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Travel Retail on the Front Line as Coronavirus Spreads

The channel, led by the beauty category, has been heavily reliant on the Chinese traveler for growth.

PARIS — The coronavirus is rattling the travel-retail industry — including its largest category, beauty — which has been heavily reliant on Asian consumers, especially from China, for growth.

The $79 billion travel-retail market, of which $31 billion was rung up by cosmetics and fragrance products in 2018, according to Generation Research’s latest statistics, could be hard hit as the Chinese travel less and tourist footfall drops around the globe.

Almost half of China’s population is reportedly facing travel restrictions, as the number of deaths worldwide from the virus exceeds 1,850 and the count of confirmed cases has reached more than 73,000 people.

Prior to the health crisis, passenger traffic was said to be increasing by about 6 percent annually, fueled by the rise of the Chinese middle class.

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There were 22 million Chinese female frequent travelers who purchased prestige beauty in the travel-retail channel at least two-times a year, and 55 million who were traveling once a year and buying, according to Shiseido data.

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In fact, the whole Asia-Pacific region helped drive travel retail’s strong 12.9 percent sales gain in 2018, with the channel’s revenues there jumping 23.3 percent to make up 49.2 percent of the overall business, Generation Research figures show.

Skin care, a key category for Asian consumers, generated about 45 percent of beauty’s total revenues in travel retail, up 35 percent year-on-year, Generation Research said.

But such numbers could fall fast.

“The travel setback caused by the coronavirus outbreak has now spread beyond China, with other parts of the Asia-Pacific region experiencing a 10.5 percent slowdown in outbound travel bookings for March and April, excluding trips to and from China and Hong Kong,” analytics company ForwardKeys said in a statement.

In that geographic zone, some key countries for beauty sales in 2018 aside from China and Hong Kong included South Korea, making $10.43 billion from skin care, makeup and fragrance; Thailand, generating $1.24 billion, and Japan, ringing up $1.12 billion, according to Generation Research.

In the first three weeks after the Chinese government placed travel restrictions on its denizens due to the coronavirus, outbound travel from China between Jan. 20 and Feb. 9 declined by 57.5 percent, with travel to the Americas worst affected in relative terms and to the Asia-Pacific region in absolute terms.

“Travel to Asia-Pacific, which receives 75 percent of the Chinese outbound market, was down by 58.3 percent; travel to Europe was down by 41.7 percent; travel to Africa and the Middle East was down by 51.6 percent, and travel to the Americas was down by 64.1 percent,” ForwardKeys said.

“The world’s largest and highest-spending outbound travel market, China, is in severe difficulty; cancellations are growing by the day, and the trend is now spreading to surrounding countries,” Olivier Ponti, vice president of insights at ForwardKeys, said in the statement. “On the brighter side, we are not seeing a slowdown in travel outside the Asia-Pacific region. So this is a moment to fill the void by studying alternative origin markets and focusing promotional efforts on them.”

Ponti added that “in a disease outbreak like this, travel trends can change quickly, and different markets are likely to respond differently.”

Travel-retail operators and beauty manufacturers are closely monitoring how the crisis evolves, but those more reliant on Asian travelers’ business will suffer the most.

“It’s too early to assess precisely the impact and evaluate short- and mid-term consequences on our business as things are evolving by the day,” said airport operator Lagardère Travel Retail in a statement.

“Our three business lines and geographically diversified strategy makes us less dependent on China-related sales — less than 10 percent of sales, including in airports outside of China — and the impact will depend on whether the situation aggravates and continues over a longer time,” the operator said.

“Naturally, anything that influences passenger movements has a commercial impact,” said airport operator Gebr. Heinemann in a statement. “The effects of the coronavirus are not yet foreseeable at present. We are broad-based and thus able to counterbalance and compensate for fluctuations in certain regions or of specific passenger groups.”

Beautymakers’ travel-retail business had been developing at a rapid clip. For such companies, the channel’s importance extends far beyond sales — which can often equate to high-single-digit percentages of a group’s overall revenues — since travel retail educates consumers, therefore making it a key brand-equity builder.

At the world’s largest beauty company, L’Oréal, sales in the channel last year registered growth of 25.3 percent on a like-for-like basis. By the second half of 2019, the group’s travel-retail business had become so large that if it were considered a country sales-wise it would have constituted L’Oréal’s third largest, after the U.S. and China.

“Travel retail represents something like 9 percent globally of our sales worldwide,” said Jean-Paul Agon, L’Oréal chairman and chief executive officer, during a conference with financial analysts and journalists held earlier in February.

At the meeting, while talking about the coronavirus, he said: “This context will have a temporary impact on the beauty market in the region and therefore, obviously, on our business in China and travel retail Asia, even if it’s too early to assess it.

“The experiences that we have had in similar situations in the past, [with] SARS, MERS, etcetera, showed that after a period of disturbance, consumption resumes stronger than before,” Agon continued.

For its part, the Estée Lauder Cos. Inc. around the same time sharply lowered its guidance for the second half of this fiscal year, due to the epidemic.

“Global travel retail, localities most effected by the virus outbreak and destination markets favored by tourists are expected to experience the greatest negative impact in the coming months followed by a gradual recovery later in the fiscal year,” the company said at the time.

History has proven the travel-retail industry’s remarkable buoyancy.

Although the channel is on the front line to be buffeted by any world crisis — be it health-, terror-, geopolitical- or monetary-related — travel retail has successfully weathered many disasters over the past two decades. These include the attacks of Sept. 11, SARS, a global economic recession and a sovereign debt crisis. In general, if sales gains weren’t maintained it has taken just up to a year for the channel to grow again after each event, Generation Research data demonstrates.

In 2001, the year of the SARS outbreak, for instance, travel retail registered sales of $22.8 billion, versus $20 billion in 2002 — so the epidemic had no negative financial impact. In 2008, the year of the global economic recession, the channel’s sales came in at $41 billion, followed by $38.2 billion in 2009, when Lehman Brothers crashed, and $43.2 billion in 2010, the year of the global debt expansion, according to Generation Research.

“Asia-Pacific is unquestionably resilient and resourceful, and there is a proven analysis of the bounce-back from previous crises, such as SARS or the 2008-09 global financial crash,” according to a joint statement from the Tax Free World Association and the Asia-Pacific Travel Retail Association.

“There are underlying long-term positives, with IATA [or International Air Transport Association] reporting an influx of 450 million additional Chinese air passengers over the last 10 years and analysis that China will become the largest aviation market within the next five years, with long-term growth projected to deliver 1 billion new passengers by 2037, to 1.6 billion,” the associations continued.

“When Chinese tourists start traveling again at full pace, which they will do, we should expect a return to commercial growth with the same vigor and energy we’ve seen when faced with other headwinds,” TFWA and APTRA maintained. “We are, after all, a region that thrives on fast change.”