The Estée Lauder Companies remains optimistic about the future of the key Hainan offshore duty free market, despite a strong March slowdown in arrivals due to COVID-related travel restrictions on the Mainland.
Speaking during an earnings call yesterday after the US beauty group’s Q3 results were announced, President and Chief Executive Officer Fabrizio Freda said: “Hainan was strong until mid-March, but then had a very strong decline of traffic – we estimate -60% to -70% in the second part of March. And in April, we saw -80% traffic reduction.
“But also we have seen historically that the bounce back can be very strong because when these restrictions finish, people travel domestically very fast and very happily. And so our confidence in Hainan’s future is unchanged; it’s actually increased given the incredible development of the place.”
Freda repeatedly emphasised the company’s faith in Hainan and the wider China market. “Actually, I personally have never been more enthusiastic about the opportunity. When the market rebounds, it also should be much more profitable as we have seen in the U.S. because the market will rebound in travel retail, in online, in more productive brick-and-mortar and a more productive fragrance businesses than in any other region of the world – because high-end fragrances is a much bigger percentage of the total development of the category.”
He added: “The long-term fundamentals of global prestige beauty in China and in travel retail China remain very, very good.”
Freda also highlighted the expansion of Hainan’s offshore duty free sector. In a reference to China Duty Free Group’s creation of the vast Haikou International Duty Free City due to open in September and other retailers’ expansion projects, he said, “There are new mega counters getting expanded in Hainan as we speak… extraordinary new opportunities.”
He added, “We hear that it’s very likely there will be more economic stimulus ahead in the country that will further develop consumption in the next 12 to 18 months. So… we are really trying to be as prudent and objective as possible in reflecting the COVID restrictions but we remain absolutely determined to continue to build our China and China TR businesses.”
Executive Vice President and Chief Financial Officer Tracey Travis said, “Our global travel retail business again grew double digits despite the challenges that arose during the quarter. Asia is the largest region for our travel retail business, and sales in the key markets of China and Korea were very robust at retail for most of the quarter.
“However, there was a precipitous decline in Chinese travel in March as restrictions to contain COVID were increased in China. We continue to see a sharp increase in travel retail sales outside of Asia as traffic increased throughout Europe and the Americas.”
Looking towards Q4, she said, “While we expect continued growth at retail in both Mainland China and Hainan, the severity of the distribution constraints we are experiencing are expected to result in a meaningful decline in net sales for these areas for the quarter.”
With The Estée Lauder Companies’ Mainland China distribution centres being based in Shanghai, the sustained COVID lockdowns there have hit the group’s supply chain badly, Freda confirmed. “We couldn’t ship orders that we had already in our hands, both from retailers and consumers online. And so obviously that’s temporary and this has happened to us in the past, in the United States and in Europe during the pandemic lockdowns.
“So we know how this works… and we know also how to rebound when this finishes because it’s not about consumer demand [declining] – it’s about access to consumers that has changed dramatically in a very short period of time.”
Reaffirming the group’s unwavering commitment to China, Freda said, “We are in China for the long term and are completely dedicated to continue to develop the market and serve our partners there.
“We are going to open soon [this calendar year -Ed] our R&D centre in China, which is a very big event and a very important manifestation of a long-term determination to continue to be locally relevant and serving the specific needs of this market.”
The new Shanghai-based innovation centre will significantly increase the company’s ability to serve Chinese and other Asian consumers with “locally relevant and inspired innovation”, Freda said. “Also, the new centre will further enable our East to West innovation mindset, supporting the creation of more successes like La Mer’s The Treatment Lotion.”
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