The next opportunity for global luxury giants From Mckinsey

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The following is the The next opportunity for global luxury giants From Mckinsey recommended by recordtrend.com. And this article belongs to the classification: Consumer research, Mckinsey .

1、 Hainan luxury market will usher in strong growth

In June 2020, the Chinese government announced that it would build Hainan Island into the world’s largest free trade port. The overall plan includes optimizing tax policy arrangements, reducing enterprise and individual income taxes, implementing more convenient visa free entry measures, expanding the types of duty-free goods, relaxing the duty-free shopping quota for tourists on outlying islands to RMB 100000 per person per year, and tourists can purchase duty-free goods online within half a year. In addition, from 2025, the whole island of Hainan will become a duty-free zone, and the brand side will no longer need to cooperate with the duty-free operator.

According to the data of Civil Aviation Administration of China, the passenger traffic volume of China’s international routes decreased by nearly 90% year-on-year in 2020. McKinsey analysis says that the fastest way to get back to the level of COVID-19 before 2023/2024 is. Therefore, Hainan has become an ideal place for Chinese people to buy duty-free luxury goods.

Although the epidemic has not completely passed, Chinese tourists are still flocking to the island, and the tax-free consumption on the island has doubled from US $2.1 billion in 2019 to US $4.3 billion in 2020. According to the customs statistics of Haikou, the provincial capital, it is likely to set another record in 2021“ During May Day, duty-free sales on the island increased by 248% year-on-year. The Hainan provincial government expects to exceed US $9 billion for the whole year.

Even if China resumes outbound tourism, Hainan is likely to play an increasingly important role in diverting luxury consumption. In fact, according to McKinsey’s survey of 552 duty-free shoppers in Hainan in June 2021, more than 60% of the respondents said that they would still go back to Hainan to buy duty-free goods even if outbound travel was restarted. In addition, up to 95% of the respondents have taken advantage of the new regulations on online supplementary purchase on outlying islands for half a year, or are ready to do so. Among the respondents who intend to return to Hainan, more than 40% said they would increase spending, and only 12% planned to reduce spending.

According to the prediction of the 14th five year plan of Hainan provincial government, the scale of Hainan duty-free market will increase tenfold from 2020 to 2025, reaching US $46.5 billion, becoming one of the largest tourism retail destinations in the world. This amazing increase is due to:

Favorable policies: the central government and local governments will continue to introduce a series of support policies, such as issuing more tax-free licenses, increasing the tax-free amount to RMB 100000 per person, and improving the supplementary purchase scheme for outlying islands, so as to build Hainan into a tax-free and luxury shopping resort with global competitiveness.

Investment Overweight: new duty-free operators and ecosystem platform companies (such as Alibaba and JD) are entering the duty-free market one after another. Developers plan to double the business area of the duty-free mall in the next four years. Major brands are also increasing marketing efforts to boost business growth through social media and omni channel activities.

Price advantage: the price gap between similar duty-free retail channels in Hainan and overseas is narrowing, and the positive price goods are 20% ~ 30% lower than the domestic price. The increasingly obvious price advantage will further stimulate demand.

Although beauty products have always been the main force of Hainan duty-free market, accounting for nearly half of Hainan duty-free sales by 2020, with the diversification of consumer demand, other luxury goods will also usher in more and more opportunities. For example, among the consumers of beauty products, although only about 15% have purchased fashion goods during their last trip, nearly 1 / 3 of the respondents intend to buy them next time.

2、 Long term risks faced by luxury brands

At present, most brands of duty-free stores in Hainan adopt the wholesale mode, that is, the duty-free operator (DFO) is responsible for operating multiple brands and single brand stores, and has strong control over inventory, pricing and employees. This model is very effective for buyers with price sensitivity and large trading volume, and is very successful in driving sales. However, in the long run, this model will bring significant risks to luxury brands, including:

Damage to brand image: the mode dominated by duty-free operators advocates high sales with high discounts. Therefore, price and discount have become the primary consideration for consumers when purchasing goods. This approach ignores brand building and is difficult to provide consumers with differentiated luxury shopping experience.

Erosion of profit space: due to the lack of pricing power and the fact that duty-free operators are not committed to keeping consistent with the prices in the domestic market, the domestic business of luxury brands may be eroded. In the long run, the brand profits of the whole Chinese market will also be affected.

Difficult to reach customers: duty-free operators are responsible for store operation and implement the duty-free store membership system. It is difficult for brands to establish new customer relationships, master customers’ consumer behavior in Hainan, or track marketing when customers leave the island.

In order to meet the above challenges, some luxury brands actively limit their layout in Hainan, and some even do not enter the duty-free market in Hainan at all. However, with the rapid development of Hainan, its share in China’s luxury market will become larger and larger, and it will become a completely tax-free free trade island by 2025. Luxury brands should formulate special market entry, operation and expansion strategies for Hainan.

3、 Five winning actions

At present, in Hainan, luxury brands have not formed a clear success model. If the brand wants to achieve long-term sustainable growth here, five actions should be considered:

Formulate differentiated retail operation mode: according to the comparison of bargaining power between brand and duty-free operators, it can be divided into two situations:

If it is a strong duty-free operator, the brand side should skillfully seek win-win opportunities to improve the control of the brand. For example, the brand side should send duty-free store managers, which can not only improve sales efficiency, but also strengthen brand training for store employees.

If it is a new duty-free operator that enters the market and lacks the advantages of scale and location, it can formulate an operation mode dominated by the brand party in order to obtain strong control over pricing, sales, employees, shared supply chain, demand planning and data operation.

Ensure consistent customer experience in the Chinese market: provide the same member loyalty program, customer data platform (CDP) and data analysis team for Hainan and domestic consumers, so that tourists can reposition them after leaving Hainan, and vice versa. To achieve this, major brands need to fundamentally rethink the institutional setting and cooperation mode of domestic and tourism retail.

Establish a series of strategic partnerships: in order to obtain key access qualifications and capabilities in the market, we should pay attention to the following two points:

Explore online cooperation opportunities with platform companies, such as door-to-door delivery, and provide off Island supplementary purchase schemes for tourists with surplus tax exemption. Due to inconvenient operation and long delivery time, only 5% of the shoppers surveyed will choose door-to-door service in duty-free stores, and 30% of the respondents are willing to make up purchase after leaving the island, but do not know how to make up purchase conveniently.

Maintain good relations with all key policy makers at the central, Hainan provincial and municipal levels according to different policy considerations and objectives.

4. Lay a good foundation for opening direct duty-free stores: from 2025, the brand can directly open duty-free stores in Hainan without cooperating with duty-free operators. In order to prepare for Direct stores, the brand side needs to gradually cultivate the team and relevant capabilities, such as brand owned supply chain strategy and supervision mechanism, real estate development, government relations, local sales and pricing capabilities, and establish a special talent development department in Hainan.

five Maintain the agile operation of Hainan brand construction: adopt the phased investment mode, that is, only when the previous stage has achieved results, can we start new investment. In this way, the brand can obtain the necessary flexibility in the rapidly changing Hainan market.

The Hainan government attaches great importance to the current restrictions on outbound travel and the shopping needs of Chinese luxury consumers, and strives to build Hainan into a global duty-free shopping center. It is conceivable that luxury brands will usher in great opportunities. Under the current operation mode, the brand needs to make a trade-off between improving sales and protecting the brand image. Only by creating a new model, creating a differentiated luxury shopping experience for tourists and forming a long-term attraction to consumers, can the brand become the winner of the new “battlefield”. China’s Digital China China Digital buyers novel coronavirus pneumonia: 2017, China’s digital consumer research, new consumption: face to face speed and passion with new generation of Chinese car buyers: how fashion companies win consumers in twenty-first Century (download) BoF& McKinsey: 2019 global fashion format report: McKinsey: new normal analysis of consumers in the post new crown pneumonia era: McKinsey: 2021 China consumer report (download) McKinsey: the recovery of consumer demand and the continuing impact of COVID-19’s report (MCS): China’s emerging consumers are more emotional, self indulgent, and more focused on personal enjoyment. With brand loyalty McKinsey: Six Trends of Chinese digital consumers in 2016 McKinsey: the road to modernization of Chinese consumers (with download) McKinsey: four trends shape the future of China’s retail banking market 2020 global luxury segment market scale (with original data sheet) McKinsey: office workers spend one tenth of their waking time busy with “e-mail” McKinsey: 2 015 China digital consumer survey McKinsey: the next stop of China’s economy: meeting with mainstream consumers

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