China’s Duty-Free Giant Posts Strong Rebound on Policy Incentives

China Duty Free Group Co. Ltd., the country’s largest duty-free retailer, posted nearly 40% year-on-year growth in third-quarter sales with net profit more than doubling, reflecting policy changes to bolster duty-free shopping.

China Duty Free, which controls about 90% of China’s duty-free retail market, said third-quarter sales totaled 15.8 billion yuan ($2.4 billion), up 39% from a year ago. Net profit rose 142% to 2.2 billion yuan during the three-month period, according to the company’s financial report released late Tuesday.

The strong performance reinforced the retail giant’s business revival since the second quarter, following a 44% sales plunge during the first three months caused by business closures amid the Covid-19 outbreak.

The retail sector in China started recovering as the country largely brought the virus under control following months of strict shutdowns. In the second quarter, China Duty Free posted 10% sales growth and an 8% profit rise. For the first nine months this year, the company still recorded a 2.8% drop in sales and a 25% decline in net profit.

China Duty Free attributed the strong third-quarter growth to new policies to encourage duty-free shopping in Hainan that took effect July 1 as part of efforts to bolster domestic consumption and develop the southern island province into a new commercial hub.

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Cover Story: Why China Is Expanding Access to Duty-Free Shopping

The new policies tripled the annual quota for duty-free purchases in Hainan stores to 100,000 yuan ($14,908) per person. Seven new categories of duty-free products were added, including mobile phones, digital tablets and liquor, bringing the total to 45 items. The policy changes also abolished the price threshold for a single duty-free product, previously set at 8,000 yuan.

Sales of luxury products including bags, watches and jewelry increased substantially under the new rules, China Duty Free said.

The policy revisions unleashed Chinese shoppers’ appetite for imported consumer goods, which was suppressed by the pandemic lockdown and suspension of international travel. During the first three months under the new rules, duty-free sales in Hainan surged 227.5% to 8.6 billion yuan with average daily sales topping 100 billion yuan.

China’s imports of duty-free products rose 90.8% year-on-year in the third quarter, following declines of 34.4% and 3.4% in the first and second quarters, data from the General Administration of Customs showed. In September alone, such imports were up 86.4% year-on-year to $565.4 million, the highest in available data going back to 2014.

Although China has cut import tariffs on a wide range of products over the past few years, taxes and nontax barriers still cause large price gaps for many high-end consumer goods sold in China and abroad, encouraging Chinese consumers to shop overseas. Most of them turn to duty-free shops at airports, land border crossings or in cities during trips abroad. According to the Ministry of Commerce, Chinese residents spent more than 180 billion yuan on duty-free products overseas in 2018, about 4.6 times the volume inside China.

China Duty Free runs more than 200 duty-free shops across the country, including four in Hainan. The largest one in the popular tropical resort of Sanya contributed to nearly 75% of total duty-free sales in the island last year and is the biggest duty-free store in the world.

Analysts project that more people will head to Hainan for duty-free goods next year. Hainan’s Vice Governor Shen Danyang said last month that duty-free sales in Hainan would reach 30 billion yuan this year and will soon pass100 billion yuan annually.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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