HK, Jeju and Okinawa, now Hainan!

Sanya builds the world's biggest duty-free shop to handle soaring popular demand

The world's biggest duty-free shopping complex will open for trial operation in Sanya, a resort city on South China's tourist island of Hainan, this December in time for next year's Spring Festival's shopping bonanza.

The 70,000 square meter shopping center, which is operated by the State-owned duty-free group China Duty Free Group Co, is located in Haitang Bay, about 30 kilometers east of Sanya and home to more than 30 luxury hotels along its 22 kilometers of sandy beach.

"We have seen downtown (duty-free) stores, we have seen airport (duty-free) stores, but nothing like this - the huge resort (duty-free) store," said Ian McLernon, regional director of Christian Dior parfums' travel retail department for Asia-Pacific, at the shopping complex's construction site.

Chen Guoqiang, vice-president of China Duty Free, said the new shopping complex was going to be an integrated project with not only duty-free shops, but also restaurants and other entertainment facilities.

The International Travel Service Corp, parent company of China Duty Free, is spending 5 billion yuan ($805 million) on the project.

Setting its grand opening schedule to August 2014, the world's largest duty-free shopping complex can't wait to open its door for trials by the end of this year, right before next Chinese New Year in January, mainly because it's when the "miracle" happens.

"Our downtown duty-free store's turnover for last Spring Festival holiday was 2.3 times the year before," said Gu Naxin, marketing director of China Duty Free. He said the 7,000 sq m downtown store broke the daily sales record of 20 million yuan ($3.22 million) during last Chinese New Year and the number of shoppers lining up was so long they had to control the flow.

At least 45 percent of the number of Hainan's inbound tourists in 2012 - about 3.7 million people - visited Sanya's only duty-free store located downtown and generated sales revenue of 2.04 billion yuan.

According to Hainan governor Jiang Dingzhi, the province currently has two duty-free shops, one at the airport of the provincial capital in Haikou and the other in downtown Sanya. But the two stores' total of 14,000 sq m of shopping area couldn't meet customer's needs. "Taking Sanya's downtown (duty-free) store as example, it received a daily average of 30,000 travelers during last Spring Festival holiday, three times the number of its visitors on an average day," Jiang said.

The crowded shopping environment and shoppers' frustration at not being always able to buy what they wanted could be solved by adding two more duty-free stores in the province, said Jiang.

Jiang also called for a more flexible duty-free policy to support the island's tourist economy.

Hainan's tourist market is expected to grow dramatically. It is expected by Chinese officials to become a global tropical island resort destination by 2020. The tourism industry in the province is expected to contribute 12 percent to annual gross domestic product by that time.

A senior official for the duty-free shop in Haikou Meilan International Airport agreed with Jiang and said the market is far from saturated at the moment and can easily afford a total of at least five to 10 duty-free shops. He declined to be named.

Hainan Duty Free Group, where he works, is a provincial duty-free company established immediately after the State Council in 2011 gave the nod to the province to explore the possibility of allowing domestic tourists to enjoy duty-free shopping.

The Ministry of Finance announced that mainland travelers were able to buy duty-free goods in Hainan so long as they left the island by air in April 2011, making the island the fourth area in the world after Hong Kong, the Republic of Korea's Jeju Island and Japan's Okinawa to launch similar policies.

Permission to buy goods duty-free in Hainan had been extended to foreign and non-mainland travelers before, but never to mainland visitors, who make up a majority of those who travel to the island.

The policy initially came with even further restrictions such as only allowing travelers aged 18 or older to buy duty-free goods. The tax exemption was originally only 5,000 yuan per person until the authorities eventually decided to be more generous.

Individual tourists aged 16 or over can currently spend up to 8,000 yuan per visit in two visits a year.

Emmanuel Ruelland, general manager of Jurlique International Pty Ltd's international department, said the 8,000 yuan cap "is a bit challenging for the (sales) of watches, but fine for most cosmetics except big brands such as La Mer".

More than 80 percent of Haikou Meilan International Airport's shop revenue came from cosmetics, perfumes, bags and watches. "Most watches sold in my store were under 20,000 yuan," said the senior official for the duty-free shop in Haikou Meilan International Airport.

"We take the 8,000 yuan cap into consideration when selecting suppliers," he said.

For most customers, however, the 8,000 yuan upper limit is more than sufficient as shopping isn't their major purpose on the resort island. "It's just some icing on the cake," said 28-year-old Bai Li from Tianjin, who was spending her afternoon at Sanya's downtown duty-free shop to kill time before her night flight home.

Figures show that up to this February, the average spending on duty-free products per person each visit was 2,300 yuan.

For 27-year-old Yang Yijun, a student at Hong Kong Baptist University who buys dozens of cosmetics and digital products for her family and friends in Shanghai, the resort island of Hainan does not challenge Hong Kong's dominance as a shopping mecca for tourists.

"Hainan has an awkward market position in that it's overpriced as a domestic destination," she said, adding the island is more attractive for the mass market rather than for high-end tourists.

However, Ralph Bou Nader, head of Travel Retail Worldwide VF Corp in Belgium, who is also the supplier for the upcoming Haitang Bay duty-free complex, said "(the duty-free) price standards match those in duty-free shops in Hong Kong".

China Duty Free and Hainan Duty Free's biggest competitors are obviously from each other but nonetheless the Chinese are buying more tax-free goods than shoppers from any other country in the world. According to Global Blue, the largest tax-refund and shopping services provider, people from the Chinese mainland spent $2.15 trillion on tax-free products in 2011 and took part in 21 percent of the tax-free sales made that year.

Staff at Chic Outlet Shopping, the collection of luxury outlet villages across Europe, said Chinese tourists were their biggest-spending customers last year. A 47 percent increase was noted in their spending on tax-free products compared with 2011.

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