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China’s Anti-Corruption Campaign and the Travel Retail Industry

by Marek Danyluk

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“Incorrect Values”
 
Suspicion turned to action in 2012, when China’s President, Xi Jinping called for a major overhaul to bribery. Following the new head of state’s inkling of commercial corruption the first wave of change began with outlining “four forms of decadence: formalism, bureaucratism, hedonism and extravagance” [The Telegraph]. There began a “thorough cleanup” process with the initial announcement of a list of commandments for state officials, which magnified specific industries including the luxury goods market.
 
In 2013, the restrictions placed on authorised plates for government and military vehicles from luxury brands like Bentley and BMW surreptitiously kick started a domino effect of decline within the global luxury goods market. The punishment of over 180,000 government officials created a rippling effect on major industries such as Luxury Retail, Travel Retail and Consumer Goods including the alcoholic beverage brands, who were hit hardest by the crackdown.
 
Statisticians predicated the “gifting” of luxury goods accounted for more than 30 per cent of total sales during the peaks of years past in the mainland. It was claimed a staggering 11 per cent drop in watch sales rocked the Timepiece industry in the aftermath of Xi’s announcement. The governance of the Swiss Watch Industry [FH], which represents Omega and Louis Vuitton amongst others, informed a drop in sales of 26% in the Chinese market during the first quarter of 2013 [South China Morning Post]. Travel back two years prior and a 54% swing in sales, is just one resulting consequence of this new regime.
 
Meanwhile, it was argued that ‘incorrect values’ were being advertised to millions through the promotion of luxury gifting. Diageo, most well known in the China mainland for their affiliation with Shuijingfang and the popular Baijiu felt the effect on corporate spending instantaneously.  According to the South China Morning Post, a survey conducted by a Chinese marketing firm reported 42 per cent of businesses decreased their budgets on entertainment with the former baijiu being hit hardest. The over reliance of “corporate entertaining and gifting” once accounted for 70 per cent of the luxury drinks market profits, the same study revealed [www.scmp.com]
 
Travel Retail
 
A seven per cent growth compared to the previous year of 30% growth gave evidence on the downturn of luxury spend in the country. In the spirits world, Diageo wrote off £264M of its 40 per cent stake in Shuijingfang while Remy Cointreau were also heavily impacted by this new crackdown. “Sales of its flagship product” saw Remy Martin fall 35 per cent reduction during the same period in 2012, announcing revenues of £114M in the final quarter of 2013.

The ripples reached Singapore’s shores where the Singapore Tourism Board announced the drop of circa 27 per cent of Chinese tourists visiting [www.rolandberger.com]. Retail sales saw a significant fall; Chinese visitors once accounted for 40 per cent of total spend in Singapore based on tax free shopping transaction records with an average spend of SGD$1,728 per person. Fast track a year on, Chinese visitors declined to 35 per cent of total transactions with the average spend also dipping to a modest SGD$1,665 per person.

The restrictions’ effect on trends in spending has inevitably steered the fate of luxury brands in the travel retail sector into one of abysmal growth; as Country Manager of Global Blue Singapore Mr. Stefan Ellrot explained in a study by Roland Berger on Travel Retail in Asia, the “need to buy the Rolex watch, to buy the Cartier jewellery is over. Now they are not coming to buy two or three pieces, they are buying one piece and with the anti-bribery and corruption law taking place now in China, it does not allow tourists to bring back a lot of presents for officials or friends.” [www.rolandberger.com.cn/media/pdf/Roland_Berger_TAB_Travel_retail_in_Asia_20140422.pdf]
 
Sure enough, the lament of concerns by luxury brands and retailers can be felt globally in the sudden halt of expansion of brands, as previously aggressive growth in the world’s most populated markets has been replaced by a conservative and cautious slow down, instead focusing on “store renovation, relocation and operational improvement.” with only 100 new stores opened in November 2013, 60 less than the previous year. [Bain & Co]
 
Opportunities
 
What next for travel retail? Despite China’s restriction placed around gifting, forward thinking businesses are looking to the new generation of nouveau riche, secondary and tertiary markets. Luxury brands wishing to stay ahead will focus on point of sales strategy which looks at the integration of traveler data, including flight destinations, bank cards and CRM to offer seamless and tailored shopping experiences for today’s traveler.
 
According to an article published by Roland Berger, savvy brands have taken to launching e-commerce platforms specifically for Chinese customers in the APAC region, offering a pre-order and pick-up service at airports, saving time whilst simultaneously boosting brand positioning. As a pioneering system in the industry for travel retail brands, those who implement it successfully have a “competitive advantage” in the market.
 
Perhaps this is indeed the next edge for travel retail brands as they graft to survive in a market that has weathered tougher survival conditions in competing for the now frugal business of previously extravagant Chinese travelers.
 
“Commercial corruption hasn’t gone away. It’s simply evolving.” 

[www.rolandberger.com]