China Duty Free Group cements world number one ranking

Driven by a rebound in domestic travel and the surging offshore duty free business in Hainan, China Duty Free Group (CDFG) became the world’s largest travel retailer measured by turnover in 2020, according to data compiled by The Moodie Davitt Report. The remarkable growth of CDFG over the past decade can be seen in its steady rise through the rankings of The Moodie Davitt Report’s Top Travel Retailers, published as a guide to the industry’s leading players by turnover (and presented in Euros as our standardised currency). Ten years ago, CDFG sales were a relatively modest €329 million, with the company ranked as low as 19th in our global rankings published in 2011 (based on 2010 figures). The Chinese outbound travel wave that would drive duty free sales over the next decade was still at a relatively early stage of development. And the offshore duty free policy that would see Hainan Island become one of the world’s travel retail hotspots was announced in 2011. By 2015 CDFG ranked 12th in the list, and was fourth based on 2019 sales of just over €6 billion. As we reported earlier this year, parent company China Tourism Group Duty Free Corp (China Tourism Group) revealed that revenues in 2020 reached RMB52.6 billion (€6,603 million at our chosen exchange rates at 31 December 2020), with CDFG the only leading travel retailer to post any growth last year.

After a difficult first three months of 2020, with travel virtually halted due to the pandemic, CDFG reported a swift reverse in its fortunes in the second quarter of last year, while its second-half results were stronger again, following the resurgence of Chinese domestic travel to Hainan and the introduction of an enhanced, highly progressive shopping policy from 1 July. That acceleration has continued into 2021. In early July China Tourism Group reported that first-half sales rose +84% year-on-year to RMB35,501 million (€4.6 billion). This is likely to represent approximately 41% of 2021 revenue, according to Goldman Sachs analysis. Importantly too, China Tourism Group reported a +484% rise in core net profit to RMB5.34 billion (US$690 million/€580 million) from a low, COVID-affected 2020 comparative base. Crucially, CDFG’s market dominance looks set to continue even as competitors enter the market. Commenting on the interim results, Goldman Sachs noted that the group retained a 91% market share in Q2 versus 95% in Q1 with Hainan Tourism Investment capturing around 6%, Hainan Development Holdings around 2% and CNSC 1-2% [with Shenzhen Duty Free/DFS accounting for the balance -Ed]. That status is like to be maintained with ambitious plans for further market development, led by the ambitious Haikou International Duty Free City development, set to open in June 2022.

The Moodie Davitt Report has also tracked performance among other leading travel retailers in 2020 and present our estimate of the Top Ten, taking into account the impact of the pandemic. In these updated rankings (derived from company reports and our estimates) we include some alternative online and wholesale figures, plus other channels such as food & beverage, where relevant. Lotte Duty Free, despite a sharp fall in 2020 sales, delivered sales of just under KRW6.4 trillion (€4.82 billion at 31 December exchange rates), driven by a resilient daigou business and some highly creative ways (supported by Korean government supportive measures) of depleting unsold inventory. The retailer also continued to make impressive strides with its ecommerce business. Despite the continuing challenges of the crisis, and periodic spiking of cases in South Korea, Lotte Duty Free CEO Kap Lee retains faith that recovery can begin to take shape this year. In a recent interview he also said that the company is aiming to respond more flexibly and quickly to trend changes by accelerating digital transformation and through business diversification. Here, digitalisation is critical. In 2019, Lotte Duty Free’s online sales accounted for 34% of the business but this grew to 44% in 2020. By the time the pandemic passes, said Lee, online sales could account for about 50% of the total.

The Shilla Duty Free posted revenue of KRW5,691 billion (€4.29 billion) in 2020, with the business also buoyed by daigou income and online sales. Shilla retains ambitions to extend its presence overseas – it already manages key P&C concessions at Hong Kong International and Changi airports – through contract gains as well as partnerships. It will seek to leverage its stake in 3Sixty Duty Free, while it recently announced an intriguing strategic tie-up with Hainan Tourism Investment Duty Free Co (HTDF). While it does not affect HTDF’s existing cooperation relationships in the sector, HTDF and Shilla say they will use their respective advantages to carry out a “comprehensive and multi-level strategic cooperation” across product development and sourcing, brand incubation, human resources & staff training. The companies will deeply integrate their activities, develop synergies, and jointly develop Hainan and overseas duty free markets, they added. [A note on the leading Korean players: the figures presented here include Korean domestic brand sales, which do not feature in the numbers disclosed according to IFRS accounting standards, and which appear on the DART platform where Korean companies report annual performance –Ed].

Long-time number one Dufry ranked fourth in 2020, having reported a -71.1% decline in turnover to CHF2,561.1 million (€2.37 billion at 31 December exchange rates) as its business worldwide was hit by the pandemic. The first half of 2021 remained difficult, though with some recovery in US domestic traffic and the travel essentials business led by Hudson, with an expected 70% of stores set to reopen by the end of August. Dufry’s pledge to place greater focus on Asia has taken further shape with its strategic partnership with Alibaba Group to operate offline and online travel retail in China, and with its cooperation agreement with Hainan Development Holdings to collaborate at the Global Duty Free Plaza, Mova Mall in Hainan’s capital Haikou (open since 31 January). These moves, alongside its investment in digitalisation across its business, represent significant plays that will help define the longer term future.

Of the other major players, Lagardère Travel Retail (ranked fifth in 2019) posted consolidated revenue (including joint ventures) of €2,300 million across all sales channels and categories. The first half of 2021 remained difficult due to the closure of many markets. A key barometer was the performance of duty free sales, which fell by -65% in H1 2021 compared to the same period in 2019, but this was partially offset by a strong er showing from travel essentials and foodservice (F&B), which were aided by growth in domestic traffic in the US for example, as well as diversified sales channels (rail as well as air). Lagardère Travel Retail is closely followed in the rankings by DFS Group, whose revenues we estimate at around €2.2 billion, which includes some online and wholesale business.

While the crisis continued to bite for DFS in H1 2021, the company is buoyed by several major recent and planned developments in locations as diverse as Brisbane, Hainan, Paris and Queenstown together with a resurgent Macau business. The reopening of the historic La Samaritaine store in Paris – Samaritaine Paris Pont-Neuf by DFS – on 23 June represented one of the most illustrious days in DFS Group’s proud 60-year history.

Like its Korean rivals, Shinsegae Duty Free’s sales in 2020 (€1,915 million) and into 2021 have been spurred by its B2B (daigou) business, with cost-cutting and lower airport rents boosting profitability. Although its downtown duty free revenues climbed by +35% in Q1 2021 compared to the heavily troubled period a year earlier, one of its key locations also fell victim to the crisis. Shinsegae’s Gangnam store, opened to much acclaim in July 2018, has been transitioned into department store space effective from July, with the focus of its duty free efforts now on the flagship Myeong-dong business.

Gebr Heinemann retail turnover fell by -68% to €1.2 billion, with the distribution business down by -57% to €400 million. The total €1.6 billion turnover figure compares to €4.8 billion in 2019. Despite the challenges, the future, says CEO Max Heinemann, will continue to lie in remaining family owned and financially independent. “Stability and long term is our way,” he told us recently. “Over 142 years we were always very careful about the investments we made and how we spent our money.” The future will also lie in expanding, not retrenching, as a global player. Max Heinemann said: “We are very clear. You will see investment going into all four regions where we operate. Of course, this crisis has put certain restraints on easy investments. What you will probably see is a much clearer focus on where to invest and a different set of priorities. Some things you can do alone but one of the core strengths of our successful globalisation is built on collaboration and partnership.”

Of other major travel retailers, Duty Free Americas (sales of US$1.17 billion which translate as €958 million at our prevailing exchange rate of 31 December) was partially insulated by the continuation of its border business, notably with Mexico, through the crisis, while airports suffered. Its Macau business has also bounced back since Mainland China visitors returned.

King Power International Group (Thailand) was hit hard by the halting of Chinese international travel since early last year, but still places firmly inside the top ten in our rankings with estimated turnover of €907 million. The company, which did not lay off a single employee after the crisis hit last year, has been aided by relief measures taken by Airports of Thailand to support its partners, and by extensions of its key commercial contracts by one year to 2032. The return of fully vaccinated tourists to Thai resorts, led by Phuket, will be closely watched by other governments and tourism agencies as Thailand seeks to re-establish its status as a top regional destination.

Of the other traditional top ranked travel retailers, Dubai Duty Free sales fell by -65% year-on-year but still reached US$697 million (€570 million) in 2020, with recovery now taking solid shape as travel to and from key source markets for Dubai, such as India and the UK, rebuilds.

Ever Rich Duty Free, ranked tenth in 2019 with estimated sales of €1,932 million, posted a decline of around -80% last year as travel collapsed, though it still retained some healthy domestic duty free sales based around the offshore islands of the territory. Among other major players, Irish state-owned travel retailer Aer Rianta International posted a -72% drop in managed sales to €334.8 million last year.

Conclusion

While much remains uncertain about the shape that travel retail will take in 2021 and beyond, the identity of the global number one for this year is in no doubt. China Duty Free Group continues to power ahead in its home market, driven by the modern-day industry phenomenon that is Hainan offshore duty free. After a strong first half, there is the very real prospect that CDFG will become the first €10 billion/US$10 billion duty free retailer measured by annual turnover – a remarkable outcome amid the worst crisis the industry has ever seen. Given the buoyancy of the Chinese domestic market, a key question once the crisis passes will be this: what proportion of the traditional overseas spend repatriated in 2020 and 2021 will stay in China, and how much will return to travel retail’s Asian and global hotspots. The answer to that question will go a long way to defining the makeup of our Top Travel Retailer rankings in 2022 and beyond.

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