China's duty-free stores losing out to foreign rivals

Although China is poised to become one of the world's largest markets for duty-free shopping due to the rise of the middle class, it has a long way to go to retain domestic customers who are largely choosing foreign countries for such consumption.

For years, China has maintained a number of duty-free stores (DFS) at a few airports such as in Beijing and Shanghai, with others located in cities. The country's most recent DFS openings were two offshore shops in south China's Hainan Province. But they seem not to be passing muster for the rising number of Chinese who are willing to spend their budgets on non-necessities.

"Recent years have seen an inclination for purchasing high-end goods overseas rather than domestically among Chinese consumers," said Wang Jiansheng, head of the Hainan Tourism Development Research Association.

According to a recent report from the Fortune Character Institute, a Beijing-based luxury research center, only 20 percent of surveyed Chinese consumers said they are willing to buy luxury goods at home, indicating that domestic duty-free stores are losing clients to their overseas counterparts.

Wang Le, a Beijing college professor, recently browsed the DFS at the airport in Haikou, capital city of Hainan Province, before she left the island after a week-long vacation.

Her sole purchase, a bottle of eye cream, has since run out, though there is plenty of scope for her to make more such purchases. Under DFS policy, every individual may spend up to 8,000-yuan (1,296 U.S. dollars) per year across the two Hainan branches.

"I do not often buy foreign-brand cosmetics at home. I do serious shopping while travelling abroad, because overseas duty-free goods are cheaper, more diverse and authentic," said Wang, who regularly takes sightseeing trips at home and abroad.

"You can try your luck at domestic duty-free stores, but you don't really have as much choice as in overseas stores. And sometimes there are supply shortages," she added.

Each year, millions of Chinese travel abroad, with shopping considered an indispensable part of their experience. Data from the Financial Times showed that London alone pockets 2.78 billion yuan from Chinese tourists each year. At London Heathrow Airport, Chinese tourists comprise one percent of airport consumers but account for 25 percent of revenue contributions.

Despite a boost in the purchasing power of Chinese over recent years, the country has acted slowly in capitalizing on growing demand for high-end duty-free goods, worsening the spending outflow, according to experts.

The limited number of Chinese tax-free stores and their failure through poor management to match international practices have constrained the development of domestic duty-free shopping, according to Wang Jiansheng.

Hainan's offshore stores, one in Haikou and another in the resort city of Sanya, were set up in 2011 as part of China's efforts to build the island into an international tourism destination. The combined sales revenue of the stores reached about 2.4 billion yuan last year.

"Whether to lure seasonal tourists who are more sensitive to price or entertain high-end consumers who care more about privacy and exclusiveness is the biggest dilemma domestic stores face in making market strategies," Wang said.

Many duty-free stores in China have adopted a supermarket-sales model, with consumers sometimes queuing up for their purchase and payment, whereas a one-on-one service model is widely adopted in overseas stores to make the shopping process more enjoyable.

Another issue is quality concerns. Yang Zhekun, a tourism expert based in Hainan, believes that Chinese consumers place more trust in goods purchased overseas, as experiences of shoddy goods bought at many Chinese scenic spots cast a long shadow.

Meanwhile, experts say the monopoly that China's state-owned companies enjoy over tax-free businesses has protected the domestic duty-free market but failed to prevent the outflow of domestic consumption.

"Foreign capital is not allowed to participate in the sector, which has undermined the role of market competition and hindered enhancement in the operation of domestic stores," said Zhou Ting, dean of the Fortune Character Institute.

While warning that the purchasing power of Chinese tourists should not be underestimated, Wang Jiansheng suggested that the government should accelerate opening up the country's tax-free shopping market.

"Given that China's tourism industry has just started, there is great consumption potential. It's time to speed up the reforms in taxation and other policies to facilitate opening up," he argued.

According to the Fortune Character Institute report, retail sales of tax-free goods in China totaled 16.8 billion yuan last year. It projected the figure will expand by an annualized rate of 22 percent to top 30 billion yuan by 2015, at which point China will be the world's second-largest tax-free shopping market.