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The center of gravity of Hainan’s ‘fire’ is tilted to China

The center of gravity of Hainan’s ‘fire’ is tilted to China

When poets, scholars, and courtiers sided with the Chinese emperors, they were exiled to the island of Hainan to defend themselves among the wild jungles and indigenous tribes.

Today, the destination of a tropical resort known as Hawaii in China has become a rare bright spot in the global luxury market as the coronavirus pandemic hit hard.

“Hainan Island is on fire,” Capri Holdings, Michael Kors and Versace brand owners John D Idol, who heads Capri Holdings, said in February.

To boost domestic consumptionThe Chinese government has turned the island into a tax-free shopping center. Visitors can wear Gucci and Prada, fashion Cartier jewelry, Estée Lauder beauty products or premium whiskey from The Macallan.

It has become even more popular in China that Covid-19 travel restrictions have pushed Chinese consumers who have driven the growth of the luxury sector in recent years unable to make shopping trips to Paris, London, Milan or Hong Kong.

The island is a powerful symbol of how the center of gravity of luxury is shifting to China, a reflection of the “homecoming” trend of Japanese buyers who bought Louis Vuitton and Balenciaga overseas in previous decades but now make them at home.

Nowhere is this clearer than the LVMH sector leader, whose rapid recovery has been largely driven by China. Company he said Tuesday With the exception of Japan, sales in Asia in the first quarter were 26% higher than in the corresponding period of 2019, before the pandemic.

Even when Chinese shoppers can travel again, analysts expect the brand to continue to buy at home as brands open brick stores and expand their e-commerce offerings, such as online stores. Alibabako Tmall Luxury Pavilion.

But according to the advisory, the share of high-end purchases by Chinese consumers rose from 32 percent in 2019 to more than 70 percent in 2020, and is expected to be around 55 percent by 2025 the pandemic effect fades.

Amy Dai is an iconic consumer who has been able to attract these brands. A 30-year-old resident of Chongqing made pilgrimages to Europe to buy luxury goods, one of China’s 170 million-year-old overseas travelers, who accounted for more than a third of all luxury sales before the pandemic.

But last year, Dai took a two-hour flight to the city of Hainan Sanya to shop, for which he turned to online platforms. Expenditures on luxury items exceeded Rmb1m ($ 150,000) last year, more than in 2019.

“Before the pandemic, I preferred to go abroad or buy from foreign purchasing agents from time to time,” he said. “I’ve been going to home stores since the pandemic started, otherwise I can’t get the latest editions on time.”

The luxury sector is booming with Chinese consumers after declining sales in 2020 a fifth approximately 217 billion euros worldwide, according to Bainen.

Hainan, China, location map

China’s successful virus eradication and rapid economic recovery – back to gross domestic product growth pre-pandemic levels in the fourth quarter – played a key role in maintaining optimism.

The recovery was initially driven by “revenge purchases,” or after the world’s most populous country moved out of the country national closure, but has since given way to something more enduring.

“There are a lot of rich people who have benefited from the pandemic when they work in high-growth industries or own good-performing stocks,” said a Beijing-based employee of a European brand. High-end jewelry, people added, was being “sold like crazy”.

The pandemic also accelerated shifts in the Chinese luxury market, such as the expansion of e-commerce, lower import taxes and stricter controls on the gray market. daigou, professional buyers who buy watches, jewelry, clothes and cosmetics abroad thanks to the Chinese of the mainland. Brands had already begun to reduce the price differential that goods sold in China were more expensive than those supplied in Europe or the US.

Hainan’s tax-free sales will grow sevenfold by 2030

Such trends have led to more brands investing in luxury brands in China.

A report by Jefferies analysts on Louis Vuitton, Burberry and Gucci the stores were located in 25 major cities in China, suggesting that others should spread the trail.

Placing a flag in Hainan could be an effective way to put it in front of more Chinese consumers.

Shiseido, a Japanese beauty brand, plans to double its sales counters on the island to 60 by the end of the year. Estée Lauder also said there was a high demand.

Beauty and cosmetics products account for nearly half of Hainan’s tax-free sales, according to Bernstein Research, while luxury products make up about a third of sales. But the latter are growing rapidly as the number of luxury brands on the island has risen by 80% in the last six years. “We expect more to come,” Bernstein analysts wrote.

Tourists buy bags at the duty-free shop in Haikou (Hainan)

Tourists buy bags at the tax-free shop in Haikou (Hainan). © Luo Yunfei / China News Service via Getty

Chen Xin, an analyst at UBS, said Hainan’s tax-free sales had doubled in 2020 from the previous year to Rmb30bn, and predicted a compound annual growth rate of 40 percent between 2019-25.

At the heart of this growth were policy changes planned to build tax-free shopping on the island.

Last year, the Chinese government tripled the amount that consumers could buy in Hainan without tax at 100,000 Rmb a year, and threw away an 8,000 Rmb cap for a single item. It also granted three licenses to companies to operate tax-free stores, which is a significant increase over the seven licenses granted before the 1980s.

But some luxury brands weren’t worried about making too many bets in Hainan, as they could only sell them through wholesale deals with state-sponsored companies and can’t open their stores. This gives the brand less control over pricing and the customer experience.

Others are concerned that the island is at risk of being abused daigou.

“We believe that Hainan’s development is positive, but we need to be careful and work together to ensure that it does not become a gray market hub in China,” said Jean Jacques Guiony, CFO of LVMH, the world’s largest luxury group. .

“If consumers travel to Hainan and come to our stores, we are ready to serve. But if it is bought in bulk and then sold to intermediaries, then no. “

Despite these concerns, LVMH has expanded to Hainan through DFS through its travel retail department. The company has partnered with Shenzhen Duty Free Group at a tax-free shopping center called Haikou Mission Hills in a popular resort. It opened in January but will open in the next two years to cover an area of ​​more than 30,000 square meters.

Such destinations can help alleviate the crowds Sharron Zhou, a 35-year-old marketing executive in Shanghai, had on his trip to Hainan during the new lunar year. He was late and didn’t buy anything. “You couldn’t find a sale. . . People were stepping on my feet, ”he said.

Additional reports by Xueqiao Wang in Shanghai, Sun Yu in Beijing and Alice Woodhouse in Hong Kong

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