China’s southernmost province, known as the ‘Hawaii of China’, the size of Belgium, inhabited by 9 million people, is set to become a duty-free paradise and a new battleground for the luxury sector. Here’s how and why
On 23 July 2020, the Tianwen-1 mission departed from the Wenchang space centre on the Chinese island of Hainan and landed on Mars on 15 May 2021. But China has planned another mission to Hainan, identifying it as the last frontier (for now) of a particular commercial horizon: turning it into the world’s largest duty-free paradise by 2050.
The next duty-free paradise
Beijing unveiled its plan a month before Tianwen-1 took off. The island has historically been a place of exile for disgraced officials and criminals. A military outpost due to its strategic geographic location. A paradise for smugglers of foreign goods. And the scene of a crash between the US and Chinese military aircraft in 2001, will increasingly become a luxury shopping destination. Not surprisingly, McKinsey analysts believe it is time for luxury brands to develop a strategy for operating in Hainan.
As a result of the pandemic and the subsequent suspension of international travel, Chinese consumers flocked to the island, encouraged by the central government’s decision to raise the cap on duty-free purchases and to extend the categories of tax-free goods. Total duty-free spending on the island in 2020 was $ 4.3 billion, double the previous year’s $2.1 billion. 2021 will be another record year, with the Hainan government estimating that it will exceed US$9 billion.
In the last Golden Week, from 1 to 7 October, the island’s nine duty-free shopping centres grossed $252 million, an increase of 75% in 2020 and 359% in 2019. And by 2025, estimates suggest spending will reach $46.5 billion. So China’s southernmost province, known as the ‘Hawaii of China’, is set to become a new battleground for the luxury sector.
The arrival of the brands
Several brands (including Gucci, Ferragamo, Prada and Tod’s) have opened shops in Hainan. Other top brands (Chanel, Hermès, Dior, Louis Vuitton) are either not present or have only landed in Hainan to sell cosmetics and perfumes. LVMH and its rivals are concerned that discounts could damage their brands’ image and aura of exclusivity, as well as erode margins and complicate the customer relationship.
“As long as we talk to end customers and not daigou, we can do business in Hainan,” LVMH’s chief financial officer Jean-Jacques Guiony noted last October, commenting on the fact that Louis Vuitton is considering a presence on the island but not considering opening a duty-free store in Hainan. How many luxury brands will resist the temptation to do so?