Impact of New Hainan FTZ to Daigou Market in the Greater Bay Area
Jun 04, 2021
China recently announced its ambitious plan to turn Hainan, its most populous island, covering an area only slightly smaller than Taiwan, and home to more than 9 million people, into a new free trade port. Starting from July 1, 2020, Hainan offers duty-free for most goods and commodities, lower income tax, and relaxed visa requirements for foreign tourists and professionals. The new Hainan Free Trade Zone will cover the whole Hainan island. Its duty-free policy will cover more products, giving individual consumers higher purchase limits, more duty-free beauty products per purchase, and even local Hainan residents are allowed to purchase duty-free products.
These are by no means small changes. Many ask whether it will have a huge impact on China’s daigou market, especially the daigou market based in the Greater Bay Area, which frequently purchases duty-free beauty products from HK. As per our initial analysis, we don’t think Hainan FTZ will disrupt the status of HK as the purchase destination for daigou in GBA in the long term. Here follows are our perspective on this issue.
Key changes of rules:
Firstly, let’s take a closer look at the key changes related to consumers brought by the new Hainan FTZ after July 1, 2020 (figure 1). The most significant difference is that the limit on the total purchase value of duty-free products has been lifted from 30,000RMB per person per year to 100,000RMB per person per year. For beauty products, the limit on maximum 12 items per person per purchase now increased to 30 items per person per purchase. And the new FTZ allows all visitors older than 16-year-old and expands to all local Hainan residents, who were not allowed before. Regarding the detailed duty-free policy, the change is mainly on prestigious beauty products (priced higher than 10RMB/mil). The new Hainan FTZ offers zero consumption tax on top of zero custom duty and VAT. This gives consumers of prestigious beauty products an extra 15% consumption tax saving. While for mass beauty products, there’s no change in terms of duty-free policy.
Above all, Hainan FTZ is open to all Chinese citizens who only need a Chinese ID card and freight ticket to enjoy the duty-free benefits. This is an advantage compared with other traditional daigou destination markets overseas like Korea, Japan, Southeast Asia, and even Hong Kong, especially during the Covid-19 pandemic. It offers a new choice for all the Chinese daigou shoppers affected by border control and travel ban.
The new Hainan FTZ’s purchase channels are still limited to four DFS (Duty-Free Shop) in Hainan. There may be new duty-free outlets to be approved and opened in the future, but the process is not clear yet. So at the current stage, customers can only purchase duty-free beauty products in Meilan Airport Duty-Free Shop and Riyue Square Duty-Free Shop in Haikou, Qionghai Bo Ao Duty-Free Shop in Bo Ao, and Haitang Bay Duty-Free Shop in Sanya. After the new FTZ regulations were effective from July 1, 2020, these four DFS achieved total RMB2.5 billion sales value in one month, a 240% increase compared with the same period last year. Average spending per visitor reached RMB5,527, an 82% increase compared with the same period the previous year.
Implications to Daigou market:
From day one, the new Hainan FTZ officially banned daigou activities. Anyone who purchases duty-free products to earn a profit outside Hainan will be prohibited from purchasing for three years. However, the actual supervision system has not been fully established, and it’s pretty vague to judge between buying for friends and business. Like all the other daigou markets, Hainan is still a grey area where there’s room for daigou to work around the regulations.
The most significant impact Hainan FTZ brought to Daigou shoppers who used to travel to Southeast Asia countries to purchase beauty products. They will most probably switch to Hainan due to cheaper flights, easier access, and a higher profit margin offered by the new FTZ. In the long run, Hainan will eventually replace SEA as a key daigou destination.
We also witnessed that many daigou shoppers who used to focus on Korea/Japan market started to sell Hainan DFS products. But we believe this might only be a short-term phenomenon mainly driven by the travel restrictions during Covid-19. Since Korea’s DFS eco-system is more established and convenient for daigou shoppers based in northern China.
The major change in consumption tax on prestigious beauty products may be a stimulus to daigou shoppers. This means a 15% profit margin increase, making Hainan more competitive in high-end cosmetic products price. But the question is whether this 15% can justify the travelling cost to Hainan for daigou shoppers based in a region far away from Hainan is still a question mark.
For the first time, local Hainan residents can enjoy the same duty-free benefits as visitors after the new FTZ launch. This might recruit some residents to join the daigou shopper group. But risks and uncertainty remain since the government will have stricter censorship on products couriered or posted outside Hainan. And for normal Hainan residents to establish a customer network in the short term would be difficult. Therefore, we might still need some more time to draw a clear conclusion.
Future impact on HK market:
Overall speaking, the Hainan FTZ wouldn’t have a massive impact on the current status of the Hong Kong market. The key reason is that the Hong Kong market is mostly driven by consumers and daigou shoppers based in the GBA. Here follows our analysis of the future impact on four key customer groups in the GBA.
This group of consumers visits Hong Kong for leisure and work/study every year. They buy beauty products according to real-life needs. Hainan FTZ is a far-fetched shopping choice to them and won’t change their shopping habit in HK.
Heavy users of daigou channels:
This group of consumers frequently use daigou channels to buy beauty products from HK. The duty-free shops in the GBA have launched a mini-program that can offer a direct online purchase experience and delivery service. This approach will be a more direct and potential threat to Hong Kong retail market compared with Hainan FTZ.
Grassroots/mid-tier daigou shoppers:
Professional daigou shoppers in GBA are super cost-conscious. Travelling cost to Hainan is too high to be justified in their business model. HK is still the most convenient and cost-efficient destination for their business.
Large-scale daigou traders:
This might be the only group that will potentially be influenced by Hainan FTZ. The launch of Hainan FTZ actually offers a new entry for imported goods. This will diversify large-scale traders’ product import channels. In the near future, Hainan might become a emerging choice for some traders who used to focus their stock in HK.
In conclusion, the new Hainan FTZ launch brings significant changes to both consumers and daigou shoppers. But for daigou business practitioners based in the Greater Bay Area, Hong Kong will remain the core purchase destination for beauty products.