Leading the way out of crisis

Rejuvenated Hainan to spearhead travel retail recovery

On 22 March, Hainan’s provincial government announced a CNY150 million (US$21.2 million) rejuvenation plan for the island’s beleaguered tourism industry with duty free shopping at the heart of its plans. The news augurs a flurry of Spring and Summer activity that is expected to result in that ultra-rare 2020 travel retail phenomenon – a shopping boom. Martin Moodie reports.

With its pristine environment and clear blue skies, tropical climate, historic buildings, bird life sanctuaries, beach resorts and beautiful forested, mountainous interior, Hainan (海南 in Chinese) is a beacon for huge numbers of Mainland China residents each year, who pour onto what is often dubbed ‘China’s Hawaii’. But for most of them, there’s a wonder every bit as alluring as that offered by nature – duty free shopping.

Ever since a far-sighted Central and Hainan government policy to introduce ‘offshore duty free’ to the island was implemented in September 2011, the province has been a beacon for millions of mainlanders intent on taking advantage of one of the world’s rare examples of such a shopping tax break.

In particular China Duty Free Group’s (CDFG’s) magnificent CDF Mall has flourished – making the world’s biggest duty free door for many beauty brands in particular and a frequent choice for some of travel retail’s most spectacular launches and campaign activations. Not surprisingly, given its extensive natural and commercial attractions – including a huge and growing hotel and resort sector – the island is hugely dependent on tourism income.

The COVID-19 outbreak therefore had a disastrous impact on visitor numbers once it began to gather pace in early January. Fortunately though, the effect has been relatively short-lived, and the subsequent rejuvenation is showing every sign of being strong and sustained. China’s state-owned news agency Xinhua wrote as early as 15 February in an article entitled ‘Tourism recovering on China’s tourist island’, “All A-level tourist sites in the city of Sanya have resumed operation since February 21, attracting more and more tourists, as the epidemic situation across the country is turning positive.”

CDF Mall is the number one travel retail door worldwide for many beauty houses; its attraction as a showcase will be magnified in coming weeks and months

That was six weeks ago and the situation has improved sharply since then. Not only has the COVID-19 outbreak in Mainland China almost become solely confined to a few dozen imported cases (a major concern for the authorities) but even the original epicentre of Wuhan has been given a near all-clear. Importantly, Hainan has led the nation in the fight against COVID-19, with no reported infections since 19 February, which allowed companies to resume production faster than in other affected regions. Haikou-based Hainan Airlines resumed all flights into Hainan from Chinese cities from 15 March.

As pointed out in our interview with China Duty Free Group President Charles Chen, the retailer was forced to close the CDF Mall in Sanya – the biggest duty free door in the world for many beauty brands – and its Haikou downtown store on 26 January due to the health crisis. Both stores subsequently reopened on 20 February as the situation improved.

Just as this eZine was being published, Haikou Customs released figures underlining the rebound in Hainan Island duty free sales since the channel resumed trading.

Between 19 February and 30 March, total duty free sales in the Hainan market reached RMB 1.283 billion (US$182 million), around 80% of the figure in the same period in 2019. The Customs agency said the numbers showed the resilience of the business during this extreme period. Luo Zilian, Head of Sanya Customs, was quoted as saying: "The number of tourists is increasing and the demand is strong. To ensure sufficient supplies, we must quickly increase the flow of goods.”

In 2019, Haikou Customs recorded sales RMB13.49 billion (US$1.91 billion), up by +30% year-on-year, across all duty free stores on the island.

Stimulating a new wave of tourism and shopping: The attractions of Hainan Island shown in this video could also help kickstart recovery in travel retail

Based on these figures and the early 2020 pre-closure performance, the business is recovering quickly. The stimulus package unveiled on 22 March includes 30 measures across six different areas of the tourism industry with the offshore duty free sector pivotal to all of them. That makes Hainan travel retail’s brightest light – perhaps its sole light over coming weeks.

The province will continue to simplify the offshore duty free shopping procedure introduced in 2011 and expand online sales of duty free products, Liu Cheng, Deputy Director of the Provincial Bureau of Tourism, Culture, Radio, Television and Sports revealed at a press conference on the island in February.

A striking campaign from Estée Lauder in 2019: expect brand investment to return to China's travel retail hotspots with vigour as domestic tourism builds

On 24 March, Hainan Province’s culture and tourism authorities signed a cooperation agreement with Shanghai-based Trip.com to accelerate the reinvigoration of the island’s tourism sector.

Hainan’s culture, tourism, radio, television and sports department and the online tourism specialist will collaborate to promote the province to the world, develop the island’s night-time and tourism economy, and lift its intelligent tourism services, according to Trip.com.

China’s powerful Fosun Tourism Group (part of Fosun International) announced on 1 April that it will issue CNY7 billion (US$986.9 million) worth of commercial mortgage-backed securities to attract investment in its tourism business. Hainan Daily reported that this is the first time in China that securities have been issued to support the tourism industry.

Importantly, group tours to the island have been given the green light, and most of its attractions, including the Tianya Haijiao (End of the Earth and Corner of the Sea scenic area) and Yalong Bay in Sanya (about 24k from the CDF Mall), have reopened. Last year Trip.com received bookings to Sanya from about 8 million tourists.

Tourists visit a scenic spot in Sanya City, south China's Hainan Province, on March 11, 2020. (Xinhua/Guo Cheng)

A couple pose for wedding photos at a scenic spot in Sanya City. (Xinhua/Guo Cheng)

Tourists visit an aquarium in Sanya City on March 12. (Xinhua/Guo Cheng)

View of a wharf in Sanya City on March 11. (Xinhua/Guo Cheng)

After Trip.com Chairman Liang Jianzhang hosted a live broadcast on 23 February which offered discounted Hainan hotel packages, around CNY10 million (US$1.41 million) of packages were sold in just an hour. That spells good news for CDFG. Hainan had 4 million visitors during the weeklong National Day holiday last year, according to Chinese media Shine.com, a +5.8% year-on-year rise. But consider the spending power those travellers generated – Hainan’s four offshore duty free stores attracted over 220,000 customers during the holiday, taking CNY385 million (US$54.3 million).

Consider this. After the CDF Mall reopened on 20 February, the retailer launched a -40% discount promotion. Most cosmetics were quickly sold out. Provided there is no major second wave of COVID-19 infections on the Mainland – and the Chinese authorities are hell-bent on ensuring there isn’t – and no outbreak on Hainan, then more of the same lies ahead. For brands doing business with CDFG and very little at all with other travel retailers around the world, the words ‘sold out’ must have a particularly alluring ring.

Kickstarting the recovery in Chinese domestic aviation

Flight analyst OAG has highlighted the early recovery of Chinese aviation as capacity returns and load factors increase. Details emerged during an OAG webinar last week that outlined the continuing capacity reductions among the world’s airlines – a contrast to Chinese carriers’ reinjection of seats into the domestic market.

In the week beginning 23 March, seat capacity in China was down by -37.5% compared to the same week a year earlier. But this compares favourably to the -60% to -70% declines during February, with millions of seats returning to the market each week since early March.

Institute for Aviation Research Professor Zheng Lei said: “The worst period was February. In that time most aircraft in China were grounded, but recently airline traffic has picked up. China Southern now has a 60% load factor on average, Hainan Airlines exceed 62% last week so that is an improvement.”

With the coronavirus coming under control, airlines are gradually resuming previous traffic partners, said Zheng [though international routes are deeply affected by new restrictions on flight routes imposed by government -Ed]. “Consumer confidence hasn’t fully come back yet and will take a while to get back to normal. But airlines have done a great job to reassure travellers with regular cleaning of aircraft, for example.”

On the wider picture, Zheng added: “The economy was hit badly in February and March. The Chinese airlines lost around US$5 billion in February and March is also difficult. But many businesses have now returned to normal, people are back to work, and that is quite encouraging. The Chinese government forecast is still for positive GDP growth in 2020.”

As The Moodie Davitt Report has noted, domestic travel is likely to bounce back first, followed by short-haul regional travel among Chinese.

Zheng said: “Chinese tourists are important to Korea, Vietnam, Thailand and Japan so the crisis has hurt tourism overseas. But once the situation recovers we will likely see a bounce back. Demand is there but it is just being suppressed.”

OAG Senior Analyst John Grant added: “You can see just how inter-dependent regional countries are for trade and for travel, whether it’s China-South Korea; South Korea-Japan; China-Thailand; China-Singapore. Therefore as China begins to lead the way out of crisis it will impact these markets before other international markets. Then it will ripple out to south-east Asia. The inter-dependency is vital.”

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The Moodie Davitt eZine

Issue 278 | 7 April 2020

The Moodie Davitt eZine is published 12 times per year by The Moodie Davitt Report (Moodie International Ltd). © All material is copyright and cannot be reproduced without the permission of the Publisher. To find out more visit www.moodiedavittreport.com and to subscribe, please e-mail sinead@moodiedavittreport.com

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