Few international business executives can have seen as much of China as Ramesh Tainwala, the CEO of Samsonite. By his own estimation he has visited 200 or so cities there, going to many of them while he was Samsonite’s Chinese country head.
The growth of Chinese tourism and travel – particularly of the overseas variety – has been a core component of Samsonite’s rising revenues since the company listed in 2011. Tainwala spoke to WiC last week in Hong Kong, where he had just announced Samsonite’s results (the world’s largest travel luggage company saw its net sales hit a record $2.8 billion in 2016). Here he talks about the benefits to his firm of flourishing Chinese tourism; when he expects his sales in China to overtake those in the US; and how he will grow sales of Tumi, the brand acquired last year for $1.8 billion.
There were 120 million Chinese who travelled overseas in 2016, and 4 billion domestic journeys too. How highly correlated is Samsonite’s business with the China market?
There’s a lot of correlation. The luggage industry’s growth is linked to the boom in Chinese travel, particularly the outbound type. The global outbound travel industry is expected to grow by about 5% this year and the luggage industry’s growth rate will be a similar figure. We expect to grow a bit faster and are looking for our core business to increase by a high single digit number. China’s outbound travel numbers will grow at a similar rate.
Chinese expenditure on luggage is currently about one tenth of that spent per person in Japan. Does this create a major market opportunity for new luggage sales?
Yes, it does. Today China makes up around 12% of our revenue. If you look at the demographics – with 1.4 billion people and increasing levels of income – I have no hesitation in forecasting that it could be our number one market for sales in five to seven years. Currently the top market for us is the US.
Isn’t China already the biggest luggage market in the world?
It is, in terms of units. But not in terms of value. In the world rankings the US is still the largest market and Japan is second.
What proportion of your sales to Chinese are made outside China?
The share bought outside the country is very small. If 12% of our revenue is coming from sales within China, then another 1-2% is Chinese buying while they are travelling overseas. It’s not the same situation for us as you see with many luxury brands where a significant proportion of their China revenues come from Chinese buying outside the country.
Have you noticed a big drop in sales in Hong Kong as fewer mainland travellers visit?
Yes, Hong Kong in 2016 was a disaster in terms of sales. Many people thought we’d find the bottom in the first quarter of this year, but it doesn’t look like that from my perspective. I think we are still finding the bottom. The first quarter is coming in at -6%, which is a slower decline than last year, but the bottom has not been reached yet. And it’s mainly down to the mainland Chinese. If you look at three years ago, about two-thirds of our sales was coming from tourists, and 90% of them were mainlanders. Now if you look at our Hong Kong sales, 75% is coming from local customers and only 25% from tourists. The local sales component is still growing by 5-10%, but purchases by the Chinese tourists fell off a cliff. I don’t think that has recovered.
Have you adapted any of your suitcase designs for the China market?
We tend to design products specifically to the consumer need – in terms of the size, the features and the pricing. Almost 80% of what we sell in China is specifically designed for the Chinese market. The remainder is part of our global collection.
So which is more popular in China: hard case luggage or soft case?
Hard case luggage accounts for over 80% of our sales in the Chinese market. This is positive for Samsonite as hard case luggage is a higher margin product than soft. I think the percentage of hard case sales will continue to rise too. It tends to be consumers at the lower end of the market that buy the soft case products.
Do you see a lot of potential for sales growth in third- and fourth-tier Chinese cities?
When we were initially going to those markets eight or nine years ago we were often one of the first international brands to enter. Actually, we probably made a mistake of going a bit too early. A lot of our stores weren’t viable and we had to shut them down. But now we are reopening them because we see stronger potential for sales and growth.
You need a physical presence, as it gives an assurance of quality to local customers and gives them a chance to go and touch and feel the brand.
One city that springs to mind is in Xinjiang close to Urumqi. It’s a small, dusty place called Karamay. It is an oil and gas city with a lot of fancy malls. When we first opened a store there it bled money and we shut it down. We reopened last year and it is now doing really well. It’s not that the population has materially grown, it’s just that they are more confident about travelling abroad. The number of Chinese holding passports in these types of cities is increasing. In the past there would be very few. Now you find – even in these smaller cities – that almost every second Chinese has a passport.
The other thing that opens up demand is each time an airline starts flying a new international route from one of these less well known cities. Then people there begin to travel abroad. And thanks to the internet and television, they hear more about travelling overseas and want to experience it themselves. I feel there is an increasing amount of confidence among the Chinese about travelling outside China, even if they don’t speak English.
For instance, when I was in Israel I was surprised to see how many Chinese tourists there were. I saw them taking photos on the banks of the River Jordan and I started talking to one Chinese visitor I found who spoke some English. I asked why he’d come to Israel and he said he’d already gone to this place and that place and he wanted to take two holidays a year, and Israel was a new place for him to go (see WiC358 for more on Chinese travelling to Israel).
Then there is Kenya. We were getting so many Chinese customers there that we began sourcing Kenyans who could speak Mandarin to work in our stores. A lot of Kenyan students now take language lessons, knowing that if they can speak Chinese they will get 40-50% in additional pay.
How fast are your e-commerce sales growing in China?
They are growing very fast – about 30% per annum. Right now online sales contribute around 15% of our revenue in China, but they are growing faster than every other channel. I wouldn’t be surprised if it wasn’t a third of our sales in the next few years.
We are using social media quite actively too. We are spending about a third of our advertising budget on platforms like WeChat. We have different kinds of contests to create interest and we give away coupons to attract people to stores.
Will you launch your own self-managed e-commerce platform, i.e. one that is independent of Alibaba or Amazon?
Yes, by the end of this year. We know that e-commerce is growing and you don’t want to be only dependent on third parties. Our own channel gives us more control over how our brand is represented.
The challenge will be the logistics of delivering the products…
We are tied up with SF Express in China. It will provide all of our last- mile delivery.
Ten years ago most of your suitcase manufacturing was done in Guangdong. Has that changed?
It’s moved north and west. Some of our vendors have even opened factories in Xinjiang province. They are moving in search of a better supply of labour.
It’s a major change. A decade ago 85% of our manufacturing was in Guangdong – today it’s more like 15%.
Are your vendors moving their factories outside China for cost reasons too?
Quite a few are opening plants in other emerging countries in Asia. For example, one of our biggest vendors has just commissioned a new factory in Indonesia, another has one in Bangladesh, and another told me recently that he’s signed a memorandum of understanding with the Myanmar government. It’s all down to wages.
On the flipside do increasing wages in China mean there are more consumers who can buy your cases?
Absolutely, it’s net positive for us in that respect.
With Samsonite you have used high-profile brand ambassadors to promote your product. Last year you acquired the premium brand Tumi. Will you use a similar marketing strategy?
We are using brand ambassadors for Tumi too. But unlike with Samsonite they don’t tend to be big celebrities. They are more usually business people with a story to tell about their own lives and successes.
The Samsonite brand has tended to use young, popular actors. But Samsonite’s customer demographic tends to be younger than the typical Tumi buyer.
You have to become someone in life to be able to afford Tumi.
Tumi’s market position isn’t very significant in China. How will you change that?
The first step is to bring the brand home. Right now we work with distributors and we hope by the second quarter to have the business directly operated, so we can bring greater focus to the business. Secondly we need to raise awareness of the brand. And third, we need more distribution – i.e. more shops or more presence in premium department stores. But for the time being Tumi – which is our most premium brand – will be limited to tier-one and tier-two cities.
You have seven brands on sale in China. What are the lowest and highest price points?
The entry-level product we sell in China is a brand called Kamiliant, which has an average price of $50-70. The highest price product would be from the Tumi brand, and could cost $1,500.
Are there local brands in China that you consider a threat?
We don’t have local competition to the Samsonite brand, but when it comes to our other [entry level] brands we might. But the local brands tend to be small and they think the only way to sell their product is via price wars. Someone prices at $50, another then drops to $40 and another to $35.
There are 2 billion consumers in Asia using unbranded suitcases. How many of those are in China?
About a quarter of them. So it’s a very big potential market for Samsonite.
In the next five years, what percentage of your sales will come from China?
Around 20%, and in 10 years about 30%. The US is currently about 40% of sales.
© ChinTell Ltd. All rights reserved.
Brought to you by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.