China looks beyond Hainan for duty-free success

As demand for luxury in China slows, the duty-free channel should be worried. Hainan’s soaring sales during the pandemic have stuttered of late, turning the island from a duty-free haven to a sinkhole for some brands that are scrambling for revenue elsewhere. A report from consultancy Bain shows that Hainan’s duty-free sales peaked in 2021, then dropped by almost 30% in 2022, and revived by 25% in 2023. The figures, based on Haikou Customs and government data, indicate that the duty-free business there was yet to come back to its 2021 peak. Could 2024 offer some hope? Earlier this month, China Duty Free Group (CDFG) hit a major milestone – the 10th anniversary of the CDF Sanya International Duty Free shopping complex. It is the main retail location in Hainan and has been the historical driver of duty-free sales on the island. CDFG is hosting some big events through October to celebrate. They will include parades, branded pop-ups, and appearances by pop stars. The retailer is also promising 1 billion RMB ($142 million) in voucher giveaways – possibly the surest way to attract cash-strapped and/or cautious Chinese shoppers. The listed parent of CDFG is China Tourism Group and it has stated its commitment to the island, promising it will “write a new chapter in the duty-free shopping sector” and help to boost consumption patterns. CDFG was key to the implementation of Hainan’s original 2011 offshore duty-free policy, which tied in with the government’s plan to keep luxury consumption within its own borders. It is also in its own interests to keep this policy alive. Over the past decade, CDFG’s Sanya store has benefited handsomely from domestic duty-free shopping, attracting over 70 million visitors and generating sales over 100 billion RMB ($14.2 billion). However, the parent tourism company, which changed its name to CTG Duty Free Corporation in 2020 to reflect the importance of travel retail, has struggled to keep investors on-side. Numbers up, but spending down Floated in mid-2022 at HK$182.00 in Hong Kong (after a Shanghai listing in 2009), the stock peaked at HK$239.80 in January 2023, before collapsing. On September 20, the share price was just HK$41.35. The big worry for investors has been the weakening Chinese economy – a decline the IMF believes will last for four years – and the falling spending on luxury by Chinese consumers, which has been evident in Hainan this year, despite tourism numbers rising. According to the Hainan Provincial Bureau of Statistics, passenger numbers at Hainan’s ports and airports in the six months to June rose by 9.1% to 35.7 million. Yet, the tourism market was unbalanced: northern Hainan was more popular than the south, where Sanya is. Passenger throughput at Sanya Phoenix Airport was 10.9 million in the first half of 2024, down 3.2% YoY, whereas Haikou Meilan Airport in the north saw a 20.3% jump to 14.5 million. However, duty-free in Hainan struggled. First half statistics from Haikou Customs indicate that sales fell by 30%, not helped by a 10% slide in shoppers to 3.4 million. Given the yo-yoing market, investors remain nervous. As the biggest retailer in Hainan, CTG Duty Free’s interim results were somewhat better in the first half, helping the company to strengthen its position and market share. The group’s revenue declined by 12.8% to 31.265 billion RMB ($4.5 billion), which the company said in an interim report released on August 30 was “mainly due to the year-on-year decrease in revenue from sales of merchandise.” During the six months, CDFG has pushed hard to entice shoppers. The retailer added around 50 new brands in Hainan, with big names like Prada, Gucci, and Lacoste opening in its huge Haikou shopping complex, while Glashutte and Coachtopia opened in the Sanya mall. CDFG has also been promoting a new “China-chic + Olympics” concept by riding an existing sports consumption wave and the guochao trend. A licensed product store for the Paris Olympics has been operating at Haikou Meilan Airport promoting partnerships between brands in beauty, sports, and cultural tourism, and highlighting local labels. Expanded horizons CDFG has also improved its product sales mix by prioritizing high-margin items and promotional strategies as it goes after the big spenders coming to Hainan. But it is not taking any chances and has an eye on the mainland, and on international markets as well. This year, CTG Duty-Free won tenders for duty-free stores at Guangzhou Baiyun and Kunming Changshui International airports, leading to over 100% YoY revenue growth in domestic stores. Outside China, the company launched duty-free outlets on the Adora Cruises’ Magic City cruise ship and at Singapore’s Changi Airport, aided by a strategic agreement with the Jinjiang Municipal People‘s Government for China-Chic brands. At the state level, the government has also stepped in after much debate. Having domestic duty-free in Hainan was never going to be the end game, and in late August the State Council released a statement that more downtown duty-free shopping with easier access to “consumer goods of fashionable Chinese brands” was coming. A duty-free store will be opened in each of eight cities – Guangzhou, Chengdu, Shenzhen, Tianjin, Wuhan, Xi’an, Changsha and Fuzhou – adding to six existing duty-free shops in Beijing, Shanghai, Qingdao, Dalian, Xiamen, and Sanya. Rules and regulations governing these units will go into effect by tomorrow, according to a statement, issued via Xinhua. Both Chinese and non-Chinese nationals, departing the country by air or international cruise within 60 days will be able to shop there. “A further 13 foreign exchange goods duty-free shops will be transformed into downtown duty-free shops within three months from the commencement of the new rules, and shall begin to operate only after passing a customs inspection,” said the State Council. A key element of these stores is that they will carry a number of domestic brands – with those promoting traditional Chinese culture getting priority.

China looks beyond Hainan for duty-free success

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Published September 30, 2024

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China looks beyond Hainan for duty-free success