by Ker Zheng & Queenie Yao
In early June, the Chinese government announced that it will relax duty-free shopping policies for the southern island province of Hainan in a bid to boost local tourism and consumption. With these policies, Hainan may become a major retail outlet for daigou resellers and consumers who cannot travel abroad to reach duty-free stores.
The policies came into effect on July 1st, and for the first two weeks from July 1 to 13, daily shopping volumes at duty-free stores in Hainan saw an increase of 30%, according to official statistics. While it's still early, signs remain positive and sales volumes may increase as China approaches the peak winter months.
We take a deeper look at the duty-free policies, why the government is implementing these policies, and whether we think Hainan will be the next big destination for domestic tourists and duty-free shopping.
Hainan's New Duty-Free Shopping Policies - What's New?
The latest announcement from Chinese government authorities includes the following:
- The annual duty-free shopping quota for each customer has been raised from 30,000 RMB to 100,000 RMB, with no limit to the number of store visits.
- The categories of duty-free products allowed for stores were increased from 38 to 45 in total. This includes seven new duty-free product categories, including liquor, tablet PCs, apparel and phones.
- The 8,000 RMB limit for single duty-free purchases was abolished. This encourages the customer to buy higher-end items such as watches and jewelry.
- Quotas for the number of products limited to single purchases will be reduced. These limits will apply to the following: cosmetics (30 items), mobile phones (4) and alcoholic beverages (1,500ML)
- Moderate competition amongst businesses is encouraged. All business entities qualified for duty-free distribution will be able to participate equally in Hainan's offshore duty-free business.
- Supervision will be increased. The new rule has clarified the legal responsibilities to be borne by individuals, enterprises and offshore duty-free shops involved in illegally reselling and smuggling products.
Will Daigou Resellers Flock to Hainan?
Gray-market daigou resellers used to be a major source of revenue for duty-free shops around the world, oftentimes buying large numbers of cosmetics in places like Hong Kong and South Korea and ferrying them back to resell on Taobao or WeChat.
But since the beginning of 2019, customs authorities have been cracking down on them as the Chinese government looks to stop untaxed gray income and redirect consumers towards more official channels such as cross-border e-commerce. And with the global Covid-19 pandemic ongoing, the daigou trade has severely declined. Those that are still in business ship items through logistics providers, which can take several weeks to arrive in China, given the current dearth in global shipping capacity.
With the development of Hainan's duty-free policies, the island province might turn into a safe haven for daigou, who can account for well over half of duty-free sales in places like South Korea.
Officially, the new regulations in Hainan state that any person who resells, purchases for others or smuggles duty-free merchandise shall be included in the credit record under the law and will be prohibited from purchasing duty-free merchandise for three years; if a crime is committed, criminal liability shall be investigated under the law.
While such provisions sound serious in nature, in reality they are difficult to enforce. Here's why.
1. It is difficult to tell whether a person buying items is a daigou reseller or just purchasing for friends and family
2. There would have to be personnel at each store to monitor the quantity of items purchased, and it is unlikely that the stores themselves would do so as it would be against their best interest. What retailer would want to limit their own sales?
3. Lastly, the government would have to post customs officials at each checkpoint to check for illegal purchases. Given that Hainan province is technically a part of China, it wouldn't make sense to post customs officials at the airport to check for excess purchases. Even if they did, there may be legal issues around illegally searching people's personal belongings.
The more likely scenario is that the government forces retailers to track the number of sales they record per national id number and send them to customs authorities. It can do so through WeChat mini-programs.
A duty-free shopping mall in Hainan
Will Chinese Tourists Spend in Hainan?
The next question is whether or not out-of-town Chinese tourists are willing to fly to Hainan to purchase duty-free items.
Hainan is quite far from China's northern provinces, and most tourists go there not to shop but to relax and enjoy their vacations.
And shopping as a percentage of travel spending has been on the decline over the last few years as more and more domestic channels open up for purchasing imported products. A report from China Duty Free group indicated that shopping as a percentage of travel spending for Chinese tourists declined from 34.34% in 2017 to 16.48% in 2018.
Lastly, travel to Hainan tends to consist of low-end travel for people who cannot afford to travel abroad or do not have passports. Those who want to travel abroad to purchase luxury items can go directly to exotic locations such as Paris or London.
It's likely that consumer purchases may remain muted for the near future, especially given that domestic travel in China is still muted due to fears of another Covid-19 outbreak. On the other hand, Chinese tourists tend to flock to Hainan during China's winter months, so it's still too early to tell. Given that travel to Hong Kong and other Asian countries is expected to be limited going into 2021, there may be a chance that this winter will be a boon for Hainan.
China Duty Free x WeChat
One player that stands to benefit from Hainan's new duty-free policies is state-owned China Duty Free Group (CDF), which operates duty-free stores in more than 30 provinces, municipalities and autonomous regions in China. The company runs more than 240 duty-free shops across China, including Sanya Duty Free City, Guangzhou Baiyun Airport, Beijing and Shanghai Sunrise Duty Free Shops.
In response to the Covid-19 pandemic, it launched a mobile-friendly "CDF Member Shop" online mall on WeChat to cater to tourists stuck at home. There are different flash sales, discounts each day, and all orders are shipped within 10 days; the delay is due to customs clearance issues. Customers do not need to reach a minimum spending threshold.
CDF Member Shop WeChat mini program
Such an omnichannel strategy helps to retain and upsell customers over the long run. Given that online customer acquisition costs are high and travel retail customers remain a tricky base for merchants to retain, more has to be done to maintain their loyalty and encourage second or third purchases.
Previously, similar mini-programs required customers to input their flight information and pick up items at the airport, but CDF instituted the direct shipping option to adapt to post-Covid-19 realities. It is possible that other duty-free organizaitons worldwide could adopt WeChat mini-programs to continue selling to Chinese customers prevented from traveling abroad.
1. Hainan is loosening duty-free shopping policies in a bid to turn the island province into a popular shopping destination.
2. Daigou re-sellers, facing difficulties due to the worldwide Covid-19 crisis, may flock to Hainan to find duty-free products to sell to customers.
3. Ordinary consumers may be reluctant to go to Hainan just for shopping reasons. Overall shopping as a percentage of travel spending has declined in recent years as more and more domestic channels have opened up to purchase imported goods.
4. China Duty Free Group is one of the main players set to benefit from Hainan's loosened duty free shopping policies. Their new mini-program enables customers to make purchases from home.