When poets, scholars and courtiers fell out of favor with the emperors of China, they were banished to the island of Hainan to fend for themselves among the wild jungles and native tribes.
Today, the tropical resort destination known as Hawaii in China has become a rare bright spot in the global luxury market, which has been hit hard by the coronavirus pandemic.
“The island of Hainan is on fire,” John D Idol, who heads Capri Holdings, owner of the Michael Kors and Versace brands, told analysts in February.
AT stimulate domestic consumption, the Chinese government has turned the island into a duty-free shopping center. Visitors can indulge in Gucci and Prada fashion, Cartier jewelry, beauty products from Estée Lauder or premium whiskey from The Macallan.
Hainan became even more popular when Covid-19 travel restrictions prevented Chinese consumers, which have boosted the growth of the luxury sector in recent years, from shopping in Paris, London, Milan or Hong Kong.
The island is a potent symbol of how the center of gravity of luxury tilts towards China, mirroring the early decades’ repatriation trend of Japanese buyers who bought Louis Vuitton and Balenciaga overseas but do so. now at home.
Nowhere is this clearer than at industry leader LVMH, whose acceleration of the recovery has been largely fueled by China. The company said Tuesday that its first-quarter sales in Asia excluding Japan were 26 percent higher than the corresponding period of 2019, before the pandemic.
Even when Chinese shoppers can travel again, analysts expect they will continue to buy from home as brands open physical stores and expand their e-commerce offerings, such as virtual stores on Alibaba Tmall Luxury Pavilion.
The share of high-end purchases by Chinese consumers in the country has increased from 32 percent in 2019 to over 70 percent in 2020, according to consultancy Bain, and is expected to be around 55 percent by 2025 once the the pandemic effect wears off.
Amy Dai is emblematic of the consumer that these brands have been able to attract. The 30-year-old Chongqing resident made pilgrimages to Europe to purchase luxury goods, one of China’s 170 million annual overseas travelers whose spending accounted for more than a third of all global sales luxury before the pandemic strikes.
But last year, Dai took a two-hour flight to Hainan city, Sanya, to shop, and to do so, turned to online platforms. His spending on luxury items exceeded 1 million rmb ($ 150,000) last year, more than in 2019.
“Before the pandemic, I preferred to go overseas or sometimes I would buy from overseas purchasing agents,” she said. “Since the start of the pandemic, I have turned to national retailers because otherwise I cannot get the latest editions on time.”
The luxury sector is counting on Chinese consumers to fuel the recovery after a difficult 2020 when sales contracted by about a fifth to 217 billion euros worldwide, according to Bain.
Comparatively successful virus removal by China and rapid economic recovery – gross domestic product growth has returned to prepandemic levels in the fourth quarter – played a central role in maintaining optimism.
The recovery was initially spurred by ‘revenge shopping’, or indulging after the world’s most populous country emerged from a national lockdown, but has since given way to something more durable.
“There are a lot of wealthy people who have profited from the pandemic because they work in high growth industries or own performing stocks,” said a Beijing-based European brand employee. High-end jewelry, the person added, “was selling like crazy.”
The pandemic has also accelerated the changes underway in the Chinese luxury market, such as the expansion of e-commerce, lower import duties, and tightening controls on the gray market through Daigou, professional buyers who purchase overseas watches, jewelry, clothing and cosmetics on behalf of mainland China. Brands had already started to narrow the price gap that had made products sold in China more expensive than those stocked in Europe or the United States.
These trends have prompted luxury brands to invest more in China.
A report from analysts at Jefferies found that only Louis Vuitton, Burberry and Gucci had stores in China’s 25 largest cities, suggesting others may need to expand their footprint.
Planting a flag in Hainan could be an effective way to promote awareness 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 is experiencing high demand.
Beauty and cosmetics make up nearly half of all duty-free sales in Hainan, according to Bernstein Research, while luxury goods account for around one-third of sales. But the latter are growing rapidly with the number of luxury brands on the island rising 80% over the past six years. “We expect more to come,” Bernstein analysts wrote.
Chen Xin, analyst at UBS, said Hainan’s duty-free sales more than doubled in 2020 from the previous year to Rmb 30 billion, and forecast a compound annual growth rate of 40%. from 2019 to 25.
Policy changes to expand duty-free shopping on the island have also supported this growth.
Last year, the Chinese government tripled the amount consumers could purchase duty-free in Hainan each year to 100,000 Rmb and removed a cap of 8,000 Rmb for a single item. It also issued three licenses to companies to operate duty-free shops, a significant increase from the seven licenses that had previously been granted since the 1980s.
But some luxury brands were reluctant to bet too much on Hainan, as they could only sell there through wholesale deals with state-backed companies and couldn’t open their own stores. This gives brands less control over pricing and the customer experience.
Others fear the island may be abused by Daigou.
“We believe that the development of Hainan is positive but we must remain cautious and work together to ensure that it does not become a gray market hub in China,” said Jean Jacques Guiony, chief financial officer of LVMH, on largest luxury group in the world. .
“If consumers come to Hainan and come to our stores, we are ready to serve them. But if it’s about buying wholesale and then selling to middlemen, then no. “
Despite these concerns, LVMH has expanded its business to Hainan through DFS, its Travel Retail division. The company has partnered with Shenzhen Duty Free Group on a duty-free mall called Haikou Mission Hills, located in a popular resort town. It opened in January but will be expanded over the next two years to reach more than 30,000 m² of retail space.
Such destinations could help ease the crowds Sharron Zhou, a 35-year-old marketing manager from Shanghai, met on her trip to Hainan in the Lunar New Year. She was so disheartened that she didn’t buy anything. “You couldn’t find any vendors. . . People were walking on my feet, ”she said.
Additional reporting by Xueqiao Wang in Shanghai, Sun Yu in Beijing and Alice Woodhouse in Hong Kong