Frost & Sullivan: Hainan's customs closure boosts tax-free market growth, but companies face intensified competition and need to seek differentiation

Once Hainan closes its customs, the entire island becomes an "inside-outside" area, implementing "one line open, two lines controlled, free within the island," allowing residents on Hainan to enjoy preferential policies such as zero tariffs. After the closure, a "zero tariff" policy will be implemented, allowing more imported goods to enter Hainan tax-free, potentially enriching the variety and brands of tax-free goods, and increasing consumer choices. At the same time, the current annual limit of 100,000 yuan per person for island tax-free shopping is expected to be further increased, and residents with Hainan household registration may not be limited by the quota. Human flow, logistics, and capital flow will further converge in the Hainan Free Trade Port, with a large number of enterprises expected to settle in Hainan, increasing the number of business travelers, and potentially further enhancing local tax-free consumption. Both island tax-free and in-island tax-free businesses may see growth.

There are several main reasons. One is the diversion caused by the recovery of outbound travel, which gives consumers more shopping options. Popular tourist destinations such as Japan and Singapore offer rich variety and attractive prices, combined with exchange rate factors, attracting a large number of Chinese tourists shopping; changes in consumer willingness and ability, the current economic environment bringing certain pressure to the public, affecting residents' income, leading to conservative consumption sentiment, and a decrease in purchasing willingness and expenditure for tax-free goods as an optional consumption, preferring more frugal spending; at the same time, factors such as intensified industry competition and e-commerce platform impacts have also had a certain impact on the performance of China National Tourism Group Co., Ltd.

Outbound travel warming up has indeed had a certain impact on Hainan's island tax-free shopping. From January to June 2024, the amount of tax-free shopping on Hainan's islands was 18.46 billion yuan, a year-on-year decrease of 29.9%; the number of tax-free shoppers was 3.361 million person-times, a year-on-year decrease of 10%. During the "May Day" holiday in 2024, Haikou Customs supervised a total of 547 million yuan in tax-free shopping on Hainan's islands, with the first day of May seeing a tax-free sales amount of 115 million yuan, about 34% lower than the same period in 2023. In the first quarter of 2024, the number of Chinese tourists to Japan exceeded 1.1 million people, with a year-on-year growth rate as high as 826.1%.

Market share competition has intensified, and new enterprises, after obtaining licenses, will inevitably strive for market share in the tax-free market. For example, Hainan currently has 6 island tax-free business entities and 12 island tax-free stores, further dividing the market originally occupied by a few enterprises and impacting the market share of traditional tax-free giants such as China National Tourism Group Co., Ltd. Price and service competition is more intense, with each tax-free enterprise likely to engage in price games to attract consumers, such as striving for more favorable procurement prices and launching promotional activities to reduce product prices. At the same time, investment will also be increased in services to improve shopping environments and after-sales service. Competition between brands and product varieties is prominent, with new entrants striving to cooperate with more international and domestic brands to enrich product varieties and meet diverse consumer needs. Competition within the industry for high-quality brand resources has intensified, and whoever can introduce more popular and exclusive brands can gain a more advantageous position in the competition.