China's irresistible force

Examining the spectacular international growth trajectory of China's travel retail giant

We examine the rise and rise of CDFG, not just in Hong Kong and on the Chinese Mainland but in Haitang Bay, Macau and Cambodia. Where next for China's and the world's fastest-growing travel retail power?

In The Moodie Davitt Report’s benchmark Top 25 Travel Retailers league for 2016, China Duty Free Group (CDFG) ranked 12th. For the just-published 2017 edition, the Chinese powerhouse had surged to fifth place. And as President Charles Chen outlines in this issue (see interview page 8), the group’s ambitions lie even higher.

For years the group had coveted Mainland China’s blue-ribbon airport duty free concessions, those at Beijing Capital International and Shanghai Pudong airports. In the space of a few triumphant months, it satisfied both desires.

Few would bet against that prospect. CDFG will reap tremendous benefit from the Chinese government’s steely determination to maximise domestic consumption – both through the nurturing of China’s own travel retail business but also through seizing a far greater bite of the huge Chinese overseas spend.

CDFG’s big advances of recent times have revolved around five pillars – contract gains, acquisitions, offshore shopping, booming Chinese tourism, and state support for the tourism and travel retail sectors. Collectively they are acting as a springboard for a group that appears to have irresistible momentum as the third decade in what is manifestly China’s travel retail century approaches.

Powerhouse performer: Sanya International Duty Free Shopping Complex in Haitang Bay

For years the group had coveted Mainland China’s blue-ribbon airport duty free concessions, those at Beijing Capital International and Shanghai Pudong airports. In the space of a few triumphant months, it satisfied both desires. In early 2017 CDFG acquired 51% of Sunrise Duty Free’s Beijing operation, an agreement that ultimately paved the way in June 2017 for CDFG and Sunrise to split the Beijing Capital International Airport duty free business with CDFG being awarded the T2 contract and Sunrise that for T3.

In February this year, CDFG entered an agreement to acquire 51% of Sunrise Duty Free (Shanghai) Co. Ltd from Base Rich Investments Limited and Shanghai Wenyuzhai Books Co. Ltd. The CNY1.505 billion (US$239 million) deal, duly consummated in May, covered all Sunrise’s business at both Shanghai airports, Pudong and Hongqiao. Once again, the acquisition was followed by a related airport contract tender success as Sunrise snapped up the seven-year duty free contract at Hongqiao and Pudong, which commences on 1 January 2019.

Besides its blue-ribbon Beijing, Shanghai and Hong Kong concessions, CDFG was awarded the eight-year Guangzhou Baiyun Airport Terminal 2 departures duty free concession last November. The spectacular new terminal at China’s third-busiest international airport opened in April this year. That success followed CDFG’s being awarded the same airport’s nine-year arrivals duty free concession in March 2017, building on other arrivals shop contracts including Kunming Changshui, Nanjing Lukou, Qingdao Liuting, Chengdu Shuangliu and Ürümqi Diwopu International airports.

A network of increasing quality: Nanjing Airport duty free (above)

Hangzhou Airport duty free store (above)

Heihe Border duty free store (above)

Buoyed by the impact of the Sunrise Shanghai integration from April 2017, CDFG generated duty free revenues of CNY14.861 billion last year (€1,897 million at 31 December 2017 exchange rates], up +69.25% year-on-year. Duty paid brought the total to CNY15.62 billion US$2.4 billion).

The momentum has since quickened. CDFG posted a dazzling first-quarter 2018 performance, generating an +89% revenue rise year-on-year to CNY6.43 billion (US$1.02 billion) buoyed by the addition of Sunrise Duty Free, new concessions, an outstanding performance at Haitang Bay and increased travel numbers. With 2018 sales having almost reached last year’s total by the end of June, 2018 is clearly going to be the most stellar year on record for the group.

The CDFG business is now bolstered by the high-quality contribution of Sunrise Duty Free (above)

Emerging channels such as cruise are also a focus; pictured is Star Cruises (above)

China National Tourism Administration predicts that over 200 million Chinese people will travel abroad by 2020, +63.9% more than in 2016. It’s a fair bet that CDFG won’t be content to simply serve those legions of travellers from its Mainland departures and arrivals stores. The Moodie Davitt Report expects the company to grow its Hainan Island business in the near future. It was not widely reported but in October 2016 CDFG’s parent China International Travel Service voted to create a joint venture with Hainan Duty Free. While there have been no statements since on the deal, it seems highly likely that CDFG will become involved in Hainan Duty Free’s thriving operation at Haikou Meilan International Airport.

Official state media reported in April that central government plans an imminent further liberalisation of the holiday island’s duty free policy. Currently there are two offshore duty free enterprises – Haitang Bay and Haikou Meilan Airport. The move is firmly in line with Chinese President Xi Jinping’s far-reaching commitment to turn the island into an international free trade zone. Xi made the pledge during a widely reported speech on the island in April, promising a more “open and convenient” duty free shopping policy on the island. Plans include an ambitious development of the island’s air routes, cruise and hotel infrastructure.

Building the overseas base: CDF Angkor Duty Free Store in Cambodia

CDFG is also eyeing opportunities for more downtown duty free shops in China and abroad. The company’s triple-store operation in Cambodia is thriving on the back of a Chinese tourism boom. Chinese arrivals spiralled by +45.9% last year to 1.21 million, making them the top inbound nationality ahead of the Vietnamese. Chinese investment into the country grew at a similar rate, buoyed by tourism and gaming. According to Nikkei Asian Review, burgeoning Chinese investment in Cambodia saw Phnom Penh casino operator NagaCorp’s revenues soar by +82.5% for the first half of 2018. The company has a 40-year monopoly on casino gambling in the Cambodian capital and in November 2017 doubled the hotel and gaming capacity of its NagaWorld complex with the opening of a spectacular US$370 million Naga2 extension.

Cambodia projects around 6 million international tourists this year, 7 million by 2020, and 10 million by 2025. Many of them will be Chinese and many of those will shop in CDFG’s stores.

Make no mistake, CDFG has a voracious appetite for growth and the ideal climate to feed that craving. China’s irresistible force is well on the way to becoming a global powerhouse.

Making waves at sea

China Duty Free Group’s (CDFG) momentum is not confined to airport and downtown locations. It’s also making waves at sea. In a critical gain for its burgeoning cruise retail business, CDFG announced in July that it had secured the duty free retailing rights onboard Costa Cruises’ Costa Atlantica.

CDFG and Costa Cruises have signed an initial cooperation memorandum, a key step in what the Chinese travel retailer said is an agreement with Costa’s parent company Carnival Corporation “on future full-scale cooperation”.

CDFG said: “This signifies the first time CDFG will, on its own, run duty free retailing on an internationally-renowned cruise vessel – turning a new chapter in our cruise duty free business.”

Costa Cruises operates Europe’s largest cruise fleet in Europe. It began operations out of China in 2006, thus becoming the first international cruise company to enter what has since grown into a flourishing market. Over the past decade the company has provided over 2 million Chinese  tourists with sea vacations.

Carnival has invited offers worldwide for the Costa Atlantica business, attracting numerous bids from global retailers. Through its success, CDFG has “broken the international monopoly” of cruise line retailing and further increased the global influence of China’s duty free industry, the group noted.

“Due to the explosive growth of cruise tourism in China, the country has become the fastest-growing emerging market in the global cruise tourism industry,” said CDFG. “Over recent years, duty free cruise retailing has become one of CDFG’s priority strategic projects. Before now, the group conducted duty free supply business and also offered management services on Star Cruises and China’s Taishan cruise ship but had never directly operated a cruise duty free store.

“At this year’s CTS [China National Travel Service Group Corporation – CDFG’s ultimate parent] working conference, President Wan Min specifically identified cruise lines as one of the future priorities for business development. In addition, when meeting with Carnival leadership, he pointed out that duty free will become one of the most important businesses in China’s cruise industry, demonstrating CDFG’s attention and commitment to the cruise and cruise duty free business.”

CDFG said that it had “seized the valuable opportunity” presented by the global bid to make a breakthrough in cruise retailing after multiple rounds of negotiations involving the company’s leadership. The group said that the success was critical to its future development in this sector.

The group said it will continue to refine its supply capability for the cruise line business and enhance the range and quality services offered from Chinese ports, in order to boost international competitiveness.

“Moreover, with this successful bid, CDFG will integrate the advantageous resources of its parent company, accelerate its outreach to other cruise brands and gradually seize the Chinese market and expand into the overseas market. This represents an effort to create a world-class cruise duty free operator, properly develop our own cruise duty free business and contribute to the implementation of CTS’s cruise strategy.”

The Moodie Davitt E-Zine | Duty Zero by cdf | August 2018