While affluent Chinese consumers are buying more high-end goods at home, they still spend freely when they travel abroad. And they spend more when retailers in the countries they visit accept the payment methods they’re accustomed to using at home.

Ryan Zheng, CEO and co-founder, RiverPay

Ryan Zheng, CEO and co-founder, RiverPay

The global banking firm HSBC recently released a report that at first glance might be cause for concern among Western luxury brands and retailers. The report, titled “Panda Luxury Staycation,” predicted a growing trend of more Chinese buyers of high-end goods in fashion, accessories, jewelry and other related areas choosing to spend their money at home, versus the traditional ritual of shopping sprees while traveling in Europe and North America. The report forecast that “the split between shopping abroad and shopping at home will shift from 75-25 a few years ago to an equitable 50-50 split within the next 12-24 months.”

Some of that expected shift is predicated on lowered prices within China for luxury goods, effectively reducing a traditional pricing discrepancy of up to 30% or more when buying similar product outside the country. Indeed, the report ominously warns: “This should boost the consumption in China at the expense of consumption abroad, assuming brands pass on the cut to consumers.”

By accepting Alipay, WeChat Pay or Union Pay, a merchant can see up to 60% increase in sales to the China tourist demographic.

Given the historically significant percentage of sales that Chinese travelers represent in Western markets, it’s understandable that the report might catch the attention of retailers from Venice to Vancouver, Milan to Miami, and London to Los Angeles.

Increase in domestic buying not surprising

Despite the dark cloud of the global trade war still lingering and a still uncertain read on the overall domestic economy, it’s actually not surprising that there is an increase in shopping for international goods within China. The combination of a lower domestic value-added tax (VAT – which was lowered from 16% to 13% earlier this year in Beijing) and some strengthening of the Chinese yuan versus Western currencies has had the effect of certain items being less expensive to buy locally then they had been, but still considerably higher than the prices in Western stores and websites.

advertisement

Improvements in online shopping sites and shipping are also cited as a factor in a predicted up-tick in Chinese domestic spending. HSBC notes that Western brands are now more comfortable with ecommerce sites and systems in China and should see a corresponding increase in sales through this channel.

For the luxury goods category, HSBC believes all of this will translate into a 12% growth in domestic spending, compared to a global average of a 6% increase.

Still bullish on cross-border spending

From our point of view (which is literally a ringside one, at the point of purchase of thousands of Western retailers, afforded to us through our role in enabling them to process payments through popular Chinese mobile payment platforms like Alipay, WeChat Pay and China UnionPay), we don’t think it’s time to panic.

For one, typically in the rare instance when a luxury brand does lower prices, it does so globally, not on a market-by-market basis. So, a 10% price reduction across the board, for example, does not impact the split between prices locally and abroad. That split is more a factor of macro issues, such as the tax and currency trends mentioned above.

The HSBC report glosses over the fact that there is still a considerable difference in prices of luxury goods inside of China compared to abroad. It notes that the split has come down from an average of 38% in 2015 to 22% in late 2018. A popular Chanel handbag model is used as an example: It costs 5,800 euros (US$6,523) at retail in France and Italy, while in China it retails for 48,300 yuan (US$7,200). Other reports reveal wider splits in pricing and most observers seem to agree that 20% is about as low as the prices difference will go, and the reality is that in some cases it’s quite a bit higher.

advertisement

We believe even a 22% differential is still a pretty hefty premium that notoriously bargain-minded Chinese consumers will find hard to swallow, and it will take more than that to lure many high-end shoppers away from the appeal of buying direct in Western markets.

Chinese travelers like to shop…and spend

More importantly, most everyone will agree that shopping, particularly in categories like cosmetics, accessories, footwear, apparel, jewelry and perfume, is an integral part of the Chinese tourism experience. The image of the Chinese tourist overladen with branded shopping bags in major Western cities is no stereotype: A recent report from Nielsen revealed that the top category of Chinese tourists’ spending while overseas was shopping, representing 25% of their total spend and surpassing accommodations or dining in their travel budgets.

In many cases trips are actually planned with a visit to the local High Street or shopping mall a more important itinerary item than seeing the main tourism attractions. The same Nielsen report found that during their most recent trip overseas, Chinese tourists spent an average of $762 per person on shopping, far exceeding that of non-Chinese tourists ($486).

The good news is that trend is definitely not slowing. Last year Chinese tourists spent a record $115 billion while traveling. In total, globetrotting Chinese consumers—buoyed by a growing middle class with larger disposable incomes, as well as relaxed international travel restrictions—represented 21% of the entire world’s tourism spending.

And if retailers make it easier for them to spend, such as supporting the mobile payment systems they are most comfortable and familiar with, the results can be impressive. Our experience is that by accepting Alipay, WeChat Pay or Union Pay, a merchant can see up to 60% increase in sales to the China tourist demographic.

advertisement

Relative price and purchasing convenience drive Chinese tourists’ spending

There is no question the Chinese appetite for Western luxury goods is still very strong and that price is still a major factor. Relative price is even more important to them: the Nielson study concluded that Chinese tourists are most concerned about the discounts offered (41%) and payment methods accepted (41%), followed by the price of the good or service (40%), compared to non-Chinese consumers.

The report noted: “And so, we see that for non-Chinese tourists, the absolute price is far more impactful when it comes to purchasing decisions, while the relative price after discount has a greater impact for Chinese tourists.” The over 20% pricing split between domestic and international would seem to be an important factor for sure.

While there are now more options and perhaps even stronger economic incentives for Chinese consumers to buy luxury items domestically, we feel the growth of international spending in this category will also increase.

Smart brands and retailers are positioning themselves to tap further into the China opportunity in Europe and North America, including making transactions and payment systems more familiar and comfortable to Chinese consumers through the aforementioned mobile wallets. Since research shows that more than 90% of Chinese tourists say that if overseas merchants supported the use of Chinese mobile payment brands it would further increase their desire to shop, we can paraphrase the saying, “If you build it, they will spend.”

RiverPay Inc. is a financial technology startup that connects foreign companies to Chinese mobile payment platforms.

advertisement

 

Favorite