Mainland Chinese are the fastest growing tourist population in the world, spending $102 billion in 2012

April 11, 2013, 9:31 a.m. ET

China’s Travelers Bring Gifts Abroad

By WEI GU

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Mainland Chinese are the fastest growing tourist population in the world, spending $102 billion in 2012. The WSJ’s Wei Gu tells Deborah Kan how spending patterns are changing as more Chinese travel abroad.

Bad air, a new strain of bird flu at home and easier visa rules in countries like Japan and the U.S. are adding to the incentives for Chinese to take an overseas holiday.

Those who do will join the millions of Chinese tourists already remaking the global travel industry.

Chinese travelers have become the world’s top source of tourist spending, according to the World Tourism Organization, with outlays of $102 billion in 2012. That flood seems likely to keep swelling. Less than 3% of China’s 1.4 billion people are passport holders, according to China’s Ministry of Public Security. By contrast, U.S. Travel Association figures show, 30% of Americans and 75% of Britons are.

As the Chinese numbers climb, there will be some surprising winners and losers.When Chinese go abroad, they are transformed from obsessive savers and bargain hunters into serious shoppers, much to the joy of retailers. Although conspicuous consumption is now frowned upon at home, total spending abroad by Chinese travelers jumped by 58% in 2012, according to Global Blue, which processes tax refunds for tourists. More than two-thirds of Chinese purchases of luxury goods take place abroad, and overseas sales to Chinese tourists are also growing at a faster clip than sales inside China.

So the luxury-goods companies best positioned to benefit from this bonanza may be those with a strong presence outside China rather than inside. Such companies include the likes of Bottega Veneta, owned by French group Kering, and Italian leather brand Tod’s SpA, TOD.MI +0.36% which is listed in Italy. Those brands offer more discreet, logo-light leather goods that appeal to well-travelled Chinese consumers, who are buying for themselves rather than to impress others.

Being less well-known in China can be an advantage abroad. Only 12% of the customers at Tod’s are Chinese, versus 33% at Italian fashion house Prada Group and 41% at Swiss-watch maker Swatch GroupUHR.VX 0.00% according to HSBCHSBA.LN +0.14% estimates. Coach COH +2.19% is ubiquitous in the U.S., but less so in China. Less exposed to Coach at home, middle-class Chinese are more likely to snap up its relatively affordable bags on their trips abroad.

Brands that are heavily exposed in China, by contrast, might actually struggle.

“Chinese accept to travel to buy a watch or bag because it is cheaper to buy abroad and it is cool to say they bought them in Paris,” said Erwan Rambourg, HSBC’s head of consumer brands and retail. “Gradually stores in China become just window displays. Brands like Louis Vuitton MC.FR +0.76% suffer from first-mover disadvantage in China.”

Other brands that could lag behind because of their exposure in China include Burberry and Gucci, as well as China-focused watch retailer Hengdeli Holdings Ltd.3389.HK -3.73% and jeweler Chow Tai Fook Jewelry Group . Hengdeli generated as much as 63% of total sales from mainland China in 2012, versus 7% for Hermès and 8% for Coach, according to HSBC.

One area where Chinese remain thrifty is hotels and restaurants, though they are sensitive about this. (An online uproar in China followed when a social-media post claimed an upscale Maldives hotel had removed the kettles from the rooms of Chinese travelers to discourage dining on instant noodles.) They organize their trips in groups to reduce costs, just as the Japanese did in the 1980s. Midrange brands such as Holiday Inn, owned by InterContinental Hotels GroupIHG.LN +1.51% should do well as more Chinese travel abroad.

Over time, wealthier Chinese travelers may reward familiar upscale Asian brands—such as Hong Kong-listed Shangri-La Hotels and Resorts and London-tradedMandarin Oriental International Ltd. M04.SG +0.63% —that follow them to the world’s gateway cities. Shangri-La, having launched successfully in Paris, will open a hotel this year in London’s new Shard tower.

Asian hotels have to explore sources of growth overseas to help offset weakness inside China. But going into unfamiliar territory has its challenges too. Weak demand in Europe has hurt Mandarin Oriental. And providing an Asian level of hospitality requires heavy staffing, which can be expensive overseas.

“Obviously, this service design cannot be as profitable in other parts of the globe as they are here in Asia,” said Randall Hall, executive managing director of Greater China at commercial real-estate services firm Cushman & Wakefield. “If expectations are not met, guests would switch to international brands that tailor their service design to suit the Asian markets.”

InterContinental Hotels Group PLC, Starwood HOT +0.87% and Hilton, which are already familiar names to the Chinese, have started to include amenities and services for visitors from China, such as Chinese menus and Chinese-speaking guest managers.

As with everything to do with China, the numbers are staggering. That 3% of the population with passports translates to 40 million people. A rise in the next decade to just 10%, or one-third the U.S. level, would increase the population of potential international tourists by more than 100 million. Housing, feeding and selling to them would be a big business indeed.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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