Duty-free haven: Can beauty expect long-term growth in Hainan when international travel resumes post-COVID?

The popular holiday spot was one of the few tourist destinations in the world that got back in the swing of things early on. The boom was further amplified when the government increased non-taxable allowance from RMB30,000 to RMB100,000 (U$15,000) last July.

Hainan quickly became the lightning rod for luxury brands, several of whom made it a priority to lessen the blow to their travel retail businesses.

According to McKinsey & Company, beauty accounted for roughly half of all Hainan duty-free sales in 2020.

Kao Corporation, which peddles luxury beauty brands SENSAI and Kanebo, announced plans to rapidly build its presence in the Chinese’ travel retail market, starting with its first sales counter in Hainan.

The company told CosmeticsDesign-Asia​ earlier year that the plan was to open 20 more doors​ on the back of its launch in Hainan.

Fellow Japanese company Pola Orbis Holdings, owner of luxury brand POLA, doubled down on efforts to gain share in the Chinese travel retail market, even planting an outpost in Hong Kong​ to manage it at the beginning of the year.

After making its debut in Hainan​, POLA sales in China surged by 96% year on year​. The Japanese cosmetics firm said it was planning to open five more doors in Hainan by the end of 2021.

Kao and Pola Orbis are not the only ones. In fact, most major beauty companies have been enamoured with Hainan. Nicolas Hieronimus, CEO of L’Oréal Group, likened Hainan to Hong Kong for Chinese travellers.

“It’s a place where the brands are really showcased in the most spectacular manner… it’s similar to what Hong Kong used to be for Chinese travellers… It’s a great place to showcase the quality of our brands. Besides gaining share in Hainan, we’ve run a few spectacular operations to showcase our brands like Yves Saint Laurent, Armani and Lancôme, which are doing fantastic there.”​

Is this a case of companies seizing the opportunity to make money where and when they can in these uncertain times, or is Hainan Island the new travel retail epicentre?

“We expect Hainan to continue to grow in the future, and we expect Hainan success to be relatively independent from the come back to international travel,” ​said Fabrizio Freda, CEO of The Estée Lauder Companies.

Freda’s confidence in Hainan boils down to a simple matter – the number of Chinese passport holders.

According to the latest data by the National Immigration Authority, only around 13% of Chinese citizens held passports in 2019.

“Assume that only a percentage of those consumers with a passport travel internationally in a given year, you immediately see that the international travel is going to create consumption that is a certain percentage of the Chinese population,” ​Freda explained.

“Hainan is domestic travel – so it's open to 100% of the Chinese middle-class that wants to travel and is travelling as we speak. So, the Hainan phenomenon basically goes well beyond international travel, because it's domestic travel and appeals 100% to the population. We believe that Hainan is here to stay and is a great opportunity for the long-term that will continue to grow even when international travel will restart.”​

And travel to Hainan they will. According to McKinsey & Company, Hainan is likely to play an increasingly significant role in capturing Chinese luxury spending even as international borders reopen.

Based on a survey conducted by it in June, 62% of Hainan travellers are likely to return to the island even after international travel is normalised.

The data also showed that these shoppers are willing to spend more during future visits, with 41% saying they planned to increase their spend on their next trip, compared to 12% who said they would likely decrease their spending.