Thursday, 18 December 2014

The Changing Face of Chinese Travelling Consumers

There have been two really significant developments in China within the past two years that are thought to be impacting the spending patterns of Chinese when they travel.  At the end of 2012, China's paramount leader, Xi Jinping, imposed new austerity measures on Chinese government officials to crack down on bribery and corruption. Associated with this austerity drive has been the enactment of new anti-corruption laws covering the purchase and use of luxury cars, the use of public funds for official dinners (including what can be served at these dinners), the handing out of special privileges such as VIP memberships, traffic permits and passes and the use of public funds for travel.  This drive has resulted in the gradual disappearance of evidence of ostentatious consumption from public view and has now moved beyond its initial target of extravagance and is affecting more basic practices in Chinese society, even funerals, as reported by Bloomberg News. 

In October 2013 the Chinese government passed the National Tourism Law outlawing the sale of tours below cost.  These below cost tours forced travellers to shop on their trip, and the tour operator was compensated through commissions paid by the retailers.  Outlawing these tours obviously changes the amount of pressure felt by travellers to shop on their trip and, therefore, potentially changes the amount they will spend.

The effects of these laws at home have been clear with growth in the luxury goods sector slowing to its lowest point since 2000, larger numbers of wealthy people saying that they will not be giving very expensive gifts (valued at $826 or more) this Chinese New Year and high end hotels in China reporting a drop of 50% in business.  

A key question is how these changes at home are affecting the behavior of Chinese when they travel.  We can answer this question with our data by looking at the changes in consumer behavior between the first two waves of our study.  Our first wave of data was collected at the end of 2011 and the beginning of 2012, right before the implementation of the austerity drive and the National Tourism Law. Our second wave of data was collected at the beginning of 2014, more than a year after the changes began occurring.

The picture is not pretty.  First, overall spending on merchandise while travelling has declined by 600 euro from an average of 2170 euro in 2012 to 1560 euro in 2014. Second, there are some significant changes in what Chinese are spending money on.  Those items that tend to be higher priced are hardest hit in terms of the number of people buying them.  Lower priced items are holding up better in terms of purchase penetration.

Some good news:  while fewer travellers are buying some key categories, there doesn't seem to be any trade down to less expensive items among those who are buying.  In fact, for watches, there has been a significant increase in the average that watch buyers are spending.

Importantly, there seems to be a substantial effect on the desirability of certain luxury brands.  In our study we asked travellers to tell us which of a selected number of luxury brands they desire to buy when they travel.  The two most desirable brands in 2012 Chanel and Louis Vuitton have declined significantly in desirability.  Chanel is still the most popular brand, but Louis Vuitton has now fallen to 5th most desirable brand, with Hermes, Burberry, Dior and Chanel ahead of it.

Finally, we see are beginning to see changes in the priorities Chinese have when shopping while they are on a trip.  The table below shows the relative proportions of different shopping style segments among Chinese travellers.  The most frequent shopping style among Chinese is what we call the "Brand Shopper" who is focused on buying the latest styles and designs from the world's most famous luxury brands.  While not significant, there is a decline in the prevalence of this shopping style from 38% to 34%.  At the same time there is an increase in the style we call the "Practical Shopper."  The Practical Shopper is one who is constantly assessing the value of what they might buy when they are travelling - if it makes practical sense, they will buy, otherwise they won't.  They want to buy the latest styles and designs from brands that are familiar to them, but they are less likely to let their emotions dictate their purchases.  They expect to find many good products at great prices when they are travelling, but if they don't, they are less likely to be tempted.  We also see a slight increase in what we call "Destination Shoppers."  These are shoppers who are sensitive to the reputation of the locations they are visiting.  So, they might buy Louis Vuitton or Chanel or Hermes in Paris, and Prada or Gucci in Milan but they are less likely to buy any of them in Hong Kong. 



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