Can tourism save European luxury?

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business, The Fashion Exec's Guide and bi-monthly Market Insights Reports, sign up for Advanced Membership here. Luxury spending by tourists visiting Europe is on the verge of recovery. This follows years of sluggish sales linked to ongoing pandemic restrictions, fewer flights and Chinese wariness about long-haul travel. Tax refunds are a good indicator that tourist spending is on the rise. In the first quarter of this year, the total value of European tax refunded to international tourists was 13 per cent below 2019 levels, according to data from payment solutions provider Planet analysed by Bank of America. By contrast, it was down some 18 per cent in the final quarter of 2023. Refund levels were particularly high in February 2024. Analysts believe that a return to pre-Covid levels of tourist spending could help offset the slowing interest in luxury among local European customers. “We expect 2024… to be a full comeback,” says Claudia D’Arpizio, senior partner and global head of fashion and luxury for consultancy Bain. “Even if the current economic situation in China is not helping.” An uneven recovery Spending by international tourists accounted for between 40 per cent and 50 per cent of European luxury revenue in pre-pandemic years. Tourists were lured in both by competitive prices and the opportunity to purchase products in the historic European capitals of luxury. The loosening of pandemic travel restrictions has fuelled a roaring trade from travelling US customers and those from the Middle East, which helped the European market to grow by 7 per cent in 2023, according to Bain. Tax refunds to US consumers were up by 100 per cent on 2019 in the first quarter, with those to Middle Eastern consumers up by 68 per cent. “Today, the American is still likely the most important tourist for many luxury brands in Europe,” says Ashley Wallace, managing director of EMEA consumer discretionary at Bank of America Global Research. There is no sign that an ongoing deceleration in local spending will reverse in 2024, meaning continued growth in tourism is important for keeping European market sales looking positive. The recovery in tourism has been stronger in some markets than others. In France, for example, tax refunds in February were 9 per cent higher than 2019 levels. France is the major European luxury power (and hosts the Olympics later this year) and it’s the only tracked country so far to have exceeded pre-pandemic figures at certain points. Per capita spending by non-EU tourists appears to be on a downward trend in the UK, according to a recent Financial Times analysis. The UK government effectively cancelled most tax-free shopping for tourists in 2021, a policy cited by industry representatives as a key reason for the downturn. Chinese travellers returning, but in no great rush The biggest drag on the overall recovery of tourism spending has been the slow return of Chinese tourists, known historically as the international travellers with the biggest outlay on luxury. Quarantine entry requirements to China were removed in early 2023, but industry hopes of a quick boom in travel were soon dashed. Chinese trips worldwide last year were down 58 per cent on 2019, according to Tourism Economics data. Reflecting on the French market in Q4, during the release of LVMH’s results in January, LVMH CFO Jean-Jacques Guiony said he was “surprised by the numbers” on Chinese spending, down by about 30 per cent on the same period in 2019. Guiony noted that fewer Chinese consumers were travelling in groups, with high-net-worth-individual travellers being much more common in LVMH stores. This slow-but-steady increase is nevertheless welcome for European luxury businesses. The Planet figures analysed by Bank of America show Chinese refunds were down 58 per cent on 2019 in the first quarter of 2024, but were at least an improvement on minus 65 per cent in Q4 2023, representing a 179 per cent year-on-year lift (due to the very limited numbers of Chinese travellers at the start of last year). This increase has helped push tax refunds close to their pre-pandemic levels, according to Bank of America analysts. “We were pleased to note that 2024 has started on an upward trend. Attendance has increased and so have purchases, particularly the footfall of Chinese clients,” says Gianluca Borghi, CEO at high-end Milan retail and culture complex 10 Corso Como, over email. Potential obstacles to growth One ongoing blocker to Chinese travel has been capacity constraints: the number of flights heading from China to Europe has remained notably lower than in 2019. Tourism Economics projections predict that global outbound visits from China will not recover to pre-pandemic levels until 2025. While overall outbound travel bookings from China to Europe are down 22 per cent in the second quarter compared to 2019, premium bookings are up 8 per cent. Geneva and Copenhagen are among the destinations seeing the biggest uplift on pre-pandemic rates, according to Olivier Ponti, director of intelligence and marketing at travel data firm Forwardkeys. John Grant, senior analyst at travel data provider OAG, says that an ongoing difficulty is the inability of European airlines to fly over Russian airspace. “Until that issue is resolved and, given the sluggish Chinese economy, there is a real reluctance for European carriers to add any more capacity,” he says. European markets are also battling for Chinese travellers with short-haul destinations in Asia, as well as popular domestic holiday destinations in China, such as the island of Hainan. As many consumers in China feel the impact of the current economic situation, a recovery in long-haul travel among aspirational consumers is likely to be slower than anticipated. Those Chinese consumers who do make it to Europe are likely to find plenty of bargains on offer. Prices of luxury handbags are about 20 per cent to 25 per cent lower than in China, per Bain figures. However, this is far less likely these days to encourage a Chinese traveller to make a long-haul trip. “Non-EU clients are less focused on prices than in the past,” says Borghi of 10 Corso Como. This has strategic ramifications for brands. In the short-term at least, a focus on very important clients makes sense. Bain’s Claudia D’Arpizio expects brands to focus on clienteling activities, one-on-one activations and mutually beneficial partnerships with luxury tour operators. “It will be less transactional,” she says. To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com.

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