Loss of overseas tourists continues to hit high-end retailers

It has been a year full of challenges for the retail sector and bricks and mortar stores in Australia’s CBDs have been among the hardest hit.

Office shutdowns and border closures drove a collapse in foot traffic, which pushed vacancy rates up and rents down across capital cities.

While the relaxing of restrictions and gradual increases in office occupancy have injected some life back into cities, the absence of international tourists continues to pose a challenge to many retailers. Luxury retailers and department stores operating in CBDs are among those most impacted by Australia’s closed borders.

Compared to domestic travellers, international tourists are more likely to stay in and spend big in CBDs. According to research by McKinsey, between 20-30% of revenue in the luxury sector globally comes from consumers shopping outside their home countries.

Before the pandemic hit, the strong and steady growth in inbound tourism presented an opportunity to these retailers and drove a surge in the number of global luxury brands looking to enter the Australian market.

Over the five years ending 2018, IBISWorld estimates that revenue generated by luxury retailers in Australia grew at an annualised rate of 10.2%.  This led to dozens of high-end brands leasing prime and super prime grade retail spaces, particularly in the Sydney and Melbourne CBDs.

Among those brands already established in Australia, there was also expansion. In 2019, for example, Gucci more than trebled its floorspace in the Paris End of Melbourne’s Collins Street from 150sqm to 500sqm.

High-end retailers like Louis Vuitton are unlikely to see an increase in foot traffic until our international borders reopen. Picture: Getty

The substantial growth in inbound tourists from China had been a boon for the luxury sector. According to IBISWorld, much of the growth in revenue seen over the years leading up to the pandemic can be attributed to growth in inbound tourism from Asia and in particular, China.

Data collected by Tourism Australia shows that over the year ending in January 2020 there were 9.5 million overseas arrivals in Australia, up 38% from the number visiting five years earlier. Looking specifically at China, however, Australia saw 1.45 million visitors in that same time period, up 75% (or 625,000 people) from the levels seen just five years earlier.

Tourism Australia also estimates that Chinese tourists account for around 25% of the total tourist spend in Australia, the largest proportion from any overseas market.

In research conducted by Nielson looking at outbound Chinese tourism and consumption trends globally, Chinese tourists were found to spend more on average than visitors from other countries.

Among Chinese tourists globally, shopping accounted for the highest proportion of total holiday spend, accounting for an estimated 25% of expenses according to Nielson.

Luxury brands, particularly those that are recognised globally, have been a major beneficiary of this spend, with Nielson putting the proportion of Chinese tourists who shop in luxury stores at 31%. In the same study, 47% of Chinese tourists globally were estimated to shop in department stores pre-COVID, and these stores are continuing to suffer due to the sudden withdrawal of overseas shoppers.

Department store Myer has reduced its presence in the CBD in response to consumers increasingly turning to online shopping due to COVID restrictions. Picture: Getty

Myer, for example, has responded to the reduction in foot traffic by committing to reducing their gross lettable area by over 110,000sqm, and in 2020 exited the Emporium level at Myer Melbourne.

In their 2020 annual report, Myer cited the reduction in foot traffic, particularly in CBD locations, as a key challenge impacting sales.

The luxury sector’s loss of the revenue previously generated through tourism has seen many of these brands invest heavily in improving and expanding their online presence. In research conducted by Bain, the proportion of purchases occurring online from consumers globally increased from 12% to 23% between 2019 and 2020. Over the next five years they predict that online sales will account for the highest proportion of luxury purchases.

Consumers purchasing domestically are more likely to shop online compared to those shopping while travelling internationally. If the proportion spent on luxury items online continues to grow, the resumption of international travel will become even more important to the success of physical stores.

The COVID-19 pandemic has halted the rapid expansion of luxury brands leasing retail space in Australia’s CBDs. The expectation that it could be several years before Australia sees inbound tourism back at pre-pandemic levels could lead some luxury retailers to reduce their physical footprint over the next 12 months and beyond. This could contribute to higher vacancy and slow the recovery in rents in Australia’s CBDs.