“Raise the bar, grow the market, seize the opportunity”
While Lagardère Travel Retail, like other industry multinationals, has been hit hard by the impact of COVID-19, its growing Chinese market operations have thrived amid a domestic travel rebound. Martin Moodie talks to Chief Executive Officer – North Asia Eudes Fabre about the continued rise of airport and high-speed rail shopping, the size of the prize in Hainan and how brands should invest now to capture a share of the market. The full interview will appear in the February edition of The Magazine, out in coming days.
Martin Moodie: Eudes, since you became CEO for LagardèreTravel Retail North Asia in 2016, is it fair to say you’ve witnessed a profound transformation of China's travel retail industry?
Eudes Fabre: Yes, definitely. In recent years we’ve been very focused on duty paid travel retail, which has really emerged as a significant business. That’s mainly driven by the development of China’s airport infrastructure, but also the phenomenal growth of the traffic, and then, more recently, also the liberalisation of the duty free market.
It strikes me that your group’s focus on duty paid has always been ahead of the curve; you now have a very diverse platform in travel retail, from food & beverage to convenience, to specialist retail and duty free. Do you think that broad base has been the key to Lagardère’s success in China?
We started in China with Relay news and convenience, which gave us a footprint on which we were then able to expand by moving into new categories, first luxury fashion, and then later on beauty, and more recently, watches & jewellery. It’s also been the platform that enabled us to launch the food & beverage activity, because once we had established the landlord relationships, airports are willing to give us a chance to deliver other categories.
The fact that we have diversified allows us to answer the needs for master concessions, which actually in China, especially for secondary airports, is very useful. Because there are such large terminals opening, usually everything is done on an accelerated timeline. So there’s definitely strong demand, both from the airport operators, but also ground for players like us that can bring a turnkey solution and absorb large commercial surfaces, offering a complete mix of brands and categories.
Eudes Fabre: Localised approach in China
But the more fundamental reason is that we’re very localised in China; we have a big team based in Shanghai, and operate quite autonomously from the main group. So all the main functions needed to run our business from purchasing, to operations, training, visual merchandising and so on are here in China. It’s allowed us to customise our business model, and suit the needs of our business partners.
The HTI/Lagardère stores in Sanya are spread over 30,000sq m and five floors
What does your footprint in China look like today?
We have 26 airports in China. We have some major openings planned for 2021, including the new airport in Chengdu, where we have a very strong luxury lineup. We are also present in over 20 rail high-speed railway stations.
Lagardère Travel Retail was certainly quick to identify that high-speed railway opportunity. In vast nations like China and India, the railways are fundamentally important in terms of mass travel.
Absolutely, the development of the high-speed rail network in China is really impressive. The first line opened only ten years ago, and now it’s by far the largest network of its type anywhere. The railway traffic has boomed, and it’s now actually significantly bigger than airport traffic.
The passenger profile in the railway is more and more like the passenger profile at the airport – people that have time and money to spend with strong purchasing power and consumers who demand good brands and a good offer.
There’s a great future opportunity for us to work with the railway companies to upgrade the retail mix and introduce new international brands. We have a lot of brand partners that are very interested in entering the rail network, including fashion, beauty and speciality brands.
And in those locations, what tends to be the model?
We’ve really focused on developing monobrand stores in recent times. We’ve seen that, whether it be fashion or beauty, I think the monobrand format has really been the most successful and the most productive in terms of sales per square metre, which I guess is somewhat counterintuitive. It’s a bit different from the duty free model.
Part of the reason is that consumer expectations are high, especially in duty paid, where you don’t have a price advantage. Your product selection has to be comprehensive, your merchandising has to be contemporary, and in tune with what’s going on downtown. The service has to be very customised and outstanding.
The monobrand format is the answer to those requirements. Fashion is the most obvious case, where monobrand formats dominate, and even the beauty category, which are traditionally found in multi-brand store format in the airports.
The surfaces of many of these monobrand stores is quite large, up to 50sq m or even 70sq m for beauty, where you can have the full range, the full expression of the brand. This is especially important for multi-axis beauty brands that cover eyebrows, skincare, makeup and fragrance and so on.
More and more brands are aware of the strong potential of the travel retail channel, both in terms of sales, but also in terms of exposure, image building, and I think most importantly, new customer recruitment. So over time, we’ve been able to convince more brands to enter.
In the past year alone, we’ve opened with Chanel, their first monobrand store in a domestic airport. Before that we opened with Jo Malone, which was also the first one.
More recently we’ve opened a monobrand store with Shiseido – their first in domestic travel retail – with a second one opening soon. The same with Givenchy in Shanghai Hongqiao Airport. Also at Hongqiao, we are opening a 50sq m store for Guerlain – their first presence in a domestic airport.
Customers flock to popular beauty brand installations at the new Sanya store in the early days after opening
How do you assess the state of the Chinese market in early 2021 and look at the prospects ahead?
China really showed that once the COVID-19 emergency was brought under control, our traffic rebounds quickly. China has some specific factors, mainly the size of the country, and the fact that people are very used to doing business face to face, which makes people want to travel and need to travel.
That’s why the rebound in China has been so swift. Here, I think we can see that, if the conditions permit, the people will get on the plane, in order to conduct business or for their leisure.
So we’re very confident for the year ahead but the next couple of weeks [in late January and February - Ed] are going to be a little bit bumpy. There are some concerning COVID-19 situations in parts of northern China, which are affecting travel to places like Hainan.
Once that is behind us we will have a very strong 2021. We’re investing a lot in China this year; we have over 80 new shop openings planned for 2021. Those are the ones that are already confirmed and I’m sure there will be more in the second part of the year. There are some exciting new projects in the new airports at Chengdu and Qingdao, and also the new terminal in Guiyang.
At the end of last year you opened a landmark development in Sanya with the Hainan Tourism Investment Duty Free Co Ltd (HTI) and witnessed extraordinary scenes on the opening day. How have things developed since?
The first day was very auspicious with such big crowds. The business has been strong since. We’ve also introduced many new brands since the opening. To be honest, the timeline to get everything done was so tight, that not everything was ready and available from the first day. But a lot of the key brands are now in. So although the first couple of weeks have been strong we do see a slowdown in Hainan recently. Part of the reason is the northern China situation [with recent COVID-19 cases prompting new restrictions on travel -Ed].
It will be slower than a lot of people were expecting, but it’s still going to be a strong Chinese New Year period, maybe even the strongest on record, because of the fact that international travel is impractical.
We were very confident in the potential of the business. That is what is great about our shop, the location is very central in Sanya and the scale of it gives us a lot of space to bring in a lot of brands and have a very complete product selection. And then of course, the key advantage of our partner HTI is that they are fundamentally a travel-focused business. They own transportation, they own tourist sites, and they own hotels. That’s really their strength – the ability to drive traffic to the store.
Longines, pictured at the new HTI/Lagardère store, carries strong appeal to Chinese consumers
Can you shed some light on what’s going to change come 2025 when the whole of Hainan Island effectively becomes duty free? What’s it going to mean for the pure duty free retailers such as yourselves? Is it going to change the landscape and the structure of the industry?
It’s true that Hainan up until now is a pure travel retail and duty free market but we can see there’s a lot of medium to long term real estate development that is underway to build shopping malls like we see in other big cities and places like Hong Kong.
No-one has clear answers, because nothing has been decided on yet. But it’s possible that once the free trade port policies are implemented part of the taxes will be waived.
There are three different taxes that apply to luxury goods. One is the import tax. The second one is the consumption tax, which doesn’t apply to all products, but it applies to quite a lot of them. And then the third is the value added tax. So it’s possible that only part of these taxes will be waived in Hainan. Maybe, for example, the import tax will be waived, but potentially the consumption tax and the VAT would stay in place. This means that the duty free licences that are owned by companies like CDFG or HTI would still provide a significant advantage in terms of pricing, and in terms of waiving taxes.
So I think over time, the market will shift away from being a pure travel retail market to being a hybrid between travel retail models and domestic High Street retailing. But ultimately, it’s not only about price, it’s also about brand selection, store presentation and customer service.
I think there will be a fragmentation and liberalisation of the market with different models emerging. But 2025 is still some years out and then the other point is that the size of the market continues to grow. Because in Hainan, tourism infrastructure and transportation infrastructure continue to expand and improve, which raises the overall capacity and the attractiveness of the island as a destination.
A lot of things are not yet clear or set in stone. But the long-term potential of Hainan as a tourism and shopping destination is very, very strong and assured.
What’s your feeling about the potential performance of the liquor category on Hainan? And if you were talking to the liquor brands, what would you be advising them in terms of seizing the Hainan opportunity?
The opportunity for liquor is a massive one, for two reasons. First, the price advantage; our duty free versus domestic market is significant. Second, it also has to do with the visitors to Hainan – a lot of customers and visitors to Hainan come from southern China. The Guangdong province is the closest and the island is easily accessible from there in transportation terms. We know that Guangdong is the biggest market in China for dark spirits, including Cognac and whiskey.
The market here attracts many customers from our big cities and tier one cities. There’s definitely also a greater interest in premium high-end products, and more specialised products, such as fine wines, etc. So the potential is very strong.
Hainan is definitely a place where brands can grow their travel retail business to offset some of the stagnation or even decline that we can see in other markets. The demand for imported liquor is strong and growing. And the brands have done a really good job on adapting their product offer and their marketing for the Chinese market; Hainan is really the place for all these investments and efforts to pay off.
Innovative installation: MaxMara at the Sanya downtown complex
Beauty has been a big success story there and I also noticed watches & jewellery is picking up fast as well. Where do you see liquor settling in terms of percentage of the market based on what you’ve seen so far?
Compared to beauty, it’s still a small share of the mix. But I think it has the most room for growth. We launched our liquor on the same day as we launched the other categories, but we haven’t yet implemented all the brand personalisations. That’s a work in progress and will be completed shortly after Chinese New Year.
Once the liquor brands have been able to bring the best of all of their personalisation to really tell the brand story, it gives customers the right setting to understand and appreciate the products and also creates the right environment to display their most premium and higher value items.
I would say that in absolute numbers, liquor is already a significant business. I believe liquor brands should pay close attention and invest time and resources in this market.
The Hainan Tourism Downtown Duty Free Shopping Complex in Sanya, with its strong array of brands, has made a strong start, says Fabre
With all the people pouring into Hainan, the island has amazing potential to be a showcase for for travel retail.
For operators like us, and for our brand partners, it’s a great opportunity to do what travel retail does best which is build brands, which is to build brand image, which is to recruit new customers, which is to give people a highly personalised and impressive experience of brands. With Hainan being a leisure destination, people have time and they are open to new discovery.
I think it’s one big advantage that travel retail has over the domestic market. We know how to showcase and do impressive and successful product launches; we know how to capture customers’ attention when they are travelling.
There’s definitely a lot to be done here. Brands have invested a lot successfully over the years in airports; taking a similar approach to Hainan will definitely pay off.
What’s your overall message to the travel retail community and brands about investing in China?
We have a great opportunity for industry stakeholders to work together to not only raise the bar in terms of quality, execution, and brand image but also to grow the market and seize the opportunity.
We’ve been given a great opportunity and great policies by the authorities. And now it’s up to us to really maximise the commercial opportunity and also to maximise the potential of Hainan as a world-renowned tourism destination.
The Moodie Davitt eZine Issue 291 | 9 February 2021
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