Travel Retail: The Future of Luxury Cosmetics

What Do We Understand By Travel Retail?

Travel retail represents the business transactions in shops located in travel distribution channels (duty free areas in the airports, airlines, ferries, cruises, downtown duty-free shops, etc.) The market for this entire segment caters to 2.4 billion international travelers currently, ^[1] with the airport segment alone estimated to reach a $100 billion market in the next ten years. The beauty segment, comprising fragrances and cosmetics, contributes 30% of the total travel retail sales ^[2].

Distribution Of Travel Retail Across Segments

Image Source: loreal-finance.com

Evolution Of The Travel Retail Segment

The entire travel retail experience has undergone a metamorphosis from yesteryear. Airports are transitioning from being mere transit venues focused around airport logistics to luxury shopping hubs. The 1950s basic “duty-free” shop has come a long way to emerge into concept stores, offering actual shopping experiences with expansive product choices, complemented by offers unique to customers of this channel. ^[3]

To put things into perspective, for Asian airports like Hong Kong or Incheon (Seoul), 60% to 70% of revenues are non-aeronautical revenue, of which the primary contributor is travel retail. Global Airport Retailing information for 2012 reveals that the Asia-Pacific airport retail spending stood at $12.2 billion, while spending in Europe was $10.6 billion and for the Americas $7 billion. By 2016, it is expected that the spending will reach $23.2 billion for Asia Pacific, whereas for the Americas and Europe the figures will be $10.1 billion and $12.4 billion, respectively. ^[4]

Future Growth Potential

According to UN World Tourism Organization,  1.087 billion people traveled abroad in 2013, a phenomenon with an estimated annual growth rate of 4%. Their cumulative spending amounted to $1159 billion. The highest spenders in this segment were the Chinese travelers, with an expenditure of $128.6 billion abroad in 2013. Chinese international tourism has increased almost tenfold since 2000. The second and third positions in 2013 were occupied by United States and German travelers, both of which were outspent by about $42 billion. ^[5]

The Mainland Chinese Luxury Shopper survey conducted by Nielsen, comprising of 1,005 respondents, concluded that 90% of Chinese travelers plan on buying luxury goods just before they travel.  For 97% of the respondents, shopping was a key factor impacting travel with the most popular categories being accessories (71%), and high-end cosmetics and skincare (70%). The respondents also listed the countries famous for their “duty free” shopping, such as Hong Kong, South Korea, Macau, and Japan, as their top choices for visit. ^[6]

Hence, the growth in international travel, coupled with the high propensity to spend on luxury goods while traveling, gives travel retail a significant scope for growth in the future. This, coupled with the fact that the beauty segment contributes to almost one-third of  travel retail sales, implies that luxury cosmetic manufacturers like L’Oréal (OTC:LRLCY) and Estée Lauder (NYSE:EL), have a huge scope for revenue growth through this channel.

L’Oreal’s “Sixth Continent”

Travel Retail Market (including all sectors) in 2013, was estimated to be around $60 billion, and is estimated to double its value before 2025. L’Oréal’s (OTC:LRLCY) travel retail division dominated the beauty category in 2013, with 21.3% market share. In November 2013, L’Oreal created a division dedicated to travel retail, describing the channel as the “sixth continent”. L’Oreal recently announced the launch of its Vichy, La Roche-Posay (popular skin care brands in the dermocosmetic market), and Kérastase (leading brand in luxury professional hair care) brands in some of the most prestigious travel retail locations by the end of 2014 in Asia, and at the beginning of 2015 in the Americas. ^[1]

For H1 2014, travel retail sales for L’Oreal displayed a 6.5% year-on-year growth with the primary contributors being the Americas and Asia. Travel retail comprised of 5% of L’Oreal’s total sales. At 20%, the luxury division was the primary contributor to L’Oreal’s travel retail sales. ^[7]

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Estee Lauder’s Travel Retail Segment Performance

For FY 2014 (ended in June 2014), Travel Retail was one of the highest growth channels for Estée Lauder (NYSE:EL), contributing to 13% of product distribution. Estee Lauder focuses in strengthening its brand presence in emerging economies such as Dubai International Airport. The company keeps customizing offers and experiences for travelers who are generally pressed for time. One such initiative was the Three-Minute Beauty, including the popular Fatigue Fighter, launched in fiscal 2014. This program teaches travelers four steps to brighten the eye area. In May 2014, Estee Lauder introduced a novel concept at the Detroit Metro Airport, which is Delta Airline’s (NYSE:DAL) primary gateway to Asia. The flagship boutique offers a collection of all its luxury brands, High-Touch services, along with other facilities like a first-class lounge area, free Wi-Fi and updated information on the flights.

In FY 2014, Estee Lauder’s net sales in the Europe, Middle East, and Africa region were $4.16 billion, reflecting an 11% year-on-year growth. One of the main contributors to this growth was its travel retail segment. The main drivers to the travel retail segment growth were: the launch of new initiatives, an expanded distribution network, an increase in global airline passenger traffic, and accelerated orders. ^[8]

We expect Estée Lauder to increase its investment  into the travel retail business in the future, driven by the higher revenue growth rate from the division. Additionally, growth in travel retail is primarily resulting from the sale of skin care products. As of the end of CY2013, Estée Lauder’s skin care market share, according to our estimate, stood at approximately 7.6%. However, higher investments into travel retail should be able to drive future revenues and expand its skin care market share in the future.

See Our Complete Analysis for Estee Lauder Here

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1. L’oréal Travel Retail Launches Dermocosmetics And Professional Hair Care Categories, loreal.com, October 2014 [↩] [↩]
2. Travel retail, L’Oréal’s sixth continent, L’Oréal Finance Mag, March 2014 [↩]
3. Travel Retail, loreal.com [↩]
4. Travel Retail Taps Travelers Beyond Traditional Corridors, Business of Fashion, July 2014 [↩]
5. Travel Retail: A Sixth Continent With 1 Billion Consumers, Luxury Society, June 2014 [↩]
6. 90% of Traveling Chinese Luxury Shoppers Plan Purchases Before Trip, Luxury Society, October 2014 [↩]
7. L’Oreal’s (LRLCY) CEO Jean-Paul Agon on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, August 2014 [↩]
8. Estee Lauder’s 2014 Annual Report [↩]