Is Duty-free Wine Losing Ground in China?

Hainan’s once-thriving offshore duty-free business, which saw a boom during pandemic lockdowns, has slowed sharply in the first half of this year, impacting China Tourism Group Duty Free Corporation Limited (CTG Duty Free).

The company, which has heavily invested in the offshore duty-free market, reported a decline in both revenue and net profit. A Vino Joy News investigation found that sales of premium wines in this channel, which allows consumers to buy duty-free products without leaving the country, are facing pressure from traditional wholesalers and cross-border e-commerce platforms, where prices are more competitive.

CTG Duty Free, the world’s largest travel retail operator, focuses primarily on duty-free sales, offering products including tobacco, alcohol, cosmetics, and luxury goods. The company operates more than 200 duty-free stores and collaborates with over 1,400 global brands. Wines available through its WeChat mini-program include Château Lafite Rothschild, Château Mouton Rothschild, Domaine de la Romanée-Conti, and Cloudy Bay.

In its latest financial report, CTG Duty Free posted total revenue of RMB 31.265 billion(US$4.4 billion) for the first half of 2024, down 12.81% year-on-year. Net profit attributable to shareholders fell 15.07% to RMB 3.282 billion (US$462.6 million). The company’s second-quarter revenue dropped 17.4% to RMB 12.46 billion (US$1.75 billion), while net profit slumped 37.6% to RMB 976 million (US$137.5 million).

The downturn has been attributed to weak sales in Hainan’s offshore duty-free sector. According to Haikou Customs, offshore duty-free sales from January to June 2024 reached RMB 18.46 billion, down 29.9% year-on-year. The number of shoppers dropped 10% to 3.361 million. This has weighed heavily on CTG Duty Free’s operations in Hainan, where the company recorded RMB 16.785 billion in revenue, accounting for 53% of its total income.

Hainan’s offshore duty-free policy, introduced in 2011, allows travelers leaving the island by plane to purchase goods exempt from import duties. In 2020, alcoholic beverages were added to the list of duty-free items. CTG Duty Free operates six offshore duty-free stores in Hainan, with this business being a key part of its operations.

CTG Duty Free’s sales peaked in 2021, with its Sanya downtown duty-free store reporting RMB 18.53 billion in revenue during the first half of that year. This surge was driven by domestic demand for travel and luxury goods during pandemic lockdowns, which was funneled into Hainan’s duty-free market. However, with the end of lockdowns in late 2022 and the gradual return of outbound travel, offshore duty-free sales have been diverted.

Despite introducing over 300 wine brands and more than 1,000 SKUs in Hainan, CTG Duty Free has not released specific wine sales figures. However, an importer familiar with cross-border e-commerce and duty-free channels said the decline in wine sales through this channel is expected, as many products lack competitive pricing.

“The offshore duty-free channel in Hainan faces competition from multiple sources. It’s not just the resumption of outbound travel; China’s high-end wine market has been sluggish, with many estates offering discounts or even price reversals since last year,” the importer said. “Cross-border e-commerce, which also exempts duties and taxes, offers a 30% discount and has a lower barrier to entry. Many wine merchants are competing on price, and these purchases can be conveniently made via mobile phones.”

Cross-border e-commerce refers to China’s tax policies on consumers purchasing goods through e-commerce from overseas or bonded zones. Consumers can purchase up to RMB 5,000 for a single purchase or accumulated annual limit of RMB 26,000 of goods through this method and enjoy tax exemptions, with VAT and consumption tax at 70% of the standard rates, but based on retail price.

For example, a bottle of Cloudy Bay, one of China’s best-known but heavily discounted white wines in recent years, is priced at RMB 199 (US$28.05) on Alibaba’s cross-border platform Tmall Global, compared to RMB 285 (US$40.18) in CTG Duty Free’s stores. Similarly, Seña 2017 wine costs RMB 955 per bottle at CTG Duty Free but only RMB 779 on Tmall Global.

“The high entry cost for offshore duty-free stores and the need for consumers to fly to Hainan make it inconvenient,” the importer added. “Given the current sluggish wine consumption and the lack of price competitiveness, the decline in sales is not surprising.”