of travel retail and emerging markets worldwide, reporting the company is outpacing the overall market in terms of growth, thanks to the success of Clarins Double Serum, which accounts for one-third of the brand’s growth in Asia.

Over the past year, most of the beauty segment’s gains have been fueled by the Chinese, who are traveling more as their spending power strengthens. But their destinations are changing. The protests in Hong Kong have taken a toll on businesses there, while some North American locations like Vancouver, Toronto and Montreal have also taken a significant hit after Prime Minister Justin Trudeau took a pro-Hong Kong stance.

Tourist arrivals in Hong Kong fell nearly 40 percent in August versus the same period last year, following a 5 percent drop in July, representing the biggest monthly decline since the SARS outbreak in 2003. Retail sales plummeted by a record 23 percent in August, according to the most recent government data.

This year, Hong Kong-based travel-retail operator DFS was notably absent from the TFWA show, which registered a 7 percent rise in attendees versus the 2018 session to 7,531 people.

“If Chinese people don’t go to Hong Kong, they go elsewhere, and that’s the beauty of travel retail,” said Vincent Boinay, L’Oréal’s general manager for travel retail worldwide.

Given privacy issues, it is difficult to track exactly where the Chinese are traveling to now, but many report growing businesses in Macao, Southeast Asia and the domestic business in mainland China.

Bulgari’s Babin noted that the company’s fragrance business has grown 40 percent year-to-date in the top five airports in China, for example. He estimates that the demand for luxury in China will double or triple by 2025.

Over the last couple of years, Bulgari has significantly evolved its go-to market strategy, cutting the number of fragrance doors from 29,000 to 18,000 to better reflect the increased interest in high-luxury.

In the fragrance category, that means an emphasis on the origin of ingredients and the hand of a master perfumer, for example. “For our Tubereuse Mystique fragrance, we have secured fields in India where the tuberose is harvested. Chinese consumers are looking for that level of specificity,” said Luis Miguel Gonzalez Sebastiani, global general manager of parfums.“They are extremely interested in authenticity and origin.”

Shisiedo, too, is showing strong growth in the channel, reporting a 24 percent increase for the first half of 2019 for Asia. This year, the company is looking to increase its market share by doubling down on consumer shopping patterns.

“Chinese travelers are becoming much more diversified,” said Elisabeth Jouguelet, vice president of marketing and innovation. “The Chinese Millennials are a huge segment, but they are not homogeneous. Their differences are much more nuanced.”

To that end, the company conducted a global survey with 6,000 shoppers in 10 airports, segmenting Chinese travelers into seven groups such as “leading connoisseur,” representing travelers who are most status-driven and have the highest spend, and “spontaneous individuals,” or those who are most likely to purchase at point of sale. (Studies show that most Chinese shoppers know what they want to buy before they depart, and that about 60 percent of purchases are made on the outbound part of the trip.)

“Age is not a key variable,” said Jouguelet. “It’s about her attitudes toward life and beauty, and her behavior in travel retail.”

Adding to downward pressure on Chinese travelers’ spending were the lower duty-free allowance coming into force starting Jan. 1 for Chinese nationals and the yuan’s recent devaluation.

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Exchange rate fluctuations around the globe have been key to shaping the new routes travelers choose, executives said.

South America has been weathering ongoing currency crises, especially in Argentina and Brazil, which had the top spenders in travel retail in the Americas. There, the trade war with China “is impacting tremendously the traffic, which is minus 2.8 percent, with a forecast of minus 2.1 percent for the rest of the year. So no real improvement in sight,” said Yannick Raynaud, managing director of L’Oréal travel retail Americas.

The executive explained that on the flip side in the region, trade in Mexico, the Caribbean and on cruise ships is doing well. “All in all, I would say difficult conditions but a silver lining,” she said.

The British pound’s depreciation in light of Brexit has also had an impact. “We see fewer Brits for the moment,” said Antonin Carreau, global director of beauty at Dufry Group. “We see a certain stagnation of European travelers, but nothing outstanding. Russians are coming back in different, specific locations.”

For the London-based Molton Brown, 60 percent of whose business is done in the U.K., Brexit is definitely impacting growth, although the brand still expects to be up 5 percent year-on-year for 2019. While the devaluation of the pound hasn’t attracted an influx of international shoppers, global president Mark Johnson is optimistic about the holidays and has a strong 2020 planned.

“We’ll have a new store design and we have tools to bridge the gap,” he said. “We need to transition from thinking about the value of each transaction to how we think about our customer’s lifetime value.”

Yet despite such a mixed landscape, executives remain optimistic about business in 2019. “We will in Europe have a second half that could be a low double-digit [gain] coming from a period where we were flattish,” said Carreau. “We see an acceleration of the growth. It will be a relatively good year at the end of the day for retailers exposed essentially to EMEA and the Americas.”

Converting travelers into shoppers remained a key preoccupation of executives at TFWA. “Year after year the conversion rates remain stable…[and] slightly declining in some regions,” said Eric Vergès, L’Oréal travel retail consumer products division general manager.

“At this point, it’s 16 percent of people who are buying. It’s a very low number,” said Coty’s Marquiegui.

Speaking of airport operators he said: “The more that we work together, the better decisions we can collectively make and the better we can serve the consumer. If we serve the consumer better and the 16 becomes 17, I have grown plus 6 percent. On a global basis, this is significantly more than what Hong Kong can do.

“If I just take it from 16 to 18, I get plus 12 percent,” he continued. “Not many industries can go up plus 12 — and I’m only talking about a 2 [percentage point] increase in the number of people purchasing.”

Likewise, Laurent of Groupe Clarins is calling for more access to data from retailers. “The more they share, the more relevant you are for consumers,” he said. “We get annual figures in late July, but these are declarative sales from the previous year. We have no way to verify them.

“We need to go to the granularity of the purchase if we want to be efficient,” he continued. “The stakes are so big — we need more information.”

It was a call echoed by Alain Maingreaud, the new president of TFWA, who made the point a central theme of his opening remarks. “We need an international standard to measure sales,” he said. “It’s time to act. At stake is the sustainability of travel retail.”

Category-wise, skin care is beauty’s key growth driver in travel retail, as it is in the domestic market globally, followed by lipstick. In the Asia-Pacific region last year, where the channel’s beauty sales reached $20.7 billion, skin-care revenues grew 41 percent, versus 40 percent for makeup and 10 percent for fragrances, according to Generation.

Skin care accounts for half of Guerlain’s sales in the channel globally, said Céline Heuga, the brand’s travel retail worldwide marketing director. She added the business is driven by Abeille Royale products.

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“It’s our priority; it is the fastest-growing line, but Orchidée Impériale for us is also very important,” she continued. “Today, we see in the market there is a lot of potential for super-premium skin care.”

Walking the TFWA fair, Carreau noted a lot of innovation, including disruptive propositions in color cosmetics. “There’s a new variety of brands coming into makeup from the designer perfume background,” he said. “Some of them have been quite creative from a product standpoint, anchoring their makeup in the territory of the brand. There are new brands as well” targeting Millennials.

“I’ve seen so many digital services, experiences, fragrance-finders, a lot of digital innovation, which I wouldn’t say I find surprising because it’s overdue,” said Britta Hoffmann, director purchase perfume and cosmetics at Gebr. Heinemann.

She saw such innovations for skin care and makeup but also now a plethora for perfume. “It is the category where we were really missing out when it comes to innovation, and I’ve seen many things,” said the executive.

Puig, for instance, was showcasing its Alchemist Atelier concept, which allows for bespoke fragrance creation with the use of an application. Guerlain presented its Mindscent device, which reads brainwaves to suss out emotional responses to scents to help consumers choose which fragrance is most suitable for them.

Lancôme displayed its fully digital shelf, replete with voice recognition, so people could be spoken to in their native tongue, while La Roche-Posay featured Effaclar Spotscan, a tool to identify skin’s imperfections and give product recommendations.

“There are some really good service elements. They were all over,” continued Hoffmann. “We’re cautiously seeing how much digital we need at the POS.”

Kay Spanger, a member of Gebr. Heinemann’s executive board, believes that if all brands come with digital components in travel retail, “it becomes boring for the consumer.”

“On the other side, what I really like is a brand that isn’t doing any digital,” continued Hoffmann. “But they do what we are asking for, which is gifting, service, entertainment.”

Heinemann is working on a “Minis to Fly” concept, which is starting with a prototype in a couple of locations, including Hamburg. “We will focus on makeup and skin care, but also smaller fragrances,” said Hoffmann. “I was happy to see all brands are really going for it. Impulse is getting much more important, especially in travel retail.”

Over the past year there’s been a rise of niche brands in the channel. For Puig, that’s included Penhaligon’s in fragrance and Christian Louboutin in makeup. “He resonates extremely well in northeast Asia,” said Javier Bach, chief operating officer at Puig, of Louboutin. “We are developing our niche portfolio in a very strong manner, and that’s a clear vector of growth.”

Bach emphasized the travel-retail shopping experience must be differentiated from location to location — and from downtown stores. “It is extremely important for our brands to not be the same in every place,” he said, citing as an example the Jean Paul Gaultier Airlines exclusive fragrance collection for travelers.

For Lagardère Travel Retail, it boils down to three key words: target, facilitate and engage. “We have to differentiate our channel from the domestic market,” said Stéphanie Metz Thevenod, executive vice president of marketing and digital. “The challenge is space. Rents make it difficult to bring in new brands that may not have the same level of margins as established brands. We have to think with the airports and brands about how to take more risks and test and learn. For beauty, this is key, because beauty is about innovation.”

One category that is happening in is fragrances. Puig’s Bach noted a growing interest Asians are taking in fragrances — especially niche perfumes. “There has been a jump to niche fragrances that in other parts of the world has taken much longer for consumers to go to that level,” he said. “Young people are interested in high-value, individualistic offerings. It’s a great opportunity.”

“Chinese people start to buy more fragrances,” agreed Euroitalia president Giovanni Sgariboldi.

Chopard Parfums is looking to build its business globally, too, said ceo Patrizio Stella, who explained that while growth in the Middle East is still strong, it is slowing from the consistent double-digit gains of the last 20 years. That means that for 2020, Chopard will stage its first global launch for the brand, as it looks to capture Middle Eastern clients around the world and solidify its Asian business.

Other established brands are looking to provide differentiation by venturing into new categories. Lalique Group, with its portfolio of fragrance brands, will soon launch a line of four serums and is pushing further into Asia, having set up operations in Japan last year.

“It was a major step, and we still see considerable growth potential and potential to gain market share in Asia, so that will continue to be our key focus in the coming years — although we also try to increase our performance on a global scale,” said Roger von der Weid, Lalique Group ceo, addressing attendees at a company cocktail.

Heinemann at the beginning of this year introduced a clean beauty concept, where 80 percent of the brands were new to the operator. It has brought incremental sales growth in Hamburg, Frankfurt and Copenhagen airports, said Hoffmann, adding: “It’s really a different target group.

“Coming back to the fair, I would have expected to see more of that,” she said.

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