In a bid to promote domestic duty-free sales, the Chinese government has made substantial efforts to not only empower domestic duty-free companies, but also develop the duty-free industry of key Chinese tourist destinations. Hainan province, sometimes labelled “China’s Hawaii,” has been a key focus of these efforts and there are hopes to make Hainan a “duty-free paradise.” The latest sales figures coming out of Hainan for the Spring Festival/Lunar New Year holiday indicate that these efforts are starting to bear fruit.
Hainan’s duty-free sales saw an increase of 25 percent during the Lunar New Year holiday compared to last year
During the week-long holiday, duty-free shops on Hainan recorded $71 million in sales, an increase of 25 percent in year over year growth. Much of this increase in sales can be attributed to the growing importance of the Lunar New Year as a leisure travel period in China. However, such a large increase in such a short period is undoubtedly linked to the expansion of duty-free offerings on Hainan.
Cosmetics, accessories, and clothing sales accounted for 70 percent sales and some shops recording an increase in the number of customers of 32 percent.
The Chinese government has been keen to reduce Chinese duty-free purchases abroad and to encourage domestic consumption. This is partly an effort to derive tax revenue from these transactions, but also part of wider efforts by the Chinese government to help transition the Chinese economy from an export-oriented economy to a consumption-driven economy.
For Hainan, the transformation into a “duty-free” paradise has centered around expanding offerings and facilities
In regards to Hainan, this has meant encouraging the development of domestic tourism and the expansion of duty-free retail shops on the island. Hainan’s CDF Mall, for example, is the largest duty-free shopping center in the world.
Nonetheless, Chinese duty-free retailers still find themselves at a substantial disadvantage compared to European or even North American retailers. Prices for luxury goods are roughly 20 percent higher than the global average. In European destinations, on the other hand, luxury goods are 20 percent cheaper than the global average.
Value-added taxes and tariffs account for some of this disparity, along with higher market prices. It’s for these reasons that Chinese customers in the first nine months of last year accounted for almost 30 percent of European duty-free sales.
While the Chinese government has vowed to reduce tariffs on certain consumer goods, this will likely do little to make Chinese luxury purchases more price competitive
To give Chinese domestic shops a level playing field ultimately reducing prices on duty-free goods. The Chinese government announced last year that it aimed to reduce tariffs on a wide range of consumer goods.
The value-added tax has not been reduced. It’s for this reason that this tariff cut will not have a substantial impact in making China’s luxury retail offerings more price competitive or curb daigou (overseas purchasing agent) sales.
However, improved facilities can also help reduce the disadvantage that Chinese retailers find themselves facing. While China’s attempts to increase the profile of its domestic duty-free offerings in Hainan are clearly off to a good start, more fundamental changes to pricing and taxation need to be addressed if Hainan wants to fully capitalize on this opportunity.