Terrie's Take 844 (Tourism Edition) - Why is Chinese Per-visitor Spending Starting to Fall?

[Terrie's Take]

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie 
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, March 27, 2016, Issue No. 844

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+++ Why is Chinese Per-visitor Spending Starting to Fall?

In February the Nikkei newspaper started running articles about the 
peaking of the inbound tourism income bubble, pointing out that since 
the end of 2015 there has been a downwards shift in per-visitor tourist 
spending, even as the numbers of actual arrivals increases. As usual 
Nikkei is trying to be the first to identify a new trend, but I'd agree 
with them that it does appear that the froth is disappearing from the 
sector and that future growth from inbound tourism is going to be much 
harder work than it was in the last two years. At the same time, I think 
this is just a slow-down, not a reversal, and there is still plenty of 
money to be made.

The Nikkei's articles highlighted home electronics and cosmetics 
players, explaining why those companies' stock prices have been dropping 
recently.

Take Shiseido for example. In January, the company announced that its 
FY2015 results would show a growth rate of just 1% compared to a year 
earlier, of which 5%-6% (of the 1%) would be due to spending by 
tourists. While 1% up is better than 10% down, the problem is that last 
fiscal year tourist spending accounted for an astounding 40% increase in 
domestic sales -- so for Shiseido 1% feels like flat-lining. Overall, 
the retail cosmetics sector is still confident that tax-free sales by 
department stores will result in a sector-wide jump of 36% for FY2015, 
but as the Shiseido news shows, confidence about similar growth next 
year has been shaken badly.

Then there is Laox, the Chinese-owned home electronics retail chain. 
Unlike competitor BIC, Laox depends on about 90% of its sales from 
inbound travel customers (for BIC inbound sales are around 10%), making 
it a canary in the coalmine concerning any inbound tourism spending 
macro trends. The company had an amazing 300% jump in sales through to 
mid-2015 and was having trouble re-stocking its shelves fast enough. 
However, by January this year, the CEO was warning that per-customer 
sales were expected to fall, and sure enough they dropped later that 
month (y-o-y) from around JPY30,000 to JPY26,700, 14% less.

[Continued below...]

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The CEO is now saying that Laox's overall sales growth will be down 50% 
year-on-year, although obviously at 100%+, this is still pretty decent. 
The reason he's so concerned and is setting shareholder expectations 
isn't sales growth, it's profits. Laox issued a warning in February that 
its profits would fall 18%, causing the company's shares to drop 18% the 
very next day. Right now the shares are down about 70% from their peak 
last July.

So what is behind the slow-down in per-person inbound tourist spending? 
My take is that it is an inevitable maturing of the market, where 
yesterday's first-timers have become more prudent repeaters today, and 
tomorrow's first-timers don't make as much money to spend, especially in 
light of the economic slow-down going on in China. You might think that 
the slow creep of the yen upwards also has a part to play, however, 
studies around the world on tourism show that inbound flows are not 
particularly sensitive to short-term FX changes, and that even long-term 
ones have to be in the order of 20% (i.e., yen to be 20% more expensive) 
before they start impacting peoples' plans to head to a particular 
destination.

Instead, as the Japanese government opens its immigration spigots wider 
to hit its inbound traveler targets, the spending power of that bigger 
base of people is becoming diluted. As well, and as mentioned, those who 
can spend more are instead becoming more sophisticated and are doing 
what all FIT repeat travelers to a favorite destination do - they become 
more informed and start exploring local lifestyle options. In short they 
are moving from buying watches and cameras to buying food, experiences, 
and entertainment -- which means they are behaving more like western 
tourists.

In my opinion this is a very desirable situation, because it means 
people are interacting with Japan because they are starting to like it, 
not just because it has cheap supermarkets and department stores. This 
reminds me of how the British enjoy going to France or Italy each year 
-- for the atmosphere, food, and wine. In fact the Q3 (Oct-Dec) JNTO 
inbound survey, which is administered to about 6,400 people per quarter, 
clearly shows changes are happening.

I do a lot of public speaking to Japanese companies and local government 
organizations these days, and I often ask the audience three questions 
to help them put the China traveler into perspective, and help them lose 
some of their obsession about how much they can get the Chinese to spend.

The three questions I ask are:
1. Who were the top spending travelers by nationality visiting Japan in 
Q3, FY2015?

2. If you exclude shopping and just focus on actual travel (hotels, 
transport, experiences, entertainment, dining, etc.), who were the top 
spending travelers?

3. Who were the top spenders on accommodation only?

Most people quickly answer that the Chinese were No. 1 in spending 
overall, and they'd be right. However, for the travel-only category the 
Chinese rank 4th after Germany (JPY629K/person), USA (JPY586K), and UK 
(JPY567K)... with China coming in at JPY563K. For the hotel-spending 
category, the high rankers are: UK, India, USA, Canada, and Spain... 
with China down around number 14.

[Continued below...]

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-----------------------------------------------------------

The same JNTO survey also shows that 61% of Chinese travelers have 
income of JPY5MM a year or less. I think this segment is where the real 
long-term inbound growth is going to come from, because, as foreign 
economists often note, once a Chinese family hits around US$35,000 
(approx. JPY4MM) of income a year, they start to travel. There are not 
many countries as close, convenient, and diverse as Japan, and so for 
this large and steadily expanding audience, making repeat FIT trips to 
Japan is becoming evermore viable and attractive.

Actually I am very interested about the relative and absolute economic 
impact of north Asian travelers (as a group of countries with similar 
values) to Japan, and profiled for comparison the traveler incomes for 
Chinese, South Koreans, Taiwanese, and Hong Kongers (not sure if HK 
qualifies as "north asia" but I stuck it in anyway...:-)).

Income:
* <JPY5MM: Chinese - 61%, S. Korea - 43%, Taiwan - 76%, HK - 63%
* JPY5-9.99MM: Chinese - 29%, S. Korea - 38%, Taiwan - 15%, HK - 25%
* JPY10-19.99MM: Chinese - 8%, S. Korea - 15%, Taiwan - 6%, HK - 10%
* JPY20-29.99MM: Chinese - 0%, S. Korea - 2%, Taiwan - 1%, HK - 0%
* JPY30MM>: Chinese - 2%, S. Korea - 3%, Taiwan - 1%, HK - 3%

Note: These numbers are from a 6,400-person quarterly survey, so there 
are probably more than zero Chinese and HK travelers to Japan making 
JPY20-29.99MM of annual income

Interestingly, all 3 of the ethnically Chinese countries have high 
percentages of travelers on relatively low income. With the mainland 
Chinese I think that this means that while some people could be 
financing their travels by buying and reselling goods back home, and 
some are only coming once and so are splurging, most of them are 
probably learning how to become FIT travelers and thus learning how to 
travel cheap. The upside is that although there are only so many cameras 
and rice cookers they can buy, they are also traveling further afield 
for longer, consuming things that ordinary people in the countryside can 
make. So I think Japan should be celebrating this trend shift rather 
than fretting about it.


...The information janitors/

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