Hainan island’s offshore duty free sales ‘could reach RMB 100 billion in 2022’

By Luke Barras-hill |

Offshore duty free shops on China’s Hainan island are forecast to take between a 17-17.5% slice of the global duty free market by 2022, according to DutyFreeExpert Founder Jason Cao.

China itself is projected to account for 30% of the circa RMB 600 billion/$92 billion in global duty free sales by this time, attendees to yesterday’s session of the TFWA China Reborn virtual event heard.

As reported, more than 1.7 million people visited Hainan island’s duty free shops in the four months to 31 October following the tripling of the offshore duty free allowance on 1 July.

Sales exceeded RMB12.01 billion ($1.81bn) for the period – a whopping 214.1% increase.

‘NEW ERA OF GLOBALISATION’

To put this into perspective, Hainan Island notched RMB13.61 billion ($1.9bn) in duty free revenue for the whole of 2019.

If the aforementioned RMB 100 billion estimate proves correct, that would equate to growth of around +640% between 2019 and 2022, although it remains to be seen whether the emphatic growth bubble currently being witnessed in Hainan will continue or burst.

In turn, the estimate is tied to the hope that global duty free sales will recover and surpass 2019 levels in 2022.

Over the years, the average wallet spend in Hainan has almost doubled to around RMB 7,000, continued Cao, though he acknowledged that it will take time for international tourism to revive due to the impact of Covid-19; in 2019, only 4.7% of Chinese travellers bought duty free goods on Hainan Island.

China Duty Free Group is one of a crop of firms operating offshore duty free stores on Hainan island but the amount of players entering the market continues to rise and a flurry of new projects are on the horizon.

China is projected to account for 30% of the circa RMB 600 billion/$92 billion in global duty free sales in 2022, according to an estimate from DutyFreeExpert. Click to enlarge.

As reported, Lagardère Travel Retail has teamed up with Hainan Tourism Investment Development Co. Ltd, while Dufry has struck an alliance with Alibaba Group.

During his address, Cao said the development of Hainan’s offshore duty free market in line with its free trade port construction is delivering a new era for China duty free, both for domestic visitors and foreigners.

This was a topic touched on frequently during the three-day TFWA China Reborn (1-3 December).

The final session of the association’s online event was entitled ‘China and the World’.

Edward Tse, Founder of Gao Feng Advisory Company delivered a compelling appraisal of China’s accelerating market reform.

Momentum is gathering in the automotive, energy, telecom and finance sectors while technology innovations are resonating for the travel and tourism industries.

Jason Cao provided a reminder of the exciting duty free shopping developments coming onstream on Hainan island. Click to enlarge.

“For the last 12/13 years China has been riding on wireless internet as a platform for tech innovations. But despite all the advancements so far, China is warming up in terms of its ability and tendency to innovate,” said Tse.

He outlined how China’s approach to multilateralism underscores its commitment to reform.

Among the strategies used to achieve this is the dual circulation policy, which balances internalisation (external circulation) and self-sufficiency (internal circulation).

RCEP: SHAPING ASIA’S TRADING FLOOR

Tse flagged President Xi Xinping’s visit to Shenzhen to celebrate its 40th anniversary and the impressive achievements over the past four years in the city and Greater Bay area as an example of encouraging cities to open up and reform, politically and social.

He pointed to the Regional Comprehensive Economic Partnership (RCEP), described as a major undertaking with  global ramifications.

“This will change regional trade flows significantly over time,” he said. “It isn’t going to happen tomorrow as it will take time for conditions to phase in. Nonetheless, if you look at the long term perspective, this will significantly change how the regions work together and products and services travel and tourism.”

On dual circulation, he said the rise of China and signing of RCEP means Asia’s trade floor is being shaped for the future.

“We are entering into a new era of globalisation,” said Tse, pointing to the fact that demand centres were previously centred in the West, with manufacturing and supply in the East.

Professor Yao Yang, Economist and Professor of the National School of Development, Peking University: “It is safe to predict in seven to 10 years time, China will overtake the US to become the largest economy in the world.”

“That in a simple sense was globalisation 1.0. That came to a bit of an abrupt ending because of the policies taken by the Trump administration and internal change taking place within Asia and particularly China. China is no longer just a supply centre; it is both a supply centre and demand centre because of the rise of China’s middle classes.

“Chinese middle classes have become a major consumption centre. Globalisation 2.0 is another manifestation of the dual circulation that the Chinese government talk about. You have internal circulation – internal supply and demand in China or Asia and external trade internationally, which will continue. This will signify the next generation of globalisation as we see it.”

China finalised its five-year plan, setting China’s economic and social policy vision for 2021-2025, at the 20 October Chinese Communist Party 19th Central Committee.

“China has come out from the pandemic in the first quarter with containment of the virus and is undergoing a reasonably strong economic recovery, [but] not uniformly across all sectors,” observed Tse. “Retail, travel and tourism is now doing better. It is still not back to its peak times, but nonetheless better than the very bad times of the pandemic.

“According to the IMF, China’s economic growth estimate this year is it will come out positively  whereas most major economies in the west are looking at negative growth.”

The IMF has already indicated that China will enjoy growth of +8.2% in 2021.

‘REHOMED’ LUXURY SPENDING

In a Q&A with session moderator and TFWA Conference Manager Michele Miranda, Tse discussed the implications of China’s dual circulation policy on international suppliers of premium brands.

“One would expect domestic consumption will continue to increase over time as this will be a major focus area for Chinese economic policies and you’d expect the government to take various measures to incentivise consumption,” he commented.

“For many of your members, you should continue to look seriously at China’s market and understand Chinese consumers’ needs of products, travel and tourism and so on and cater your service offerings to those patterns.”

Casey Hall, Asia Correspondent at Business of Fashion provided an interesting picture of the CAGR in China’s luxury industry (in blue) versus worldwide. By 2025, China is projected to account for well over a third of luxury spending globally.

The session also included presentations from Business of Fashion Asia Correspondent Casey Hall and Professor Yao Yang, Economist and Professor of the National School of Development, Peking University.

Hall spoke about the ‘great accelerator’ of Chinese luxury spending.

Categories that have done particularly well since the start of the year amid the Covid-19 pandemic have been sportswear, health and wellness, fashion jewellery and beauty, particularly skincare rather than colour cosmetics.

She pointed to ‘rehomed’ Chinese luxury spending as being an important lever for travel retail. This includes a re-examination of China’s domestic stores network as a way of balancing concerns regarding domestic daigou customers.

A lot of luxury brands realise they need more stores in China and are looking at second and third tier cities as points of expansion, remarked Hall.

A doubling-down on making flagship stores ‘experience centres’ while expanding the physical stores network is also becoming important, she continued.

“Thinking about physical retail in a traditional way of 10-year leases and four-wall sales isn’t going to cut it anymore; brands that have done well in China are those that have a much more flexible idea of their retail network,” she said.

While there are limits on international travel, Chinese pax are travelling domestically.

In the first half of 2021, Hall expects to see a continuation of the travel trend, but when international travel opens up again – together with short haul trips to Korea and Japan – travellers will grasp the opportunity to travel and travel retail will bounce back.

PRICING CONSIDERATIONS FOR BRANDS

Turning to the phenomenon of ‘revenge spending’ in China, she believes this will in turn lead to a resurgence in ‘revenge travel’.

Locations of interest include Macau, which until recently had been off limit to Chinese travellers. Short trips will also continue to grow.

Hall identified daigou shoppers as ‘infiltrating’ Hainan’s duty free shopping scene.

In doing so, she questioned the ratio of tourist shoppers to professional consumers next year in Hainan and in turn, the pricing ramifications for luxury brands in physical and online retail.

“There is a risk for some brands of undercutting themselves by having lower prices in duty free and what that might mean for their sales elsewhere,” she said. “I think this is something people should be considering.”

Edward Tse, Founder & CEO, Gao Feng Advisory Company extrapolated China’s economic policy approaches.

Professor Yao Yang then delved into China’s 14th Five Year plan. By 2021, China’s target is to become a well-off society and by 2049, to become a high-income country.

The 14th five-year plan will be the first in China’s quest for its second centennial goal, said Yang. He grouped his presentation into four key areas: innovations, urbanisation, more equal distribution of public services and greener growth.

Luxury goods should not be sold just in stores, he suggested, pointing to China’s trustworthy and robust distribution networks that have eased the selling of goods online.

On incomes, he noted the current disparity between the highest 10% earners and the lowest earners.

He said a ‘boom’ cycle is coming to China with GDP growth estimated to reach 2% this year.

“It is safe to predict in 7-10 years time, China will overtake the US to become the largest economy in the world,” He added.

To read coverage from day one and two of TFWA China Reborn, click below links.

Day one

China’s gains ‘instil confidence for industry rebound’

Lagardère revels in imminent opening of new downtown duty free shop in Sanya

Day two

CNSC ‘ready to open’ in Hainan; awaits approval of offshore DF licence

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