Chinese and Low-Cost Travelers Buoy Beauty’s Travel-Retail Business
CANNES, France — Geopolitical tensions and trade wars may be roiling the world, but they show no signs of impacting the desire of travel-retail shoppers.
In 2017, sales in the channel gained 9.5 percent to reach $69.3 billion — and the momentum is increasing. In the first quarter of 2018, travel-retail sales jumped 10.7 percent versus first-quarter 2017 to $19.8 billion, according to Erik Juul-Mortensen, president of the Tax Free World Association, citing figures from Generation. He presented the findings during the recent TFWA World Exhibition and Conference held in Cannes, which attracted more than 7,000 visitors and 500 exhibitors.
By far, sales of beauty and fragrance are the most buoyant in the channel, accounting for $25.6 billion in 2017 and growing almost 20 percent. In the first quarter, they increased 16 percent to $7.6 billion. Wines and spirits were the second-largest category last year with $11.4 billion, and fashion and accessories were the third, with $9.5 billion, a 4.5 percent rise.
The boost in travel-retail sales can largely be attributed to the rising numbers of Millennial and Chinese travelers. By 2020, there will be more than 200 million Chinese traveling abroad, up 60 percent since 2015, according to Juul-Mortensen. The Asia-Pacific region had the largest sales uptick in 2017, a 12.6 percent rise to $30.8 billion, with Europe accounting for $20 billion, a 7 percent gain; the Americas, $11.7 billion, with 7.4 percent growth; the Middle East, $6 billion, up 7.3 percent; and Africa, comprising the remainder, with sales advancing slightly less than 1 percent.
Juul-Mortensen, who also announced he is stepping down as president of TFWA, predicted that urbanization around the globe would continue to spur growth of the channel. “By 2030, there will be 43 megacities in the world, versus 33 today,” he said. “The wealth generated by megacities is fueling travel retail. By 2040, there will be 21.3 billion passengers, versus 7.8 billion today.”
Beauty’s travel-retail business is continuously growing, but not uniformly everywhere. “This year, and more than ever, travel retail has been really contrasted,” Vincent Boinay, travel retail managing director at L’Oréal, said at a press conference. He highlighted Asia’s strong double-digit gains. “On the other hand, you have the Americas — especially South America, a that is affected by currency devaluation, market difficulties and political issues. In the middle you have Europe — Europe is flattish."
Yannick Raynaud, managing director of L’Oréal travel retail Americas, said: “We have a little bit of a mixed situation. We had a fantastic 2017 and a very good start of 2018. However, the continent is challenged because 75 percent of the nationality footprint is having a crisis.”
She was referring to difficulties linked to currency devaluations, political uncertainties, trade wars and visa tensions. “Overall, the traffic in the Americas has slowed down significantly, and the spend per passenger is actually decreasing by double-digits,” said Raynaud. “This is tough. However, it is also temporary.
“What is going to matter today and tomorrow is how we are going to crack the American passenger,” she said. “One-third of the traffic in America is the Americans, and only 2 percent of them are buying duty-free.”
Emmanuel Goulin, managing director of L’Oréal travel retail Asia-Pacific, described the situation in the region as “buoyant, to say the least,” with the Chinese travelers driving business.
The burgeoning number of Chinese consumers was a point also reinforced by Cedric Prouvé, group president, international, of the Estée Lauder Cos. Inc. “When you consider China, our company has a physical presence in 120 cities, but online touches consumers in 650 cities,” he said. “That means there’s a whole population of consumers who are only going to buy our products when they travel or when they shop online. Right now, only 9 percent of Chinese have a passport, so you can see the kind of runway we have.”
Shiseido, too, has benefited from the explosion of Chinese shoppers, which comprise 60 percent of Millennials traveling today and have picked up sharply in the company’s home market of Japan over the past two years.
Of traveling Chinese, which now tend to generate 30 to 70 percent of a Japanese beauty brand’s sales domestically, Elisabeth Jouguelet, vice president marketing and innovation at Shiseido travel retail, said: “The gap between those who are traveling and those who are not is 33 percent when it comes to the average annual spend on skin care. And the farther they travel, the more they spend on skin care, which internally is a key insight, because it really shows the role that travel retail can play in showcasing our brands and educating these travelers.
“We still have this dichotomy between those who are replenishing, and it’s mostly value-driven, and those who are more interested in the experiential part of the brand,” she continued, adding such learning is important for fashioning a seamless, enriching connection between the domestic and travel-retail markets to create one ecosystem.
Starting in January, as part of its cross-border strategy, Shiseido will have a dedicated travel-retail team in Shanghai to help align marketing plans, among other priorities. The company is studying how best to use data it's culling on travelers. They’ve noted, for instance, Chinese travelers — particularly Millennials — today are becoming more adventuresome in their destinations, now visiting less trodden cities than Paris, London or Rome.
Shiseido’s chief executive officer Masahiko Uotani unveiled a new initiative at TFWA called Forest Valley at Jewel Changi Airport in Singapore. The project will be a multi-sensory art exhibit consisting of a vast garden environment inside the airport with plants, a maze and even a canopy bridge. “This partnership indicates our commitment to travel retail, and this is just the beginning,” Uotani said during a ribbon-cutting ceremony with Jean Hung, ceo of Jewel Changi Airport Devt Pte. Ltd.
As more Chinese get passports and start to travel, the demographic makeup of the shopper keeps evolving. Ariel Gentzbourger, executive vice president of global merchandising at DFS, said that the behavioral change tends to happen in five-year increments, noting that Chinese Millennials born in the Eighties manifest very different shopping patterns from those born in 1990-1995. “The older Millennials are traveling with their families, kids, grandparents,” she said. “The younger ones are going for experience, and that includes food. In our footprints of the future, at least 15 percent will be food,” she said.
Gentzbourger also spoke about key differences between travelers from top-tier cities in China, and those from the lower-tier cities, whom she said spend on average 10 percent more. “With the second-tier cities, each trip they spend about $2,500,” she said. “They plan their purchases in advance and they buy for friends and family. The marketing piece is essential for us as we broaden our horizons — it is about data analytics.”
Chinese usage of fragrance is increasing. “In Asia, we see there is an adaptation of consumption of perfumery, which is much stronger than what we have seen in previous years,” said Javier Bach, area chief operating officer at Puig. “I would say it’s a very interesting evolution from established designer brands into the niche and superpremium segments.”
Skin care is the key driver for travel retail sales, fueled at many brands by hero products. At Clarins, Double Serum is the bestseller.
Price, historically an important engine fueling travel-retail sales, is becoming less of a factor as discounting in local markets and online makes such items more easily accessible. Now, making a sale comes down to providing a compelling experience. “Before, the price advantage was the main reason people shopped,” said Amélie Watteau, business manager, travel retail and export division worldwide at Groupe Clarins, “but today, many local markets are discounting, so service, care and touch are very important.”
Discounting, according to Euroitalia president Giovanni Sgariboldi, “will ruin many companies. We are losing professionalism.”
To up its high-touch factor, Clarins is rolling out a menu of five-minute flash services, from a hand-moisturizing massage to a glow booster. “We are seeing a real shift in behavior,” said Watteau. “Millennials want that service, even if they only have two minutes.”
The point was echoed by all of the brands in attendance. La Prairie aims to give people a 15-to-20-minute free skin-care application. “It’s about offering a service,” said Katharina Walther, business development director of global travel retail at La Prairie Group. “We believe this is what they remember.”
She’s not convinced focusing on one bestseller is key, however. “A brand needs an identification, not necessarily a hero product,” said Walther. “People are craving luxury."
“It’s not one product that’s going to make a difference,” added Laurent Marteau, head of travel retail worldwide at La Prairie Group, which is accelerating the rollout of its new store design, and highlighting its history and heritage. “We focus on luxury collections.”
Chanel is also working on continually upping the experiential ante — with everything from a Chanel-branded golf cart to ferry customers from the store to their gate in the Copenhagen airport to a shower in Frankfurt airport as part of a promotion for Chanel No. 5 L’Eau. “You have to create a great moment for the consumer to have with the brand,” said Jean-Guillaume Trouvin, director general of export, Europe, who noted Chanel’s sales are up in the double digits in Asia and 6 percent in Europe.
But maintaining leadership isn’t easy. “In the last five years, we’ve seen a lot of new brands — not necessarily in the beauty category — and it challenges us to do better,” said Trouvin. “Once you buy a pair of Uggs for 120 euros, you may not have a lot of money left to buy a bottle of fragrance. It’s easier to be number seven and move to number one than to be number one and hold it. We have to reinvent ourselves a lot.”
At Coty, creating a traffic-stopping experience has included wrapping the front of a store in Tiffany blue to promote the launch of the jeweler’s namesake fragrance. That introduction and the launch of Gucci Bloom has helped fuel growth of 21 percent in the channel, said Philippe Margueritte, senior vice president global travel retail, luxury, at Coty Beauty.
The company is looking to build on that momentum next year with the introduction of Burberry makeup and the Calvin Klein Woman scent. Noting that Coty has been particularly successful in markets like Oakland, Calif., where it is able to install specially designed spaces around novelty, exclusivity and gifting, Margueritte said: “You have to look for ways to disrupt the automatic pilot of the shopper.”
Both brands and retailers are hoping that providing unique experiences will help increase the penetration rate of passengers who currently buy in travel-retail stores, which has remained stubbornly low at 15 percent, despite the 7 percent to 8 percent annual uptick in the number of travelers.
“We have in front of us, to some extent, a disengaged audience,” said Stéphanie Metz-Thevenod, executive vice president marketing and digital at Lagardère Travel Retail. “We need to reconvince that there is a value proposition to buy in duty-free and travel retail. So that’s a huge opportunity.”
“Discounts are no longer enough to drive conversion,” said Olivier Bottrie, global president of travel retail and retail development at Lauder. “We’re seeing an increased demand for exclusivity — destination exclusives, occasion exclusives, exclusives through personalization — to serve the needs of gifting, as well as a desire for trend-based assortments.”
“There’s more pressure on the brands the product,” said Philippe Benacin, chairman and ceo of Inter Parfums SA. “ message, the concept, the stories, the gift-with-purchase or the fact that very often want to play at the store level.”
The executive quipped that ages ago his company got in on the games — and moviemaking — businesses. “I say we are no longer in the fragrance business. If you go with fragrance only, you are lost,” he said.
Lagardère believes in the need of being more targeted with products and activations, plus entertainment — bringing increased excitement and uniqueness to retail propositions.
Travel retail exclusives generate some 10 percent of the operator’s beauty sales. Metz-Thevenod thinks another key driver could be impulse products, such as Christian Dior’s recent J’adore miniature in a roller format. “They are developing products mixing convenience and the DNA of the brand,” she said, adding: “Digital is definitely for us an opportunity to bring content into our stores.”
Metz-Thevenod said some Chinese travelers have been buying beauty sets priced at 500 euros to 700 euros. “However, in mature markets, a big part of the growth is related to accessible travel, linked to Millennials, who look for high savings,” she said.
Travelers taking low-cost flights are on the rise. “In Continental Europe, the weight of low cost is almost representing half of the local traffic and 55 percent of the traffic growth over the past five years,” said Gianguido Bianco, managing director of L’Oréal travel retail EMEAI. “Therefore, we see a decreasing spending by , which is stronger than in the rest of the world. So we have the challenge to recruit, increase penetration and seduce our customers.”
The rollout of a brand like L’Oréal Paris represents a bid to do just that.
“My vision for travel retail is creating beauty hot spots,” said Britta Hoffmann, director purchase perfume and cosmetics at Gebr. Heinemann. “In the shops where we have a high percentage of low-cost or younger travelers, we need to distinguish ourselves. We need to give impulse spaces, create a new design concept, bring a lot of new brands in and of course create great shopping areas for the younger target groups.”
The profile of staff must be different there. “They need to be a bit crazier, a bit more daring,” she said. “They need to focus on the category itself — not on single brands — and really approach the customers in a totally different way. We are still learning. The biggest challenge is convincing the industry of having openness for new concepts.”
Heinemann is testing a new retail format, called #LookLab, which is dedicated to color cosmetics. It debuted in Copenhagen's airport in late March as a prototype and is expected to roll out to other major airports. “It’s highly digital,” said Hoffmann, adding the shop focuses on younger, Instagram-friendly trendy brands, such as Dior Backstage, Make Up For Ever, Urban Decay, BareMinerals and Becca.
“In skin care we see big opportunities in entering a new segment with, for example, conscious beauty, focusing on mindfulness, vegan, organic, cruelty-free — maybe also creating a new area, a new design concept for customers to really understand the category,” she said.
A section devoted to men’s grooming might also be in the offing.
“We have to rethink how much room we give to mass fragrance brands,” continued Hoffmann. “We need to reconsider what’s the future of mass fragrances in the beauty segment.”
“The evolution of the mélange needs to be different,” said Kay Spanger, member of the executive board at Heinemann, of the product mix. “You have to have something for all senses, for all ages — and this has changed.”
Heinemann, whose beauty business is currently up by 7 percent in retail and 8 percent in its distribution activity, will debut at the end of this month two duty-free departure stores in Istanbul’s new airport.
For companies like Lauder, whose portfolio of brands has risen steadily during the merger-and-acquisition mania of the last few years, a key strategy in travel retail has been offering a wider assortment of its brands in store. But, as has been the case for the past few years, there are chinks in the links uniting brands, retailers and airport operators, with brands and retailers sounding the call for improved negotiations with operators.
“What is also critical for the long-term success of the channel is for the airport partners to understand that the current status quo is not allowing them to develop and sustain the travel-retail business model,” said Bottrie. “We must tackle the structural barriers to sustainable success, such as the structure of airport retail contracts, which can make our channel less profitable for brands and retailers, and prevent us from investing in the consumer experience.”
That topic was top of mind during a round-table discussion on the opening morning of the TFWA show, whose participants included Julién Diaz Gonazélez, ceo of Dufry; Susan Whelan, senior executive vice president of King Power International Group; Claus Heinemann, co-owner of Gebr. Heinemann, and Dag Rasmussen, chairman and ceo of Lagardère Travel Retail.
“The risk is not the business. It’s the business model,” said Rasmussen. “The pie is growing, but not enough to sustain the business model. Some airports need to understand that better.”
The challenge from e-commerce is real. “What is happening around is very fast,” said Gonzalez. “We have an advantage, but are we prepared to really face this challenge? I have my doubts. We are all very clear about what to do and nothing ever happens. We have to convince the landlords that this is a collaboration not a fight.”
Euroitalia’s Sgariboldi said challenges in travel retail are “good points of sale, good professionalism in suggesting products.” He added that without a high level of service, people will buy products according to discounts.
Still, some brands say they have begun to work more closely with airports. “We start to see some travel-retail operators are exploring how to engage with the consumer in a different manner,” said Puig’s Bach. “And from our end, this is us think in a different manner in the channel. We are working very much in transforming the shopping experience in travel retail.”
“One thing we have significantly improved in the last year with many operators was understanding a bit the profile of the clients either by terminal or shop, and that allowed us to customize our assortment,” said Luis Miguel Gonzalez Sebastiani, managing director of Bulgari’s fragrance unit, which is logging high double-digit growth in the channel, driven mostly by Asia and the Middle East. “In the past we were trying to do a lot of the same thing everywhere. Right now, we’re really starting to customize our offer and make sure we do it based on consumer profiling.”
Bulgari Splendida Magnolia Sensuel eau de parfum, for instance, resonates particularly well with women from China, so it’s being showcased where they are. And the Gem collection chimes with Middle Eastern travelers.
Bulgari and Lagardère in Paris’ Charles de Gaulle airport staged a pop-up for the Gem collection, with a strong digital component. The formula worked, and in November 2017 Bulgari was the bestselling fragrance brand and third-ranked beauty brand in the terminal.
“Can we do much better? Yes, we can as an industry. We are still not very clear on how to integrate the entire ecosystem in travel retail,” said Gonzalez Sebastiani. “But what I’ve seen is significantly higher interest from many operators on understanding the clients — understanding how we can use data, partnering with airports.”
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