Is Hainan about to lose its duty-free sheen?

In recent years, China has intensified its efforts to curb the “daigou” trade — individuals purchasing goods overseas or in duty-free zones like Hainan and reselling them domestically to circumvent taxes. Authorities have launched anti-smuggling campaigns across malls, airports, and train stations, distributing informational pamphlets that explain Hainan’s offshore duty-free policy and highlight related smuggling cases to deter citizens from participating in such activities. Police officers are also visiting shopping centers to remind merchants that misusing offshore duty-free shopping quotas for bulk purchasing and resale is strictly prohibited. An industry insider in Hainan’s travel retail sector notes that the daigou trade has shifted from group operations during the pandemic to a solo model. While large-scale daigou still exist, they’ve largely severed ties with Duty-Free Operators (DFOs) due to government crackdowns. Despite this, the price gap between taxed and duty-free goods continues to tempt some to persist in their activities. For luxury brands, the disadvantages of the gray market trade often outweigh the benefits in the long run. While the daigou business remains strong in 2024, with growth rates for many top brands in the gray market significantly outpacing both global revenue and e-commerce growth, this trend presents challenges. Consumers continue to turn to daigou as a way to save money on purchases or access goods unavailable in China. Beyond the daigou trade, luxury brands also face challenges from an over-reliance on duty-free channels, which can erode margin potential in China. For instance, Estée Lauder has long depended on duty-free channels to sell products at reduced prices. Reports indicate that 23% of Estée Lauder’s sales in China come from duty-free channels, compared to just 10% for Shiseido and L’Oréal. This reliance has led to significant price discrepancies, with Estée Lauder’s Advanced Night Repair serum selling for $96 (695 RMB) at regular counters, but only about $41 (300 RMB) in duty-free stores. In contrast, L’Oréal has adopted a more conservative yet responsive approach to Hainan’s duty-free market, with a primary focus on protecting its brand and interests in China. By raising prices in Hainan’s duty-free shops, L’Oréal aims to narrow the price gap between these stores and other domestic outlets, preventing excessive discounts and unsustainable pricing in the travel retail sector. To this end, L'Oréal established an internal committee in 2021, bringing together executives from the China team and the Asia-Pacific travel retail team. The committee works to ensure that travel retail pricing and promotions do not harm profitability in China. Luxury brands are approaching these issues cautiously. Dior and Chanel are considering integrating their Hainan operations into their domestic business segments to better control pricing and distribution. Meanwhile, watch brands are maintaining exclusivity by controlling styles and quantities, with Cartier even launching Hainan-exclusive models, much like the strategy used by outlet stores. Where possible, it’s beneficial to create differentiated portfolio strategies for different channels. Offering products that are not identical helps avoid direct price comparisons; however, this must be balanced with avoiding confusion for consumers. Beauty brands, in particular, have been guilty of this in response to daigou, introducing an increasingly complex system of free gifts, giveaways, and promotions. Daigou market growth may slow in the future as brands become more accessible online and across borders through omnichannel approaches. It will become increasingly difficult to differentiate when mainland Chinese brands offer products that are just as good as, or better than, those available abroad. With or without daigou, brands should remain optimistic about the future of Hainan. After all, China has only one Hainan Island — a tropical vacation destination with the world’s highest duty-free allowance that can be accessed without a passport.

Is Hainan about to lose its duty-free sheen?

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Published November 25, 2024

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Is Hainan about to lose its duty-free sheen?