Not long ago, most Asian tourists were from Japan, South Korea, or Hong Kong—the region’s more affluent markets—but that trend is rapidly changing. The World Tourism and Trade Council estimates that China in 2011 surpassed Japan to become the second-largest travel and tourism market in the world in terms of contribution to gross domestic product. Travel within China, which currently accounts for most Chinese travel and travel spending, is projected to increase by 16 percent per year and to be worth ¥3.9 trillion ($615 billion) by 2020. Meanwhile, the country’s outbound travel market will likely expand to triple the size of Japan’s by 2020.
Yet China’s travel industry is still in its infancy. It is also a highly regulated sector and a challenging one for foreign players. Intense competition with little innovation or differentiation is typically found in China’s travel agencies, hotels, and airlines. Few domestic or foreign companies understand the needs of Chinese travelers, 95 percent of whom claim they are poorly served on both the domestic and international fronts.
In a recent survey, the Boston Consulting Group (BCG) found that the rapidly rising demand for travel in China, together with the lack of offerings for Chinese tourists within China and abroad, present a rare opportunity for travel-related companies to gain a first-mover advantage. This advantage can be enormously valuable in a market where consumers are desperate for brands that meet their needs. Travel providers who are equipped with insight into targeted segments could develop differentiated products for affluent travelers as well as for the burgeoning segment of middle-class tourists emerging throughout China.
Demand for travel services
In another BCG survey of more than 4,000 consumers in seven countries, only about one-quarter of US and European respondents said that they planned to trade up—to increase spending in a particular category or service—on vacations, whereas more than one-third of Chinese intended to do so. Indeed, vacations were the highest-rated category for trading up among Chinese respondents, compared to other categories such as food and beverages and personal care.
Travel and lodging companies should prepare for a big change in China. BCG expects the market value of leisure trips to more than quadruple by 2020 and the demand for domestic accommodations—for business and leisure travelers—to double. Business travel accounts for fewer trips, but spending per trip is higher. BCG estimates that business travel within China will remain stable at about 10 percent annual growth over the next decade. The overnight leisure market will likely surpass that of the business segment, accounting for nearly half the market for domestic travel by 2020.
Compared with the already significant domestic travel market, the Chinese market for international travel is still young. According to BCG, Chinese international travel will likely increase by 17 percent per year between 2010 and 2020, driven by rising incomes and aspirations. Slightly more than two-thirds of all international travel today is to Hong Kong or Macao, but Chinese tourists are increasingly venturing to other parts of Asia and even to “long haul” destinations such as Europe, Australia, and New Zealand that require more than six hours of flying time.
Chinese international travel will become a major source of growth for travel providers in destination countries. BCG’s findings show that by 2020, 25 percent of international travelers arriving in Japan and South Korea will come from China, while arrivals in Europe from China will quadruple. China will become one of the largest sources of growth for Europe’s travel market, accounting for more than half of the increase in international arrivals between 2010 and 2020 from countries outside the EU region. In North America, travelers from China will rank third in number, after travelers from the United Kingdom and Japan.
The Chinese traveler
Chinese travelers differ from their Western counterparts in ways that are significant for the companies that serve them. For instance, demand for travel in China comes mostly from active younger people eager to visit new places, whereas demand in the West is driven by senior citizens, who tend to have more time and money for travel.
According to BCG, fewer than 200 million urban Chinese consumers today have taken an overnight leisure trip. With an average of 25 million Chinese taking their first overnight leisure trip every year, however, that number will at least double by 2020. Middle-class and affluent consumers are spearheading this explosion in travel. Over the next decade, this population will increase from 150 million to more than 400 million travelers, and two-thirds of these people will come from smaller cities, where disposable incomes are projected to rise rapidly. By 2020, there will be more than 650 urban areas in China (cities and the urban portions of counties) where real disposable income per capita is greater than Shanghai’s today.
Longer trips and larger groups
Whether traveling domestically or overseas, Chinese travelers are more likely to take longer trips than Westerners and tend to travel with large groups of friends. BCG’s surveys show that about twice as many Chinese as US domestic leisure travelers take trips longer than six days in duration. In addition, 26 percent of Chinese travel with more than five people, whereas only 13 percent of US travelers do so. Of the Chinese who travel in groups, nearly half said that they travel with friends rather than family members. Only 12 percent of US group travelers made that claim.
The Chinese propensity for longer trips may partly be a result of holidays that occur consecutively. But because the PRC government in 2008 shortened the one-week Labor Day holiday to one day and added three traditional Chinese holidays to other months, the holiday schedule may become less of a factor. The preference for traveling in large groups reflects the age of the market—most Chinese travelers are under 40—as young people prefer to travel with friends, and even with parents and children.
Short planning cycle
Many Chinese also take less time to plan a trip. Thirty-nine percent of US travelers said they started planning more than three months ahead for their last domestic leisure trip of five or more days. Only four percent of Chinese travelers begin that early. Of course, the larger the travel group, the more difficult it is to coordinate schedules months ahead of time. But the Chinese also love a good deal, and travel agents often do not announce bargains until one or two months before the departure date. Yet another factor may be force of habit. In the past, travelers from China’s big cities could buy train or bus tickets no more than four days in advance; in smaller cities, travelers often had to wait until the day of the trip. Finally, it is still somewhat frowned upon in China for employees to tell their bosses six months in advance that they plan to take a vacation.
China already has nearly 400 million Internet users, so it is not surprising that Chinese travelers are embracing do-it-yourself travel arrangements for domestic leisure trips. Most Chinese have had little experience with leisure travel, so they seek out online travel sites for recommendations, information, and reservations. More than half of BCG’s survey participants ranked online information as their most trusted source for travel planning, while only one-third favored word of mouth. This is probably because not everyone knows someone who has been to the places they want to visit.
For travel outside of China, however, people prefer to rely on travel agents, not only for the convenience of handling any visa requirements, but also because agents help bridge cultural differences and language barriers.
In contrast to the United States, where most travelers either fly or drive, trains and buses remain the most popular modes of transportation within China. The dominance of bus and rail means that being located close to train and bus terminals, city centers, and tourist attractions is an important factor for tour operators and hotels.
Automobile travel is increasing in China, especially for shorter trips, but it is unlikely to become the dominant form of travel in the near future. Roadside facilities are still sparse, accident insurance protection is inadequate, and driving itself can be less than relaxing because of pollution and reckless drivers.
Travel and shopping
On international trips, most Chinese are willing to spend much more than they do on their domestic travels, even excluding transportation costs. They also allocate their spending differently than US travelers. While US travelers prefer to spend the lion’s share of their travel budget on accommodations and meals, the Chinese devote nearly half of their budget to shopping. China’s strong gift-buying culture stimulates some of this spending. As one consumer told BCG, “I travel overseas only once a year, so my family and friends all know when I go. If I don’t buy gifts for everyone, I feel very embarrassed.” Chinese tourists purchase luxury items mainly overseas and in Hong Kong and Macao, rather than in duty-free shops in Chinese airports, where there is less variety. Apparel retailer Burberry claims that one-third of the sales in its London stores are made by Chinese shoppers. In Hong Kong, the Louis Vuitton and Chanel stores also have long queues of Chinese tourists.
Companies that offer premium services to Chinese travelers should realize that Chinese and US views on value can differ. For example, Chinese travelers rank baggage delivery between airport and hotel second among desired premium services, while US travelers do not even consider it a top-ten demanded service. This is probably because auto travel including car hire, which essentially eliminates the need for separate baggage delivery, is more common in the United States than in China. Furthermore, since Chinese travelers often travel in groups with a full schedule of activities, they appreciate not having to deal with their baggage. Chinese travelers are also more likely to prefer special treatment at airports and the sense of exclusivity conferred by access to priority lounges, security lines, and seating.
All segments are underserved
Many of these preferences, however, are often unmet by China’s emerging travel and tourism industry. Many domestic companies serving tourists remain state-owned, and they are just learning how to serve consumers in a competitive environment. Foreign companies in China have focused largely on expatriate customers or on the affluent domestic segment. As a result, a huge portion of the travel market has been underserved.
Troubles on the domestic front
Middle-class domestic travelers typically care more about basic services, such as the price and cleanliness of their accommodations, than they do about value-added extras. This is only a little less true for the affluent segment, which ranks price below a hotel’s amenities and cleanliness. Such basic requirements are taken for granted by Western travelers, but Chinese travelers in the BCG survey said these needs were going unfulfilled, particularly on the domestic front. Most of the complaints about hotels in China concerned a lack of cleanliness and basic comforts.
Challenges for international travel
Chinese travelers in all segments are more willing to trade up when they travel abroad. They believe that they need a higher level of service to deal with language barriers and unfamiliar cultures, and they view international travel as a special treat—an occasion to splurge. The luxury end of the consumer retail industry has already begun to invest in serving this expanding market by hiring Mandarin speakers in their global stores and providing language lessons and exchange programs in China for local staff. Some retailers have VIP programs that require specific customers to be greeted by their first name at any of the company’s locations around the world.
Though some casinos in Las Vegas or Macao have become sophisticated in serving Chinese high rollers, BCG research shows that the travel sector has not paid as much attention to affluent travelers as the retail sector. Few hotels at popular destinations for Chinese tourists in the United States and Europe provide tailored services for Chinese travelers, although some are beginning to offer Chinese language services and other amenities (see Hilton Welcomes Chinese Travelers at Home and Abroad). For example, most foreign airlines lack Chinese websites or signs, and restaurants overseas rarely offer menus in Chinese.
Differentiated premium services
Currently, most offerings—in foreign countries and in China—are either undifferentiated and targeted at the mass market or they lack sufficient quality to appeal to affluent travelers. For example, the affluent travelers in BCG’s survey were less satisfied than those in other income segments with packaged tours offered by travel agencies. Affluent travelers frequently complained about the poor quality of the guides and the lack of diversity in the tours available. BCG survey participants noted that they could detect little difference between two European tour packages—one priced almost twice as much as the other.
Online travel planning
While many consumers in China are already planning their travel online, downloading and interpreting the complex information that appears on the Web, comparing prices, and determining reliable reviews can consume hours and even days for most Chinese. The experience of one Shanghai traveler interviewed is typical: She visited 10 travel websites when planning her most recent trip to Xiamen, Fujian, a major city just an hour’s flight away. There is a rising market in China for one-stop, user-friendly travel sites that provide trusted information and services.
Few clear winners in the market
Because the travel and tourism sector in China is still relatively undeveloped, it offers some of the best opportunities in the consumer industry. Companies entering now will be able to set standards and guide consumers in their shopping behavior. So far, few if any companies are fully serving the needs of Chinese travelers. That window will not remain open forever. Therefore, it is important for players to act now. Companies that wish to tap into the China travel and tourism market should:
- Invest in consumer insight to develop different products and services for mass-market and affluent consumers, as well as for consumers with different levels of travel experience;
- Identify opportunities to develop a trusted umbrella brand that will attract the loyalty of consumers new to the travel market;
- Consider opportunities for acquisitions in new, fragmented sectors where the company may not have an established operation; and
- Design a well-timed, cost-effective, and innovative expansion into lower-tier cities to capture this rapidly growing and underserved market.
China’s speedy ascension in the world’s travel and tourism sector presents an unprecedented opportunity for growth at a time when most mature markets remain sluggish. Considering the colossal advantage to be gained by innovative first-movers in a market desperately seeking trusted brands, companies in China and abroad must take up the challenge of meeting the needs of Chinese travelers.
[author] Vincent Lui (lui.vincen[email protected]) is a partner and managing director, Youchi Kuo ([email protected]) is a project leader, Justin Fung ([email protected]) is a principal, Waldemar Jap ([email protected]) is a partner and managing director, and Hubert Hsu ([email protected]) is a senior partner and managing director at Boston Consulting Group’s Hong Kong office. [/author]