Hainan “on fire” as the center of gravity of luxury leans toward China

When poets, writers, and courtiers fell into disgrace before the emperors of China, they were banished to the island of Hainan to defend themselves among savage jungles and indigenous tribes.

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

“Hainan Island is on fire,” John D Idol, who runs Capri Holdings, which owns the Michael Kors and Versace brands, told analysts in February.

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

Hainan became even more popular when Covid-19 travel restrictions meant that Chinese consumers, who have driven the growth of the luxury sector in recent years, could no longer travel to Paris, London, Milan or Hong Kong.

The island is a powerful symbol of how the center of gravity of luxury leans toward China, reflecting the trend of “repatriation” of the early decades of Japanese shoppers who used to buy Louis Vuitton and Balenciaga overseas but who now do it at home.

Nowhere is it clearer than the LVMH industry leader, whose accelerated recovery has been largely fueled by China. The company he said Tuesday that its first-quarter sales in Asia, excluding Japan, were 26% higher than in the corresponding period of 2019, before the pandemic.

Even when Chinese shoppers can travel again, analysts expect them to continue shopping at home as brands open brick-and-mortar stores and expand e-commerce offerings, such as online stores. Alibaba Tmall Luxury Pavilion.

The share of high-end purchases by Chinese consumers in the country increased from 32% in 2019 to 70% in 2020, according to consulting firm Bain, and is expected to be 55% in 2025 once the pandemic effect fades.

Amy Dai is emblematic of the consumer that these brands have been able to attract. The 30-year-old Chongqing resident used to make pilgrimages to Europe to buy luxury goods, one of China’s 170 million annual overseas travelers, spending more than a third of the world’s luxury sales. before the pandemic.

But last year, Dai took a two-hour flight to Sanya City, Hainan, to shop and, to do so, headed to the online platforms. Its spending on luxury goods exceeded Rmb1m ($ 150,000) last year, more than in 2019.

“Before the pandemic, I would rather go abroad or occasionally buy overseas buying agents,” he said. “Since the pandemic started, I switched to national retailers, because otherwise I can’t get the latest issues on time.”

The luxury sector relies on Chinese consumers to fuel the recovery after a difficult 2020 that reduced sales about one-fifth to 217 billion euros worldwide, according to Bain.

China’s comparatively successful virus suppression and rapid economic recovery: Gross Domestic Product Growth Returned pre-pandemic levels in the fourth quarter, it played a key role in maintaining optimism.

The recovery was initially driven by “revenge purchases”, or to please after the world’s most populous country left a country. national blockade, but since then it has given way to something more lasting.

“There are a lot of rich people who have benefited from the pandemic while working in high-growth industries or owning stocks with good performance,” said an employee of a European brand based in Beijing. The high-end gem, the person added, “sold like crazy.”

The pandemic also accelerated changes in China’s luxury market, such as the expansion of e-commerce, lower import duties and tighter controls on the gray market, driven by daigou, professional buyers who buy watches, jewelry, clothes and cosmetics abroad on behalf of the mainland Chinese. Brands had already begun to reduce the price differential that goods sold in China had risen in price to those sold in Europe or the United States.

These trends have motivated luxury brands to invest more in China.

A report by Jefferies analysts found that only Louis Vuitton, Burberry and Gucci it had stores in all 25 major cities in China, suggesting that others may need to expand their footprints.

Planting a flag in Hainan could be an effective way to stand up to more Chinese consumers.

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

According to Bernstein Research, beauty products and cosmetics account for nearly half of duty-free sales in Hainan, while luxury goods account for about a third of sales. But the latter are growing rapidly, with a number of luxury brands on the island rising by 80% in the last six years. “We expect more to come,” Bernstein analysts wrote.

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

Changes in policy aimed at building tax-free purchases on the island were further support for this growth.

Last year, the Chinese government tripled the amount that tax-free consumers could buy annually in Hainan to 100,000 Rmb and removed a limit of 8,000 Rmb for a single item. It also issued three licenses to companies to operate tax-free stores, a significant increase over the seven licenses that had been given previously since the 1980s.

But some luxury brands were wary of betting too much on Hainan, as they could only sell there through wholesale deals with state-backed companies and could not open their own stores. This gives brands less control over pricing and the customer experience.

Others worry that the island risks being mistreated daigou.

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

“If consumers travel to Hainan and come to our stores, we are ready to serve them. But if it’s about buying in bulk and then selling them to intermediaries, no. “

Despite these concerns, LVMH has expanded to Hainan through DFS, its retail travel division. The company has partnered with Shenzhen Duty Free Group in a duty-free shopping mall called Haikou Mission Hills, located in a popular resort. It opened in January, but will expand over the next two years to reach more than 30,000 square feet of retail space.

These destinations could help relieve the crowds with which Sharron Zhou, a 35-year-old marketing executive from Shanghai, met during her trip to Hainan during the new lunar year. She was so put off that she didn’t buy anything. “You couldn’t find sellers. . . People were stepping on me, ”he said.

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