China
“Growing the size of the cake” in Hainan’s offshore duty free business
China Duty Free Group President Charles Chen underlines the powerful potential of the offshore duty free channel and welcomes the competition that new Hainan Island duty free licences and store openings will provide.
When China Duty Free Group (CDFG) President Charles Chen spoke at the recent Moodie Davitt Virtual Travel Retail Expo, he had an upbeat message about the future of the offshore duty free channel in Hainan Island.
“Although duty free shopping for international travellers [in China] is not yet restored to the normal state, the duty free market in Hainan has been hitting new highs. Thanks to the new policies [introduced on 1 July], the sales in CDFG stores in Hainan are not only recovering but thriving.”
He underlined that core message last week when speaking at the TFWA China Reborn virtual event on the Chinese market, highlighting the powerful impact that the updated offshore duty free policy and increased allowances since 1 July have had on the sector. These, he said, have released “new demand among Chinese shoppers for duty free consumption”.
Charles Chen: “New players will bring new models and methods of managing duty free stores. They will help to grow the size of the cake.”
Citing Haikou Customs figures, Chen said that Hainan duty free sales from 1 July to 31 October had reached US$1.7 billion, +214% higher than the figure from the same period in 2019. The number of goods sold was 12.869 million, up by +139% year-on-year.
CDFG, said Chen, has “seized the opportunity” of the expanded duty free policy in Hainan to introduce new categories and brands. Liquor and electronics stores have been added to the mix at the Sanya International Duty Free Shopping Complex, Haikou Downtown Duty Free Shop and Haikou Meilan Airport Duty Free Shop.
Growing demand for high-end luxury has also seen CDFG partner with leading houses such as Cartier, Bvlgari, Tiffany, Prada and Canada Goose to open new branded boutiques recently. “Since [the business restarted in] February we have had much cooperation with vendors and we thank them for their support,” said Chen.
Speaking about the addition of new licences in Hainan – three more stores will open there shortly – Chen said: “We welcome all the competition in the Hainan Island market. New players will bring new models and methods of managing duty free stores. They will help to grow the size of the cake.”
Market share and growth of China's duty free market
Scale of duty free goods purchased by Chinese consumers in different regions (2019)
Source: TFWA
He added: “We have competition in Hainan but in fact the cake is big enough for everyone to do business there. We are open to all of the new licence operators and we have good relations with the other duty free operators. What is important is not the competition but how to better serve the customers.”
On the wider opportunity, Chen noted: “Hainan Island has a very great future. The government is developing a Free Trade Port which will be a great step. There are challenges travelling elsewhere so in coming months Hainan Island will be a place for Chinese people to spend their holidays when they cannot travel overseas. So the strategy given by our government is important and we will invest a lot in our existing and new stores.
The performance of the Hainan market has helped CDFG rebuild 2020 sales to close to 2019 levels, showing ”strong momentum against the trend”. He said that the market’s strength was promising enough to mean that CDFG will lead the rankings of the world’s top travel retailers for the year. As we have reported, CDFG first-half sales – buoyed the quick recovery of its home market, led by Hainan – outstripped those of any other major travel retailer.
Sales are underpinned by strong Chinese domestic tourism figures. During the National Day and Mid-Autumn holidays, China reported 637 million domestic tourists, recovering to 79% of 2019 levels for these events. Domestic tourism revenue reached almost 70% of prior year levels and airline passenger recovery in Q3 reached 98% of 2019 numbers.
Fostering the restart of the Chinese duty free market
Leading beauty brands in particular are leveraging the power of the Hainan Island market, with other categories now investing in the offshore duty free opportunity
Chen said that China’s potential as a duty free market remained relatively untapped. “In 2019 China’s consumers purchased about 40% of the duty free products in the world. However China only accounts for about 8% of the global duty free market.” Chinese consumers also account for around one-third of luxury goods sales, a figure expected to hit 50% by 2025 according to Bain & Company, as we reported in the previous eZine.
In addition, younger consumers and those from second and third tier cities represent vast opportunity and an “emerging force for the Chinese duty free market”, said Chen.
CDFG has been transforming its own approach and operations to match new demand, said Chen. This means increased investment in Hainan, where the Haikou International Duty Free Mall will become the largest duty free store in the world when it opens in 2022, plus a new operation at Sanya Phoenix Airport, alongside its four existing operations. A strong focus on online sales across its business – with enhanced digitalisation and targeted marketing to its 10 million high-end members – complement that expansion of physical stores.
Chen noted: “The pandemic means that business will not return to what it was before. We are introducing contactless services, more online and even after the pandemic we’ll see new models such as pre-order, home delivery and other non-contact models. We are increasing our logistics and distribution [capabilities] and developing new business formats to meet the needs of customers.”
CDFG in the first three quarters of 2020
Chen concluded: “The Chinese duty free market will continue to grow vigorously. We have strong faith and confidence in this. CDFG looks forward to enhancing the exchanges and communications with partners in this industry. We continue to introduce more brands and limited collections to the Chinese market with favourable prices to better cater to the needs of Chinese consumers.
“Let’s join hands to create a better Chinese duty free market with openness, communication, cooperation and innovation. Let’s share the prosperity of the Chinese duty free market.”
*Click here for Charles Chen’s insights on the China market from the Virtual Travel Retail Expo, held on 12-16 October.
Shenzhen Duty Free and DFS on a Hainan Mission
Shenzhen Duty Free Group, supported by DFS Group, is progressing well towards an early 2021 opening of an initial 1,000sq m duty free at Mission Hills Resort Haikou on Hainan island, we understand.
Shenzhen Duty Free Group (full name Shenzhen State-Owned Duty Free Commodity Group) is expected to announce its licence for the much-anticipated business in coming days.
DFS will be supporting Shenzhen Duty Free, having enjoyed a long and successful relationship over recent years. In 2017 the two groups aligned in an unsuccessful bid for the West Kowloon MTR Express Rail Link (XRL) duty free concession. They have partnered since 2018 with DFS supplying merchandise and advising on store upgrades across Shenzhen Duty Free’s network.
As reported in August, DFS acquired a 22% stake in Shenzhen Duty Free Ecommerce Co, which is majority-owned by Shenzhen Duty Free Group.
Initially a display store of just under 1,000sq m will be developed but a much larger shopping footprint will be developed in the future, The Moodie Davitt Report understands.
Hainan Island: Travel retail’s global hotspot
The Moodie Davitt Report will publish a Hainan Island Special Report with the China edition of The Magazine in February 2021. Written by Martin Moodie and Dermot Davitt, it will explore how the offshore duty free business in China has become critical to the world’s leading brands across many categories.
The report will feature:
- Comment & analysis on the seismic impact of the new offshore duty free policy in Hainan since 1 July
- The potential of new offshore duty free allowances across categories from beauty to fashion and watches and from wines & spirits to consumer electronics
- Major interviews with and profiles of China Duty Free Group, CNSC, Hailvtou Sanya Downtown, Hainan Provincial Bureau of International Economic Development, and others, with a special focus on the ambitious Hainan Free Trade Port project
- Beyond Hainan, we examine the rebound in the China domestic market, assess prospects for Chinese airports and hopes for an eventual return to international travel. With input from leading travel retailers in the Mainland, Macau and Hong Kong markets
- The ecommerce drive: Assessing the potential of the partnership between travel retail’s long-time market leader Dufry and the digital powerhouse Alibaba; plus digital strategies at CDFG and other major players
- With contributions from our content partners Globuy, iClick, Jessica’s Secret and DutyFree Expert on trends among Chinese consumers and the duty free market
Contact Irene@MoodieDavittReport.com to partner with The Moodie Davitt Report for this special edition.
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The Moodie Davitt eZine Issue 288 | 8 December 2020
The Moodie Davitt eZine is published 15 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