Sep 18, 2020 03:11 PM

China Grabs Global Top Spot in Duty-Free Shopping Amid Pandemic

(Nikkei Asian Review) — The coronavirus pandemic has ravaged the world’s travel-related industries, but the sector is recovering faster in China than other countries with the help of government policies. Chinese airlines, for example, while still losing money, are rapidly resuming flight operations.

Now, a Chinese state-owned operator of duty-free stores has claimed the top global position in the sector as measured by revenue. China Tourism Group Duty Free has surpassed Dufry Group, based in Basel, Switzerland, in sales for the first half of the year.

The reason behind that success: the promotion of the resort island of Hainan as a duty-free zone and Beijing’s recent decision to more than triple the amount that Chinese citizens are allowed to spend each year at duty-free shops.

The two companies’ results highlight how Dufry, which the industry had widely recognized as the world’s largest duty-free shop chain in terms of revenue, has been dethroned. Their major competitors are either not listed, like Gebr. Heinemann of Germany, or under other listed companies where financial data is not comparable, such as Hong Kong-based DFS Group, which is part of LVMH Moet Hennessy Louis Vuitton.

“This is certainly a difficult time for both, the travel-retail industry and our company,” Julian Diaz, CEO of Dufry Group, said last month, when the company announced dismal half-year results.

Even though the company has been seeing the “first signs towards a recovery” since mid-June, Dufry’s revenue dropped 62% from the same period a year earlier to 1.586 billion Swiss francs ($1.743 billion), as more than half of its 2,400 shops in roughly 420 locations around the world remained closed at the end of the period.

Meanwhile, CTG Duty Free, which controls virtually all of China’s travel shopping sector, posted first-half revenue of 19.309 billion yuan ($2.824 billion), marking a smaller decline of 22% from a year earlier.

“Along with the continued improvement of the epidemic at home,” the increase of consumption to domestic stores from overseas and powerful sales promotions have kept the decline in revenue to a relatively low level, the company said in a stock market disclosure last month.

Li Dan, an analyst at Zheshang Securities, in his 60-page global duty-free sector analysis report Sept. 7 declared that CTG Duty Free has “succeeded Dufry” and is poised now to be the industry leader in a “new era of duty-free.”

The sharp decline in international air travel has affected every duty-free operator around the world, but the major difference between CTG Duty Free and the others stems from solid policy support at home, and that assistance could further expand the company’s lead over its foreign peers.

CTG Duty Free enjoys the benefits of Beijing’s continued push to transform the southern island province of Hainan into a duty-free zone. The new phase of the international duty-free shopping complex in Sanya, the central city of the tropical island’s resort area, opened its doors in January and has since turned into a major revenue booster after weathering a difficult period during the first few months of the outbreak.

As the pandemic in China started to recede and domestic travel gradually restarted in April, the company added two more outlets in Sanya. The acquisition of a 51% stake in a separately run duty-free operator in Hainan owned by CTG Duty Free’s unlisted parent was approved and completed in May.

The company changed its name at the end of June, after the transaction was completed, to China Tourism Group Duty Free from China International Travel Service, to clarify its position as a duty-free shop operator.

Almost immediately, Beijing said it would raise the duty-free shopping quota per person to 100,000 yuan a year from 30,000 yuan, starting from July 1. That move has been attracting renewed waves of domestic tourists to the island, especially since most are unable to travel abroad.

The four duty-free outlets on the island — monopolized by CTG Duty Free — had sales of nearly 6 billion yuan from July 1 to Aug. 26. That is 2.5 times more than the same period a year earlier, and averaging to more than 100 million yuan a day.

S&P Global Ratings on Tuesday upgraded its outlook on China Tourism Group Corp, CTG Duty Free’s parent company, to stable from negative, affirming its single A-minus rating.

While evaluating the deterioration of travel agent, theme park and hotel businesses as “significant,” the ratings agency took into account the swift recovery of its duty-free segment, which stands at around 60% of overall sales and 70% of earnings before interest, tax, depreciation and amortization. S&P attributed a jump in duty-free sales in Hainan to be “an important contributor.”

“Tourists’ consumption has greatly stimulated sales, and such duty-free items as Western liquor, electronic products and so on, immediately disappear from store shelves,” a vice president at one of the company’s Sanya shops was quoted in a recent report by state-owned Xinhua News Agency.

The Hainan effect has not only lifted revenue for the company, but also for others that provide goods to it.

Shiseido, a Japanese cosmetics brand that began disclosing duty-free segment results of sales and profits through duty-free shops this year, posted a 19% drop in segment revenue to 51.7 billion yen ($486.9 million) for the first six months.

The company attributes that fall mainly to a decline in Chinese tourist arrivals to Japan. But Michael Coombs, Shiseido’s chief financial officer, said that Hainan was a bright spot, and the increase in the shopping quota “is expected to support future growth” for its business.

Investors’ optimism for CTG Duty Free has been reflected in the company’s stock, taking full advantage of the Hainan effect. The Shanghai-listed company’s share price hit an all-time high of 249 yuan in early August, and closed at 217.26 yuan on Wednesday, an increase of about 144% since the beginning of the year.

“We remain confident in the company outlook,” wrote Xin Chen, an analyst at UBS, giving the stock a “buy” rating. Chen is forecasting a 37% compound annual growth rate for Hainan’s duty-free sales until 2025, on top of the contributions from its online direct mail service launched at the beginning of the year.

“China is unlikely to grant duty-free licenses to overseas operators or private enterprises,” he said, adding that the Chinese state-owned operator was expected to maintain a market share of more than 80% in the country’s duty-free sector.

Dufry, meanwhile, was expecting by now to have reopened half of its shops that represent 70% of its total sales capacity, while also embarking on a global restructuring centered on cuts in personnel expenses through October.

But the company has not provided details on its progress toward those goals, including the geographic breakdown of shop reopenings. That information is “market sensitive,” Renzo Radice, Dufry’s global head of corporate communications, told the Nikkei Asian Review in an email.

The company’s exposure is spread out across the globe, with a higher presence on the Americas and Europe, which have been harder hit by the pandemic. For the year’s first half, Asia-Pacific and the Middle East attributed just 15% to its total sales. Investors have been harsh on Dufry. The Zurich-listed company’s shares have dropped nearly 70% this year.

While Dufry faces severe headwinds, some analysts are cautioning that the company’s strength should not be overlooked once the pandemic recedes and global air travel returns.

Its presence of 420 locations around the world makes it “well positioned to benefit from increasing global travel flows,” Jelena Sokolova, an analyst at Morningstar, wrote in a report.

She said the company would be able to expand by about 4% a year over the next decade through a mix of increasing passenger numbers and by the acquisition of new airport concessions.

As a market leader, Sokolova said, Dufry would be “well positioned to withstand concession inflation pressure and consolidate the industry as weaker operators exit the market, which should increase its bargaining power in the long term.”

This story was originally published by Nikkei Asian Review

Contact editor Yang Ge (

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