Travel retail’s ultimate hot spot

If there is one word that offers cause for optimism in a COVID-19 travel retail community, it is this one. Hainan. China’s much-loved leisure and resort island has been the sole global location to experience any kind of meaningful renaissance since the crisis began and it is one that is gathering momentum by the day.

Duty free retailing will play an integral role in that development, spearhead by China Duty Free Group (CDFG), through its multiple locations including, most famously, the acclaimed CDF Mall in Haitang Bay.

Now there is a second, eve more ambitious project taking shape. Construction of the Haikou International Duty Free Mall in Hainan province, which began in 2019, is being accelerated, according to CDFG President Charles Chen. The project will be completed in 2022.

“The Haikou International Duty Free Mall will become the largest single duty free store in the world and a wonderful travel destination, with a total area even exceeding CDF Mall in Sanya,” Chen told The Moodie Davitt Report recently.

Sense of Wonder: The Haikou International Duty Free Mall will be even bigger than the acclaimed CDF Mall

Sense of Wonder: The Haikou International Duty Free Mall will be even bigger than the acclaimed CDF Mall

“The construction… will take three years to complete. It is a large scale international duty free complex, embracing duty free and duty paid business, office space, and a hotel. The complex is already at the foundation and basement building phase,” Chen added.

“Also, our two downtown duty free experience stores opened on 13 May in Sanya, located in Mangrove Tree Resort Hotel, with an area of more than 740sq m, and the Nanshan scenic spot, respectively. We have a team of professional salespeople in place who can bring better understanding of the offshore duty free policy to consumers in both stores.

“Coordinating with the Hainan government, we will also have duty free experience stores covering 1,700sq m in Sanya Phoenix International Airport’s airside area; while we will add 7,000sq m at the Haikou downtown store,” Chen continued.

“We are also speeding up the construction of 8,000sq m of retail space at Haikou Meilan International Airport Terminal 2. On top of that we plan to launch a series of big marketing promotions on the island.”

Hainan’s growth will spur a doubling of China’s duty free market by 2025, according to Morgan Stanley Research.

The magnificent architecture will house a world-class array of brands

The magnificent architecture will house a world-class array of brands

In a detailed note dedicated to prospects for CDFG parent company China International Travel Service (CITS), Morgan Stanley Research said recently: “The COVID-19 outbreak has triggered an evolution in China’s duty free market, with ecommerce the newest initiative. Together with Hainan and the mainland downtown [duty free] development, we think this market will double by 2025 in our prudent base case scenario.”

While noting that deregulation of China’s duty free market will bring increased competition for CDFG (from both local and international players), Morgan Stanley Research concludes that CITS (which is being renamed as China Tourism Group Duty Free) will maintain its dominant position with minimal market share loss. “We see CITS as the key beneficiary of China’s duty free evolution,” the report observes.

Speeding up growth

“New initiatives – online, Hainan free trade zone, and Mainland downtown – should speed up the [sales growth] process,” said Morgan Stanley. “In 2019, Chinese consumers contributed one-third of global duty free sales (US$27 billion of US$82 billion), but China’s duty free market was just 9% of the global share (US$7.6 billion).

“We expect China’s duty free market to more than double to US$16.5 billion by 2025, with the Hainan contribution to grow from 24% in 2019 to 50% in 2025. We see upside risk if the government relaxes restrictions faster. Before COVID-19, we had expected a 10% CAGR in market size, to US$12 billion by 2025, with 33% coming from Hainan.”

Morgan Stanley believes there will be three key drivers of growth, as follows:

1. Online duty free:

This sector was ramped up following the COVID-19 outbreak and contributed 50% of CITS’s revenue in May, up sharply from under 10% in January. Consumers can purchase online with home delivery after they return from travelling to Hainan. This channel will be sustainable even after COVID-19, as operating costs are lower than in airport stores, Morgan Stanley said. This supports attractive product pricing that is 30%+ lower than official prices.

2. Hainan free trade zone:

The development roadmap announced on June 1, 2020, proposed raising the Hainan duty free purchase limit from RMB30,000 per annum to RMB100,000 per annum, and widening the duty free product category mix by 2025 [at the latest -Ed]. Morgan Stanley believes that CITS can defend its leading position.

3. Mainland downtown duty free:

The NDRC said recently that this channel would be developed, although an exact development timeline has not been given.

Hainan hotspot

This year has seen several critical developments that augur well for the future of Hainan province.

They include:

22 March: Hainan’s provincial government announces a CNY150 million (US$21.2 million) rejuvenation plan for the island’s COVID-19-hit tourism industry with duty free shopping at the heart of its plans.

11 April: China Duty Free Group (CDFG) parent China International Travel Service (CITS) and Hainan headquartered aviation-to-leisure giant HNA Group sign a strategic cooperation agreement in Haikou. The two parties will cooperate across various sectors, including aviation, duty free retailing and asset projects to promote the upgrade of the Hainan Free Trade Zone port.

13 April: Two new offshore duty free shops open on Hainan Island.

15 April: China unveils plans to permit visa-free travel to Hainan from May. The policy allows travellers from 59 countries to visit Hainan for 30 days visa free.

29 April: CDFG introduces scheme allowing Mainland visitors to Hainan to spend any of their unused RMB30,000 (US$4,240) annual allowance online for up to 180 days once they arrive back.

1 June: The annual offshore duty free allowance for shoppers visiting Hainan Island is to be raised from RMB30,000 (US$4,215 at current exchange rate) to RMB100,000 (US$14,050) as part of sweeping government plans announced for the creation of Hainan Free Trade Port.

The range of duty free categories is also being expanded, as part of a hugely ambitious Hainan Free Trade Port Overall Plan released by Hainan Provincial Bureau of International Economic

9 June: CDFG parent company CITS acquires a 51% stake in Hainan Duty Free Company Ltd.

13 June: A new carrier, formed to serve an anticipated boom in Hainan passenger traffic is created. Sanya International Airlines is being launched by a consortium controlled by China Eastern Airlines. Other shareholders include Hainan Province Transport Investment Holding, Sanya Development Holdings, Juneyao Airlines and Group.

18 June: The extraordinarily ambitious vision for the Hainan Free Trade Port, including a star role for the duty free retail and international luxury brand sectors, is outlined during an online European Chamber webinar led by Hainan Provincial Department of Commerce and Hainan Provincial Bureau of International Economic Development (IEDB).


Spotlight Series • June 2020

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