There is a major shift occurring in the international retail industry. Its genesis began long ago and was built on the needs of an aspirational and global-minded consumer. Yet, despite its prolonged ascension, only recently have a few brands chosen to recognize it, and even fewer have chosen to tackle it head-on. However, with China’s economic concerns, the stock market free fall in August and the government’s decision to devalue its currency, the Western world’s dependency on China has never been more apparent, and the shifting landscape of the retail industry can no longer be ignored.
What is this shift? It is the increasing importance and purchasing power of the Chinese retail tourist in the global retail market. During the last year alone, there were approximately 100 million outbound trips from China to international destinations. This number dwarfs other nations and is further compounded by the fact that Chinese tourists spend more per capita during their travels than any other tourist group. While some pundits cite China’s lagging growth rate and weakened yuan as reasons that the purchasing power of this group will wane, there are equally compelling arguments to the contrary.
Nonetheless, Western brands relying on domestic sales are right to worry. The rising Chinese middle class will be less likely to travel, and therefore more inclined to utilize domestic channels where a weak yuan will make purchasing foreign goods more expensive and less attractive to a traditionally price-sensitive consumer base. At the same time, while much of the country’s stock market gains for the year retreated to pre-rally levels during August’s sell-off, the segment of the population most important to the global retail market, the affluent traveling consumer, was least affected by the market shake-up.
Although the Chinese accounted for nearly 45 percent of all global luxury consumption in 2014 (a figure that has steadily increased year-over-year), amazingly, 75 to 80 percent of this spend was bought outside of Mainland China. This percentage stands in stark contrast to approximately 60 percent only four years ago. Given that there were an estimated 62 million outbound international trips taken by the Chinese during the first half of 2015, and factoring in consumer sentiment for international purchasing, the immediate effect of China’s economic spiral on Western retailers’ international outlets is not as clear-cut as their Mainland counterparts.
The impact of the Chinese retail tourist is far-reaching both in size and in relevancy. Recent quarterly earnings reports from Western retailers are prime examples. Under pressure to mitigate investor fears of a weakening Chinese economy, corporate executives enthusiastically highlighted revenue growth resulting from Chinese consumers in Western Europe and Japan as offsets to declining sales in domestic China. Left unsaid, however, was that the benefits generated by the outbound Chinese consumer were more the result of external factors than the result of corporate-level business decisions made in Europe or in the United States.
Luxury retailers have been succeeding with the Chinese retail tourist not as a result of proactive championing of the brands to the outbound consumer; but rather as a result of market conditions on the Mainland as well as in Hong Kong. Such market conditions include recent government-led crackdowns on corruption, rising political unrest in Hong Kong, higher domestic prices than abroad, as well as a fear of product authenticity on the Mainland. These forces have enabled brands to profit from the Chinese retail tourist’s migration from the local streets of Beijing and Shanghai to storefronts in Paris and Tokyo.
While a weakened yuan will certainly affect international purchasing decisions, the currency’s devaluation has yet to hit a price point that would render pricing arbitrage opportunities moot. As such, it is still in the Western retailer’s best interests to optimize the opportunities made available by the Chinese retail tourist.
In order to sustain these benefits, global retailers must first accept change. Brands must recognize that their traditional consumer base is shifting, and as a result, so should the way they engage them.
Western brands must reassess how they constitute themselves for this buyer. To date, virtually all global retailers use China-based consumer channels to do one thing: drive domestic consumption. They spend very little time and energy embracing and understanding the true Chinese consumer journey — which is to build awareness of a brand, formulate a perception of the brand, compare the brand to its peers, and ultimately purchase the brand’s products in the most advantageous market to the buyer.
Given the uncertainties surrounding China’s economy and the long-term impact on Western brands, both domestically and abroad, it is imperative that Western retailers invest in real-time international consumer intelligence to better understand where their consumers are traveling, what items they are most interested in purchasing, how they view trends in an international setting, and who the main influencers are who are helping to shape their perspective.
In other words, Western brands are better served preparing for the arrival of Chinese retail tourists than bemoaning the presumed loss of their business.
Brian Buchwald is chief executive officer and cofounder of Bomoda, and Andrew Roth is Bomoda’s chief strategy officer.