Chinese tourism is changing the locations where cosmetics are sold internationally, and is also changing how corporations are marketing to a savvier and better-travelled breed of Chinese consumer, according to a detailed research report by a Hong Kong investment bank.
Compiled through interviews with panels of tourists from around China, the report by CLSA, Asia’s leading investment banking company, shows cosmetics (specifically skin care, make-up and fragrances) remains the second most common answer to the question ‘what did you buy for yourself in outbound travel in the past three years?’ The report, released in January, says this follows a broad answer of ‘local specialties’ among hundreds of tourists surveyed.
There is big money to be made here. CLSA forecasts that outbound trips by Chinese tourists will total 200 million by 2020, suggesting an annual growth rate of 9%, albeit down from 17% in the past five years. Chinese tourists are drawn to destinations offering lower pricing and lower taxes and import duties, as well as a “wider product offering”. They also seek a “feeling of greater authenticity” in travel by purchasing products overseas, according to the CLSA report, which also points out some winners and losers in destinations for the cosmetics trade from Chinese tourism.
Hong Kong slows
The key loser out of all this seems to be Hong Kong, which has been a key focus of mainland Chinese travelling shoppers. Growth in absolute numbers of Chinese outbound travellers is slowing due to a higher base, but the growth is decelerating faster for once hot destinations, such as Hong Kong and Macau. Growth has slowed to 3% per year for Hong Kong, while numbers of Chinese tourists to other destinations will rise by 16% per year to 2020, says the report. Up-and-coming destinations in the next three years for Chinese tourists are likely to be South Korea, Japan, Thailand and the US, the report specifies.
Hong Kong retailers of cosmetics, such as Sa Sa International Holdings, a leading cosmetics retail group in Asia, will lose out on sales as a result. Whereas Hong Kong accounted for 59% of all Chinese outbound trips in 2014, changing travel habits mean mainlanders are travelling farther to seek out new experiences. “A shift towards Japanese and South Korean cosmetics brands has also impacted Sa Sa,” notes CLSA’s Head of Consumer and Gaming Research, Aaron Fischer.
Tokyo love
Indeed, in 2015, the number of Chinese visiting Japan soared 90% on the previous year to 4.65 million, according to the Japan National Tourism Organisation, with research suggesting that they are particularly keen to purchase branded products from companies that have a reputation for quality.
A beneficiary is Japan-based Shiseido. With a long history in China, the brand had suffered from falling profitability in recent years but “the sharp rise in Chinese tourists to Japan is driving purchases of Shiseido products in duty free shops, department stores and drugstores,” says the report.
Another brand singled out by CLSA is the Japan-based KOSÉ Corporation, whose products are especially popular with Chinese tourists to Japan. Its high end Albion brand, mid-range Sekkisei and value-based Sekkisui have all sold well in Japanese department stores and drug stores frequented by Chinese tourists. Several Chinese tourists interviewed by SPC pointed to the increasing attraction of Japan for sightseeing and shopping.
Proximity (it’s approximately a two to three-hour flight from Beijing to Tokyo) and a weaker Japanese yen have both make shopping in Japan more attractive than flying to Hong Kong (a three to four-hour flight from Beijing) explains Zou Yanli, who operates an online cosmetics store Qing Meili from her home base of Weihai city on China’s east coast.
“While Hong Kong has been tightening visas for mainlanders, Japan has been making it a lot easier,” explains Yanli. “Japan is also attractive from a cosmetics perspective because of consumers’ familiarity with the products. Japanese cosmetics are also designed for Asian skin and there’s a lot of confidence in their quality [among Chinese consumers].”
Meanwhile, the Japan Airport Terminal Co will open its first downtown duty free store later this year in a joint venture with department store operator Mitsukoshi Ginza, called Japan Duty Free FaSoLa Mitsukoshi Isetan Co. The Japanese duty free market will almost double in value between 2014 and 2020 to total ¥560bn (US$4.9bn) in 2020.
Shiseido and rival Kanebo Cosmetics have both deployed Chinese-speaking beauty consultants at their counters in department stores in major cities.
June Sato, a spokeswoman for Shiseido, tells SPC that the move is designed “to let Chinese tourists feel comfortable and to make it easier to communicate”.
Kanebo confirmed that it is “currently struggling to meet demand” for some items that have become hugely popular with Chinese visitors. Kanebo is also providing Chinese language leaflets and in-store displays, as well as trial cosmetics kits designed specifically for foreign visitors.
Despite being widely available in China, the Freeplus range of creamy cleansing soaps formulated specifically for sensitive skin is proving particularly popular with Chinese visitors, primarily because of the price difference, says Shinji Yamada, Kanebo’s spokesperson.
Other driving factors for Chinese consumers is the perception – albeit mistaken – that products made for the domestic Japanese market are of better quality than export products, Yamada says, while there is also a general mistrust of many Chinese-made products.
Another important factor that helps Japan’s personal care companies is the “group dynamism” that often takes hold among Chinese tourists, who buy because their tour guide recommends a particular product or because everyone else in the group is buying the same items.
Tailor made in Korea
There is a similar dynamic benefiting South Korea’s personal care product sector. South Korea-based consumer goods company LG Household & Health Care has seen a “remarkable increase in cosmetics profits over the past two years from Chinese tourists – beauty products are accounting for a growing proportion of its profit” notes CLSA, which projects duty free revenue growth of 38% year-on-year in 2016, accounting for 14% of total revenue and 30% of operating profits.
South Korean cosmetics brands, such as Mamonde, Innisfree, Laneige and Aritaum, have oriented their product research and development towards Chinese preferences, while South Korean cosmetics retailers have figured out how to make the most of the tourist influx. “Chinese tourists have been the number one cosmetics customer for over a couple of years in [South] Korea’s busy streets, most prominently in Seoul’s Myeongdong [one of the main shopping and tourism districts in Seoul],” says Seongmin (Mike) Sohn, a researcher with the Korea Cosmetics Industry Institute’s (KCII) planning and research team. “There, all the local sales staff must speak Chinese and provide marketing materials in Chinese.”
According to KCII research, Korean cosmetics brands tailor ingredients and concepts to Chinese customers. Also in the bag of tricks are lots of red colours and gold sparkles on the packages, as well as bigger package sizes, which attract Chinese visitors. “We can easily add 10% to our official cosmetics exports to China if purchases by Chinese tourists are included,” explains Sohn. “The approach by Korean cosmetics brands works so well that the Chinese government had to set the cosmetics purchase limits for government officials visiting Korea.”
Global benefit
Prospects are also rosy further afield for shopping centres and duty free outlets in anticipated top future destinations, such as Australia and Thailand. Australian mall operator Scentre Group, home to high end retailers in several cities, will benefit from an influx of Chinese tourists drawn by the weaker Australian dollar. Airport operators are also well-placed to benefit as China is close to becoming the number one source of tourists into Australia.
Shopping for cosmetics and other gift items will also increase at airports in Thailand and onboard the jets of fast-growing low fares airline AirAsia Berhad (headquartered in Malaysia), which is carrying ever larger numbers of Chinese tourists to Thailand and other Southeast Asian destinations from regional Chinese airports. Southeast Asian destinations are preferred by Chinese tourists for their first forays overseas, the CLSA report finds.
Aside from higher absolute tourist numbers, Chinese tourists’ spending is also on the rise. Spending overseas totalled $229bn in 2015, up 23% from a year earlier, according to a report compiled by Fung Business Intelligence Centre and China Luxury Advisors, which predicts that by 2020, total Chinese consumer overseas spending will reach $422bn. Their report lists clothing, footwear, cosmetics and electronics as the items topping Chinese tourists’ shopping lists overseas. The UK-based World Travel and Tourism Council (WTTC) estimates that China, already the top contributor to global outbound travel, will overtake the US in 2017 as the biggest spender on tourism globally.
Increasing Chinese worldliness due to travel overseas, meanwhile, is forcing significant change on brands’ pricing and marketing strategies. Price cuts are on the way in Hong Kong for luxury brands which had, in the past decade, pushed up prices aggressively, particularly in Asia, to cash in on rising Chinese demand. Thus, Hong Kong is now one of the more expensive places to purchase luxury products. Some products’ prices in Hong Kong are now 20% higher than in Japan, notes CLSA analyst Fischer. He points to Chanel reducing prices in Hong Kong in 2015 as proof and believes other luxury brands will follow suit: “The price gap between Asia and Europe has widened… as a result, we expect price deflation in Asia through outright price cuts or new product launches at lower average prices.”
Increased travel and social media is making Chinese consumers savvier and more demanding targets for marketing campaigns – squeezing margins further as key brands battle more competition. This “inherently more experimental nature” of Chinese consumers has “widened the number of brands that consumers will consider before making a purchase”, notes the CLSA report, pointing to Italian fashion company Fendi and French luxury brand Yves Saint Laurent as two brands that have been taking share at the expense of the traditional power brands, such as France’s Louis Vuitton and Italy’s Gucci.
