◼ BUSINESS Bloomberg Businessweek February 8, 202114
THEBOTTOMLINE China’sgovernmentlastyeartripledthe
annual limit for duty-free purchases by domestic travelers to Hainan,
and by January tax-free sales there averaged $28 million a day.The goal is to get wealthy Chinese to shift some
spending back to China rather than on trips abroad,
and it’s working. China’s share of the global luxury
market—the goods typically sold at duty free—almost
doubled last year to 20%, according to consultants
Bain & Co. “Even when international travel reopens,
there will be an alternative for mainlanders,” says
Bruno Lannes, a Bain senior partner in Shanghai.
Hainan, a subtropical island in the South China
Sea with hundreds of beachfront resorts, has led
the way, with duty-free shopping for domestic vis-
itors since 2011. The government in July tripled the
annual limit for such purchases, to 100,000 yuan
($15,500) per person, and removed a cap of
8,000yuanforanysingleproduct.InearlyJanuary,
Hainan’sduty-freesalesaveraged 180 millionyuan
a day,morethanthreetimesthelevela yearearlier,
according to the local government.
Until last year, state-owned China Tourism
Group Duty Free Corp. had a monopoly on shops
in Hainan. The company, which controls 90%
of such sales in China, on Jan. 29 released pre-
liminary results showing 2020 net income grew
32%, to 6.1 billion yuan, on revenue of 53 bil-
lion yuan. CTG’s Shanghai-traded shares have
more than quadrupled over the past 12 months,
vs. a 45% increase for the benchmark Shanghai
Shenzhen CSI 300 index. That strength contrasts
sharply with duty-free operators elsewhere.
South Korea’s Hotel Shilla Co. lost 283 billion won($253 million) last year on revenue of 3.2 trillion
won. And Switzerland’s Dufry AG likely lost more
than 1.5 billion Swiss francs ($1.7 billion), accord-
ing to analyst estimates compiled by Bloomberg.
CTG faces growing competition from domestic
and foreign rivals, on both Hainan and the main-
land. Department-store operator Wangfujing Group
is building a duty-free shop at the Universal Beijing
Resort theme park scheduled to open in May,
and in January it signed a deal for Hainan stores.
DFSGroup,a duty-freeoperatorownedbylux-
uryhouseLVMH,is workingona 30,000-square-
meter (320,000-square-foot) outlet at a golf resort
in Haikou, Hainan’s provincial capital. Paris-based
Lagardère Travel Retail on Jan. 4 said it had formed
a partnership for a duty-free shop in Sanya, a city
on the south coast with scores of luxury hotels. The
next day, Dufry announced a partnership for a shop
in downtown Haikou. China “provides immense
potential in terms of new customers for many years
to come,” says Pedro Castro, Dufry’s chief operat-
ing officer for Asia.
A test of the industry’s strength will come
during the weeklong Chinese New Year holiday
in February. Typically a busy time for duty-free
stores worldwide thanks to big-spending Chinese
tourists, the start of the Year of the Ox is likely to
be more restrained as the government discourages
even domestic travel following coronavirus out-
breaks in several cities. Ivan Xu, a 30-year-old cor-
porate travel manager in Shanghai, spent $10,
onDiorclothesanda designerhandbagduringa
DecembertriptoMacau.He’dplannedmoreduty-
freebingeing in Hainan during the Lunar New Year
but has postponed the vacation. “There’s no point
in taking the trip if we’re worried about our safety,”
he says. “We can find a better time to go there for
the beach and shopping.”
An even bigger challenge will come once the
pandemic is brought under control and Chinese
tourists can resume jetting around the world.
While there’s little doubt that will take a bite out
of sales in China, duty-free store operators are bet-
ting that the country, and especially Hainan, will
still offer plenty of opportunity. “With China being
the main—or maybe the only—major luxury mar-
ket left, a lot of brands have put more focus there,”
says Eudes Fabre, head of North Asia for Lagardère,
which is planning further expansion in the coun-
try after it opens its Sanya store. “There’s a lot of
thinking about where to go next.” �Bruce Einhorn,
Daniela Wei, and Corinne Gretler“With China
being the
main—or
maybe the
only—luxury
market left, a
lot of brands
have put more
focus there”◀ Foreign duty-free
chains are planning
more shops on Hainan