BEAUTY DOMINATES HAINAN’S FAST-GROWING DUTY FREE MARKET – BUT THERE IS A DRAWBACK

Hainan’s duty-free share of China’s total personal luxury market doubled from 6% in 2018 to around 13% last year, with beauty dominating the market. In a new report, global consultancy Bain & Company has identified the island province as one of the drivers of future luxury growth in China, although the picture is less rosy from a profitability and market perspective. ‘picture.

Hainan has been a designated duty-free retail destination for around a decade, but the tripling of the allocation in the summer of 2020 dramatically increased its importance – for beauty in particular – as mainland Chinese flocked to Hainan when they have been banned from international travel purchases due to the pandemic.

Bain’s China Luxury 2021 report, an annual study released in January, said luxury beauty accounts for more than 50 percent of Hainan’s duty-free sales. We have already reported how the island has boosted some houses such as Estée Lauder Companies in unexpected ways.

Many other travel retail brands have launched. They include major multi-brand players, from the French group L’Oréal, the Japanese group Shiseido and Coty, to Elizabeth Arden and Foreo. But the big push to boost duty-free sales in Hainan — while the rest of the channel, namely airports, are struggling — could come at the expense of profits.

In its report, Bain states, “The biggest promoter of Hainan’s success has been its aggressive pricing. For many brands, the benefits go far beyond simple tax benefits. For example, we did in-store checks at many beauty brands over the Christmas period. Our research shows that Hainan unit prices (RMB/ml) can be 30%-55% lower than official brand prices. »

Will the luxury beauty get caught?

Understandably, consumers are rushing to avail such luxury beauty discounts. As a result, island sales now account for nearly 25% of official Chinese channel sales (online and offline) in this category. The large price gap has also disrupted the luxury beauty market’s pricing system and is “helping to slow the growth of other channels,” according to Bain.

Promotional demands from Hainan retailers can be costly and not only risk hurting profitability, but could also change consumer perception. Luxury brands without the marketing budgets to bolster their high-end brand images risk being downgraded to prestige, while prestige becomes “masstige and so on.”

It could be the price paid for popularity in order to increase sales volumes. At one point, China Duty Free Group controlled virtually all duty free sales on Hainan, but over the past 12-18 months other international duty free operators such as DFS Group, Dufy and Lagardère Travel Retail have piled in with Chinese partners. .

“As more operators arrive, we expect retail opportunities on the island to continue to expand. With more options for buyers, price competition is likely to become more intense,” Bain said.

A future American market scenario?

These ongoing price disruptions, including the resilient daigou channel (where professional buyers buy duty-free on behalf of multiple individuals) are bringing beauty to a possible cliff edge. “We anticipate major risks of category repricing and negative impacts on brand image and equity. This is a developing US market scenario,” Bain warned.

For now, brands seem more interested in gaining duty-free sales and market share, and Hainan’s offshore market can largely achieve at least one of these two ambitions. The island has become an unmissable luxury hub. In 2020, thanks to the tripling of the allowance, sales more than doubled (by 120%).

Last year, sales rose another around 85% to RMB60 billion, or just under $10 billion, helped by an influx of 81 million tourists, up 25% from the previous year. The Hainan provincial government is targeting duty-free sales of more than $46 billion by 2025, more than four times current sales.

Bain calculates that Hainan contributed about 5% to China’s overall luxury goods market growth in 2021. Personal luxury accounts for almost all (95%) of the island’s sales. This high percentage will not last forever, although the dominance of beauty is expected to continue.

The Hainan Provincial Bureau of International Economic Development is doing its best to make the island a luxury destination, aided by the China International Consumer Products Expo. The second annual event will take place in April and promises to be bigger, with a greater share of foreign brand exhibitors.

More broadly, the Chinese luxury market continued its double-digit growth trend of 2020, although it slowed in 2021 to 36% (from 48% in 2020), and was particularly shaken in the second half (see graph ) due to multiple shocks. However, the three core trends of digitalization, continued repatriation of spending, as well as explosive growth in Hainan’s duty-free sales, mean the country is on track to become the world’s largest luxury market by 2025. overtaking the United States.

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