Hainan, Hong Kong or Paris: Where Will Chinese Shoppers Go?


Alexander Wei | February 17, 2023

Dior’s ski-themed pop-up store at Lake Songhua Resort in Jilin provinceCredit: Courtesy

The relaxation of outbound Chinese travel and the rebound in domestic consumer activity has bolstered the confidence of luxury companies. But how will Chinese consumption be distributed, and will the in-country market continue to expand?

Chunyun (referred as the Spring Festival travel rush in China) is regarded as a rare migration on a global scale, lasting a month and involving hundreds of millions of Chinese embarking on journeys around the Lunar New Year period. This year's Chunyun has a special meaning for the country.

It is the first Lunar New Year after China downgraded its management of COVID-19 to Class B following the outbreak in Wuhan in 2020, and Chinese consumers are no longer bound to regular PCR tests and unexpected quarantines. Almost all domestic travel restrictions have been lifted, and border entry and exit procedures have been significantly simplified.

According to data from travel service platform Ctrip, hotel and B&B booking volumes have even surpassed that of the same period in 2019. In addition, Chinese residents made 741,000 outbound trips during the new year holidays, more than double the number from the previous year.

The luxury sector is also expected to experience a positive 2023 as the lives of Chinese shoppers return to normal. Bernard Arnault, Chief Executive Officer at LVMH said at its earnings meeting in January: “We have every reason to be confident, and indeed optimistic on China.”

However, the Chinese luxury market is unlikely return to its pre-pandemic state, because of the general impact of the global economy on retail, as well as changes in local consumers' preferences for channels and merchandise. How the local and international markets will grow in the coming year, and whether there will be a significant influx of Chinese consumers at international travel destinations, resulting in a geographical redistribution of consumption, have become major concerns for global luxury companies.

Repatriation Beyond Sales Figures

The pandemic has resulted in the repatriation of overseas luxury spending, nearly doubling the size of mainland China's luxury market. In fact, Chinese consumers' global spending has shrunk by 30 per cent since 2019, with overseas spending accounting for less than 10 per cent of total spending.

While the pandemic undoubtedly dampened the consumption intentions of Chinese luxury consumers, shopping was an important part of Chinese tourists' trips abroad – something that was absent since 2020. There are numerous reasons for shoppers to buy luxury goods while travelling – one of the most significant being the more competitive pricing of products in Western markets. For example, a Chinese tourist can get a Louis Vuitton Capucines bag in Paris for nearly a third less of the price listed in China.

The concern of brands’ domestic teams about the outflow of local consumption in the post-pandemic era is not unfounded, as the return of outbound leisure travel may impact their consumer base.

However, brands appear to still be investing in China, particularly in expanding their retail network outside of established first-tier cities. In recent months, Louis Vuitton opened its first store in Fuzhou, and Hermès returned to Tianjin after an 11-year absence. Cartier, Dior, and Harry Winston are also expanding their presence in other second-tier cities.

Retail sales at Hang Lung Properties' mall portfolio fell 1 per cent year-on-year, while sales at its flagship mall Plaza 66 in Shanghai dropped 24 per cent year-on-year due to COVID measures. Despite this, chairman Ronnie Chan believes retail sales will break records this year. China Resources Mixc Lifestyle, another high-end retail property behemoth with 11 luxury shopping plazas in mainland China, says it will launch more luxury projects in cities such as Xi'an and Guangzhou.

Where does this confidence come from, and what will keep consumers spending in the Chinese mainland despite the price difference?

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According to Pablo Mauron, Partner and Managing Director China at DLG (Digital Luxury Group), buying luxury goods abroad has long been more than merely about saving money for Chinese shoppers.

“It also means buying exclusive products that are not available in China and enjoying a travel shopping experience that is different from that in the domestic market. Purchasing luxury goods from other countries is also a form of social currency and status symbol of sorts.”

“Luxury brands can add a sense of urgency when comes to consumer decision-making by introducing the element of product scarcity, which can make Chinese consumers overlook the price gap and continue to spend in China. This strategy is significant in the leather goods and watches and jewellery segments,” he continues. “In the meantime, it’s also important to improve the in-store experience in China so that a walk-in experience can also create social hype.”

In recent years, it has become the norm for brands to launch flagship stores or pop-ups amidst a fanfare of publicity. Top brands like Louis Vuitton, Dior and Vacheron Constantin have all done so of late.

The Duty-Free Market Within the Country

Another point of traction in the local market is Hainan, a small tropical island in southwest China where Chinese shoppers can buy luxury goods at reduced prices without leaving the country.

Hainan's offshore duty-free industry is seen as a way to drive “internal circulation” (also known as domestic consumption), a concept that Beijing has repeatedly emphasised since the COVID outbreak. Although the offshore duty-free business existed prior to the pandemic, Hainan's duty-free market did not really take off until July 2020, when the new offshore duty-free policy went into effect.

Offshore duty-free sales in Hainan was valued at only 13.61 billion RMB in 2019, but this figure exceeded 60 billion by 2021. China Duty Free Group currently controls 87 per cent of the duty-free market in Hainan, making it the largest travel retailer in the world after the pandemic, surpassing international retailers such as Lotte and Dufry.

Despite the recovery in international travel, the expansion of the in-country duty-free landscape has yet to come to a halt. Wangfujing Group just unveiled the city's first duty-free mall in Wanning, Hainan, which is also the group's first duty-free project. François-Henri Pinault, Chief Executive Officer of Kering, is reported to have met with the group's executives in Beijing during his recent trip to China. In addition, Swire Properties is now planning its first duty-free project in Sanya in collaboration with CDFG.

However, not every brand wants a piece of the duty-free pie. As LVMH's Chief Financial Officer Jean-Jacques Guinoy stated last year, the current licensed duty-free business in China follows a wholesale model, which does not fit with ‘the bulk of the corporate business.’ As such, they will not consider the duty-free business in Hainan at the expense of their business philosophy – the brand-owned retail model.

But the duty-free ecosystem is set to change drastically in the near future. “Hainan will be taking up 21 per cent of the global duty-free market share by 2028, from 12 per cent in 2020. Brands that are not keen to enter this market will likely to lose a big portion of the share from the global market,” says Willi Sun, Head of Advisory, Consumer & Retail at KPMG China. “This explains why many luxury brands are setting up their presence and planning out their own operations following the Hainan free trade zone establishment in 2025.”

Where Will the Cash Flow?

A contraction in Chinese domestic consumption is unavoidable. According to Bain & Company, luxury sales in China will return to 2021 levels sometime between H1 and H2, with the fundamentals of domestic consumption remaining strong. However, given outbound travellers attracted by price differences and the outflow of HNWI, global brands must be prepared for a slowdown of the Chinese mainland market.

“Asia regions will benefit most from Chinese consumer’s consumption distribution. Hong Kong and Macau will top the list, followed by some other Asian countries such as Thailand, Korea, Singapore,” says Sun. In a recent report by KPMG China and DLG, 71 per cent of consumers polled plan to travel abroad once COVID measures are lifted.

“Rather than debating about how Chinese tourists spending on luxury goods abroad will rise, we should focus on the challenges that these luxury companies will face upon China’s full reopening,” Mauron adds.

He believes that the rapid expansion of the domestic luxury market over the last three years has made Chinese consumers more discerning, and that luxury companies should quickly upgrade their offering in Western markets for Chinese shoppers. The price appeal of the West has been diluted, especially with the option of purchasing duty-free products in Hainan.

In his view, for the domestic teams of luxury brands, consumption outflows are unavoidable, and brands should consider how to capitalise on this trend. “Rapid growth in the past has led luxury companies in China to be overly focused on metrics as conversions and traffic. Now is a good time for them to reinvest in their brand image and positioning, as well as restructure their KPIs. Not everything in the luxury industry is about conversion,” he elaborates.

Sun also notes that due to consumer behaviours that have developed over the last three years, a certain level of in-country consumption will remain in China. He points out that during the pandemic, brands strengthened their connections with local consumers in a variety of ways – not just in China, but also from a global perspective – as consumption was repatriated.

However, consumers will always choose the best deal in the end. He cites the booming European luxury market brought on by American travellers after the dollar grew stronger, as well as the influx of international visitors to Japan as a result of a weak yen, as examples. With COVID finally coming to an end, the battle to win over Chinese consumers is heating up again. And it is now more important than ever for brands to balance experience and pricing strategy to stay in the race.

COVID-19 | China | Recovery