Can Hong Kong, as a free trade port and a long entrenched magnet for globe-trotting Chinese mainland tourists, be still looking to hold on to its “shopping paradise” crown when it embarks on the long trek to economic recovery post-COVID-19?
Would an iPhone that’s 1,000 yuan (US$143) cheaper at duty-free shops on Hainan or in mainland cities be tempting enough to rob Hong Kong of its army of big Chinese spenders as mainland retailers shift the spotlight from international to domestic consumption?
In the opinion of industry experts, the answer is “yes and no”.
While the proliferation of duty-free spots on the mainland may dig deeper into the SAR’s retail-market pie, it’s still beneficial to the city’s retailers rather than a zero-sum game, they said.
On one hand, it presents an opportunity for Hong Kong retailers to join in the mainland arena jostle. On the other, it prods them to upgrade the local market toward “retailtainment”, described by US sociology guru and author George Ritzer, who espoused the “McDonaldization” concept, as the use of “ambiance, emotion and activity” to get consumers into the mood to buy.
The real battle for Hong Kong is to ignite fresh retail competitiveness in order to thrive again when the blunting global travel curbs imposed to fight the coronavirus are eventually lifted, putting the world economy on its recovery course.
The spending prowess of mainland consumers is astounding. In 2019 alone, they took home more than 180 billion yuan worth of duty-free goods from overseas, according to China International Capital Corporate. But Guotai Jun’an Securities estimates the mainland’s own duty-free shopping market is poised to rake in profits of up to 17 billion yuan by 2023.
Streamline the policies
As consumption is seen as one of the chief stimulators in a post-COVID-19 rebound, the central government said in March it will streamline duty-free policies to prop up the development of duty-free shopping in downtown areas, particularly in the nation’s top-tier cities. Since then, Beijing, Shanghai, Guangzhou, Shenzhen and even Zhuhai, which borders the casino hub of Macao and is one of the country’s pioneering special economic zones, have rolled out plans to set up more duty-free stores.
Enterprises like retail and travel operators, and even real estate developers, are making a beeline for it, setting their sights on winning a duty-free license. So far, eight duty-free licenses have been granted. The latest license, issued in June, went to Beijing-based Wangfujing Group — a leading department store chain that opened one of the best-known department stores in the nation’s capital in 1955.
The news boosted Wangfujing Group’s share price more than sixfold from April to July.
But there’s apprehension that new duty-free spots are giving the traditional duty-free shopping centers a run for their money.
Chen Tao, an analyst with internet consultancy Analysys, said the southernmost island province of Hainan may be leading the charge.
The sunshine province, dubbed “China’s Hawaii” and “Hawaii of the East”, could grab a piece of the action, although the impact of duty-free shops in the downtown areas is very much limited, he said.
“Many people have a misunderstanding of the two different kinds of duty-free channels,” said Chen, explaining that Hainan’s offshore duty-free policies refer to preferential tax cuts for travelers departing from the island (but not the country) by air, train or ship, but Chinese citizens are allowed to buy goods once in most downtown duty-free shops only if they have a record of traveling abroad in the past 180 days.
In June, the central government unveiled a master plan to transform the whole of Hainan island into a free-trade port, making it one of the country’s largest special economic zones. The move has raised concerns that it would pose a credible threat to regional economic powerhouses like Hong Kong and Singapore.
The theme is to liberalize cross-border flows of trade, investment, capital, personnel and transportation, with broader market access for foreign enterprises, particularly for the telecommunications, tourism and education sectors.
Currently, residents of up to 59 countries and cruise-tour groups are allowed 30-day and 15-day visa-free access respectively to Hainan.
Chen believes Hong Kong traders also stand to gain by playing a key role in the world supply chain for the mainland’s burgeoning duty-free stores.
Zhang Tianbing, head of the APAC Consumer Product and Retail Sector at Deloitte, agreed, saying Hong Kong retailers can also apply for a duty-free license, using the brands and products to set up shops in the designated areas.
Pricing is no major concern
Although travel to Hong Kong is very much restricted at the moment as the pandemic takes its toll, Zhang said he believes the SAR will benefit from the shift in demand back to the domestic market, given its proximity to the mainland.
For Hainan, the retail market has expanded progressively since the individual offshore duty-free quota was raised to 100,000 yuan on July 1. However, many consumers and industry experts believe Hong Kong is still attractive, given its unique charm.
Shenzhen consumer Wang Xiaoyang said she’s still willing to go shopping at duty-free shops in the mainland’s central commercial areas if there are any, but it will not sap her appetite for Hong Kong as the city has plenty of brands, and the goods are more concentrated.
“I’ve been spending the weekends there with my mother since childhood so I’m very familiar with the locations, and it has become a habit that’s difficult to change,” she said, adding that she’s eagerly looking forward to the reopening of cross-boundary travel between Hong Kong and the mainland, which has been reduced to a trickle since the start of the year as the coronavirus reared its head.
In particular, Wang has a penchant for Hong Kong’s eateries and cultural activities, with retail spending a bonus along the way.
Wang Zheng, who hails from Beijing, believes that the mainland’s duty-free shops and Hong Kong’s shopping malls are never in conflict with each other. She prefers going to Hainan for imported cosmetics items, but to Hong Kong for fashionable and trendy items.
In fact, price is not the chief concern for many among the new generation of consumers. Wang Zheng said a product’s unique characteristics matter most to her, either its special design or local features.
“The perceived reliability and authenticity of products marketed and sold in Hong Kong, along with a greater variety of international brands, I think, still outweigh pricing as the key buying factor for mainland tourists,” said Michael Cheng, consumer markets leader of PwC Asia Pacific, Hong Kong and the mainland.
“The price war stirred up by the duty-free wave should not be seen as a zero-sum game, but rather an opportunity for Hong Kong retailers to embrace the change and adapt their business models to refocus on nonprice attributes, such as product quality and authenticity, after-sale services, and user experience,” he said.
When the travel curbs and quarantine measures eventually ease, Cheng expects local retailers to reposition themselves and channel their resources to lure less-price-sensitive but experience-seeking tourists from the mainland.
With the retail price gap narrowing, he suggested that the HKSAR government augment its marketing efforts to promote Hong Kong as the short-haul destination for “retailtainment” and experience-driven retail, aided by improved cross-border transportation and increased integration with neighboring cities in the Bay Area.
