Key Takeaways:

• Western and Chinese travel retailers will likely deepen cross-border ties as Chinese consumers pivot toward online discount platforms and domestic brands.
• Beauty remains travel retail’s most resilient category with about one-third of total sales, yet rising traveler numbers have failed to lift sales volumes.
• Hong Kong and Macau are set for a slower recovery than Hainan, where supportive government policies and domestic tourism continue to underpin traffic and spending.

China’s travel retail industry isn’t recovering quickly enough for the world’s largest luxury conglomerate to keep its Duty-Free Shoppers (DFS) business from continuing to weigh on its financials.

“We were losing hundreds of millions of euros on DFS, and we are now breaking even at long last,” LVMH Finance Chief Cécile Cabanis told analysts last week during the company’s full-year earnings presentation. She was referring to the $395 million sale of DFS’s Hong Kong and Macau stores, along with intangible assets in Greater China to the country’s largest travel retail operator, China Tourism Group Duty Free (CTG Duty Free).

In 2025, DFS reported €1.5 billion ($1.8 billion) in revenue, a sharp decline from about $4 billion in the early years of the pandemic, driven by weaker Chinese consumer spending.

Chairman and CEO Bernard Arnault used the occasion to offer clues about DFS's future within the LVMH portfolio, as luxury players like Kering increasingly refocus on their core businesses. 

Addressing the selective retailing division's flat performance in 2025—with Sephora's profitability and revenue growth offsetting continued weakness at DFS, making it the group’s second-largest category after fashion and leather goods—Arnault was blunt.

“DFS is less interesting [than Sephora],” he said. “We've sold most of it. We'll continue to exit slowly, but surely.”

Arnault’s remarks signal waning patience with the challenges of China’s travel-retail market, which have weighed on beauty groups for five years and prompted LVMH to withdraw from a large project on the duty-free island of Hainan. The shift contrasts with the cautious optimism voiced just three months ago by LVMH’s Financial Communications Director Rodolphe Ozun, who pointed to “strong traffic” in Hong Kong and Macau.

The all-cash agreement between LVMH and CTG Duty Free, which controls about 80% of China’s travel retail market with roughly 200 stores across the mainland, reflects how far the sector departed from its pre-Covid peak. At the same time, it highlights how quickly shifting consumer preferences in China are undermining foreign companies’ traditional playbooks.

“Before Covid, every company went to invest in travel retail given how well it was growing in China, but they are having doubts now,” Mengyuan Jiao, Investment Banker at Ohana & Co., told BeautyMatter.

She pointed to e-commerce competition as the biggest threat to beauty travel retail’s long-standing rationale, as heavy online discounting erodes its price advantage.

With beauty accounting for roughly a third of travel retail revenue, a brand’s strength in the channel was seen until recently as a trophy asset in M&A discussions. That same exposure is increasingly viewed as a liability. In the current environment, heavy reliance on travel retail is often treated as a red flag. As Jiao puts it, “it can signal that the brand’s core channels aren’t performing as well.”

Echoing a broad industry consensus, Jiao described the LVMH–CTG Duty Free transaction as a “smart deal” for both parties. The key lies beyond the asset sale: LVMH and the Miller family—DFS co-founder Robert Miller and his heirs—will participate in a capital increase at CTG Duty Free by subscribing to newly issued H-shares in Hong Kong.

From Must-Have to Red Flag: The E-Commerce and Policy Shift

The cross-border deal allows LVMH to reduce operational risk while maintaining exposure to China’s travel retail market through the equity stake, Jiao said. It also enables CTG Duty Free to strengthen its dominance outside of mainland China by expanding into Hong Kong and Macau, where recent policy changes have eased visa restrictions for mainland Chinese visitors.

Investors should expect more deals of this kind. “Letting local players run the local business is a clear trend,” Jiao said, citing Swiss travel retail group Dufry’s joint venture with Alibaba Group as an example.

Bernstein analysts Luca Solca, based in Paris, and Melinda Hu, based in Hong Kong, welcomed LVMH’s divestment.

“From my understanding, these stores [in Hong Kong and Macau] were generating losses, so it is good to see them outside of the perimeter,” Solca said, while describing travel retail as a “captive business with limited opportunities to grow outside of airports.”

Hu said Beijing is steadily steering consumer spending back onshore, particularly to mainland China and Hainan, where DFS had no presence, intensifying pressure on DFS’s operations.

“It makes sense that these Western DFS operations move toward Chinese state-backed players,” she said.

Shares of CTG Duty Free, with reported revenue of roughly $8 billion in 2024, have outperformed LVMH in recent months, though the two groups are not directly comparable given their different core businesses. Its stock has climbed about 50% over the past 12 months. During the same period, LVMH shares have fallen about 21%, weighed down by a broader luxury slowdown and an uncertain economic and political environment.

According to Bain & Company’s latest luxury report, global luxury spending reached €1.44 trillion ($1.72 trillion) in 2025, slipping 1%-3% from 2024 as spending by Chinese tourists fell about 15%. Beauty growth cooled, with only the highest-end brands outpacing the category, while fragrance emerged as the clear standout, driven by sustained demand for niche scents. The numbers reflect further erosion of the consumer base, extending a downturn that began in 2022. Over the past year, roughly 20 million shoppers left the market, cutting back on purchases, trading down to smaller indulgences, or redirecting spending toward experiences and the pre-owned market.

The “China-Chic” Travel Retail Future

For beauty conglomerates with significant exposure to travel retail such as L’Oréal, Estée Lauder, and Coty, the sale of DFS’s operations in China means they are likely to face intensifying competition from local prestige cosmetics brands such as Mao Geping, which are expected to expand their brick-and-mortar presence over the near to medium term.

In the joint press release regarding the transaction, Luke Chang, Executive Director and President of CTG Duty Free, said the deal is also aimed at building “a platform for promoting China-chic brands globally.”

The commentary highlights the growing influence CTG Duty Free is poised to wield across Asia-Pacific, the world’s largest travel retail region, as it absorbs Macau and Hong Kong into its portfolio. DFS was the dominant operator in both markets, said Guilhem Souche, a veteran beauty travel retail executive and former Senior Vice President of Global Travel Retail at Coty in Singapore.

“While CTG Duty Free is still mainly selling Western brands, it will be interesting to see how it adds Chinese beauty brands across the board and whether fragrance labels like To Summer and Documents increase their power,” Souche said.

A greater presence of local beauty brands in this critical market could also translate into stronger visibility for Chinese beauty brands overseas, including in the US, given Hong Kong's role as an international travel hub. 

The Structural Decoupling: Travel Retail Is No Longer a Volume Driver

The numbers leave little doubt about the state of China’s travel retail market.

As the Chinese economy continues to grapple with a weak property market, high youth unemployment, and subdued household consumption, consumers are prioritizing savings and becoming more selective in their spending.

Covid-19 travel restrictions sent the global travel retail market into free fall, slashing sales to $49.9 billion in 2021 from a record high $85.9 billion in 2019. Passenger traffic has since rebounded, but retail spending has not kept pace, creating a widening gap between volumes and sales. Now in its third consecutive year of comparable declines, that divergence points to a structural decoupling of traffic and spending, according to Kearney data.

By 2024, global passenger volumes had climbed to 9.5 billion, surpassing pre-pandemic levels. Travel retail sales, however, rose only to about $74.1 billion, still roughly 13% below the peak reached in 2019. The recovery has been especially uneven in Asia-Pacific, where total sales have fallen as mainland Chinese travelers cut back on spending.

Shopping patterns diverge sharply by demographic. Gen Z travelers shop less frequently but with greater intent, gravitating toward products that signal relevance, identity, or exclusivity, including in beauty. Older travelers, by contrast, behave more cautiously, trading down or opting out altogether. Even so, global passenger volumes are expected to reach about 9.9 billion by the end of 2025 and exceed 11 billion by 2030. The key question is whether that growth will translate into a meaningful improvement in travel retail sales.

That uncertainty is already visible in category performance. Within the channel, beauty has proven more resilient than big-ticket categories like leather goods, which typically benefit from deeper discounts and travel exclusive editions, but failed to post growth in 2024. Fragrance and cosmetics travel retail sales dipped slightly over the period, falling to $25.2 billion from $25.8 billion in 2023, supported by prestige and niche brands but weighed down by restrictions on personal shoppers, known as daigous.

Kearney identified the crackdown on daigous as a central factor behind the persistently weak travel retail performance, underscoring the structural decline of what used to be a critical sales channel for the cosmetics industry.

“The beauty travel retail business has yet to recover from restrictions on daigous in China,” said Fabian Lux, Head of EU Beauty and Personal Care at Kearney. “I wouldn’t say that companies like L'Oréal are still suffering from it, but they are still healing from it.”

Sherri He, Partner and Managing Director at Kearney China, singled out Shiseido as one of the beauty groups most challenged by travel retail, saying the company has scaled back investment in the channel after more than two years of weak performance.

In Shiseido’s latest earnings call, CEO Kentaro Fujiwara cited a “shrinking travel retail market” as a key driver of the sales decline recorded in the first half of 2025. The executive said the channel remains challenged by weaker spending among Chinese travelers and intensified price competition from discount promotions. Customer purchases declined at a high-teen percentage rate in the third quarter, he added.

“L’Oréal has done very well in understanding the local consumer, and Shiseido is catching up,” He said. Shiseido has lost about 75% of its value since 2019 to a market cap of around $6.65 billion. Meanwhile, L’Oréal added around 38% to its market value.

The beauty brands that are struggling are those with the highest exposure to travel retail, particularly those that went too far with promotions, according to Souche, who warned that “once you start with promotions, it’s hard to pull back.”

That doesn’t mean travel retail no longer plays a key role for beauty companies. Rather, the channel is no longer viewed primarily as a volume driver.

“Companies are now refocusing their strategy toward using travel retail as a strategic brand-building tool,” Souche said.

Stéphane de La Faverie, CEO of Estée Lauder, underscored that shift in a LinkedIn post last week, giving followers a glimpse of his recent visit to Bangkok, Hong Kong, and Singapore as the company moves through its most sweeping turnaround to date. In Singapore, he said he met with the group’s travel retail team to discuss how Estée Lauder is “pivoting the channel from a point of transaction to a point of experience, with a focus on creating interactions that spark discovery, deepen connection and expand our brands’ reach across geographies and journeys.” He added, “Today, experience must be at the center of everything we do." 

Where Do We Go from the DFS China Sale?

LVMH and DFS share a long history. Founded in Hong Kong in 1960 by Robert Miller and Charles Feeney, DFS came under LVMH’s control in 1997—the same year the group acquired Sephora. In recent years, however, the partnership has come under strain, culminating in the sale of DFS’s China business after a roughly yearlong restructuring focused primarily on its Asia-Pacific operations.

The turnaround led to the appointment of Ed Brennan as the unit’s new CEO in November of 2024. Brennan, who had previously served as its top executive from 1997 to 2021, oversaw major moves such as closing its Venice travel retail galleria in the Fondaco dei Tedeschi after investing “many millions of euros” on it, according to former DFS CEO Philippe Schaus. The restructuring also included the transfer of the Paris luxury department store La Samaritaine out of DFS and into LVMH to diversify the store's consumer base beyond Chinese shoppers.

Since changing to the hands of Le Bon Marché Rive Gauche’s CEO Patrice Wagner, La Samaritaine “is recovering,” Arnault said, showing content with the decision to give less power to DFS. “We’re off to a good start.”

Parker Gundersen, former President of Retail Operations at DFS in Hong Kong until 2021, said LVMH’s move reflects long-standing challenges for foreign operators in China—risks that investors had likely largely priced in after repeated warnings about DFS’s losses.

“The market in China works a little bit differently to the rest of the world,” he said. “It’s very difficult for foreign multinationals to come in and operate in China.”

Others were caught off guard.

Citi consumer-goods analyst Filippo Falorni said the sale surprised him, given the rebound in sales and tourist traffic in Hainan since September, particularly in beauty. Offshore duty-free sales surged 88% in the first week of 2026, according to Citi data.

“If this data reflects that the Chinese consumer is feeling better about the economy, even Hong Kong and Macau should get a bump.”

The Road to Recovery for Large Beauty Conglomerates

Falorni expects Estée Lauder and L’Oréal to benefit from early signs of a rebound in China in their upcoming results, due in the first and second week of February, respectively.

“If China returns to 20% growth—and I expect Estée Lauder to report around a 10% increase in China sales and up to 15% growth in travel retail in the coming quarter—that would be a significant positive for companies like L’Oréal,” he said. “China has been the biggest growth driver for the group over the past decade, and though it became more concerning over the past three years, it is starting to look better now.”

Gundersen remains positive on China’s travel retail beauty outlook as other categories such as tobacco and alcohol continue to shrink. He views Hainan as an exception, citing the Chinese government’s efforts to turn the island into a major duty-free tourism destination after rolling out a comprehensive zero-tariff regime last December.

“The question is whether the same dynamic can apply to Hong Kong and Macau, which have always operated somewhat differently by nature.”

Macau’s travel retail performance remains tightly linked to gaming, leaving beauty sales heavily dependent on casino-driven visitor flows. A similar dynamic plays out in Hong Kong, despite its far larger $407 billion economy, though Gundersen is more optimistic about its recovery. “The Chinese want to travel to Hong Kong—it’s just a matter of time as shoppers wait for the economy to recover.”

He believes success will hinge on disciplined execution on the ground—particularly around pricing, technology, and customer relationships—as well as how convincingly beauty brands can demonstrate value for money.

Even so, scope for recovery remains as Chinese consumers resume international travel, with travel retail offering a more sustainable growth path if brands use the channel to build long-term loyalty rather than chase short-term volume.

“Travelers are increasingly savvy and compare prices on their phones,” Gundersen said. “With AI becoming more prevalent, that pressure will only intensify, making it essential that value in travel retail is real and credible.”

In that environment, price transparency and experiential investment—exemplified by Louis Vuitton’s ship-inspired flagship store in Shanghai, where the brand also sells its makeup line—may define the boundaries of travel retail’s next phase.