Analysis: A mounting crisis for travel retail – The Moodie Davitt Report

Key travel retail store temporary closures due to the coronavirus

  • 26 January: China Duty Free Group closes its busiest duty free location, the cdf Mall in Haitang Bay, Sanya. For many beauty suppliers this is their biggest travel retail door in the world.
  • 3 February: Lotte Duty Free shuts its Jeju downtown store to prevent the spread of the coronavirus domestically.
  • 3 February: The Shilla Duty Free shuts down its downtown stores in Seoul and Jeju.
  • 6 February: DFS Group suspends operations across its seven stores in Macau from 6 to 19 February inclusive, with a planned reopening on 20 February.
  • 7 February: Lotte Duty Free announces a temporary shutdown of its flagship Seoul Myeong-dong store after the country’s then 23rd confirmed novel coronavirus-infected patient (a female Chinese traveller from Wuhan) had visited the Lotte Department Store on the same site.
  • 7 February: The Shilla Duty Free reopens its Seoul and Jeju downtown shops.
  • 8 February: DFS shuts down T Galleria by DFS, Hong Kong in Tsim Sha Tsui East; and Hong Kong T Galleria Beauty by DFS, Moko from 8 to 29 February
  • 10 February: Lotte Duty Free reopens its flagship Myeong-dong store.

Source: Moodie Davitt Business Intelligence Unit

INTERNATIONAL. News of the closure of two more DFS stores is an unwelcome reminder of just how severe the impact of the coronavirus outbreak on the travel retail community has become, writes Martin Moodie.

Some of the world’s most prominent duty free doors are now shut for business. These include seven DFS locations in Macao, two more in Hong Kong and of course the cdf Mall in Haitang Bay, Sanya, the epicentre of China’s offshore duty free business.

One can add to that list the temporary closure of Lotte Duty Free stores (including its flagship Myeong-dong complex) and those of rival The Shilla Duty Free for various periods over recent days.

There has also been an alarming slump in business at many other airport and downtown locations around Asia Pacific and the US West Coast. As reported, King Power International Group has seen its key group tour traffic (up to 10,000 store visitors a day) wiped out, despite being fully open for trading and applying strict health measures. And business at Chinese airport stores, starved of passenger traffic, is in freefall.

Travel retailers such as China Duty Free Group, DFS, Lotte Duty Free and The Shilla Duty Free have acted with commendable speed in putting the safety of staff and customers first, whatever the drastic commercial toll. They and many of their retailer and brand peers in the travel retail community are being hit hard.

As we have said before, the big difference from a travel retail perspective between this health crisis and SARS in 2003 is the huge growth in Chinese travel and overseas shopping in the intervening years. Remember, offshore duty free on Hainan Island was not introduced until 2011.

Considering these sobering statistics from ACI Asia-Pacific: In 2003 the total number of passengers moving through Chinese airports amounted to about 187 million vs 1.26 billion in 2018. The volume of international passengers increased from 50 million to 114 million over the same period (representing annual average growth by +9.6%).

Chinese shoppers have become not just a locomotive of the travel retail industry, but a bullet train. Markets such as South Korea (the world’s biggest duty free channel) have grown to be overwhelmingly dependent on the nationality and others have relied increasingly on the Chinese for growth.

Consider the words of Singapore’s Transport Minister Khaw Boon Wan on Thursday, when comparing the coronavirus outbreak’s impact on the aviation sector with SARS.

Chinese travellers accounted for just 5% of Changi’s passenger numbers in 2003. “Now, they account for 11%, so it is double in terms of percentage and even more by absolute numbers,” Khaw said. “But the purchasing power has increased even more… they account for one-third of retail sales in Changi, and the one-third has evaporated.”

Evaporated is a very strong word, especially from a usually understated individual such as Khaw. But it tells its own story. The luxury and travel retail sectors, inextricably related, are going to take a powerful hit over coming weeks.

In absolute terms, the reduction in traffic in China would amount to 16.4-19.6 million passengers for Q1 2020, which would translate to approximately US$4.1-US$4.9 billion potential loss of airline-related revenue in the quarter. The loss to travel retail will also be huge. [Image: ACI Asia-Pacific]

How big a hit depends very much on one’s geographic, customer and product profile. For suppliers, premium skincare, Cognac, baiju and tobacco brands, for example, are being affected worse than others due to their popularity with Chinese travellers (sales of those liquor categories at Changi, for example, are off by around -70% over the past couple of weeks, compared to Scotch whisky off by 30-40% and spirits such as rum and gin, not particularly favoured by Chinese consumers, down by around 5-15% depending on the category). For retailers, it’s all about how key the Chinese traveller and spend is within their geographic footprint.

The question every business executive is asking themselves is ‘How long will it last?’ And that, alas, is a question that no-one, not even in the medical world, can yet answer.

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