By Jonathan Yan and Laurent Doucet

Hainan travel retail has recently attracted much attention due to phenomenal growth. Meanwhile, most brands in Hainan adopt the DFO (duty-free operator) wholesale model, relying on DFOs to manage retail activities. This shows risks of inconsistent consumer experience, with negative consequences on brand equity and sales cannibalization. For brands to capitalize on Hainan's boom, a managed DFO wholesale model, governance structure optimization, and retailization are key levers to consider.

Policy relaxation and Covid-19 steering the boom

The Hainan travel retail market has recently experienced phenomenal growth compared to its counterparts. This growing momentum has been propelled by the relaxation of government policies to boost domestic consumption and repatriate overseas shopping. In addition, Covid-19 has restricted the outbound flow of Chinese tourists and consequently their overseas spending to the benefit of domestic destinations such as Hainan.

DFO (duty-free operator) wholesale model now most commonly in use but with potential risks

In the meantime, a majority of brands in Hainan are adopting the DFO (duty-free operator) wholesale model, relying on duty-free operators to run the multi-brand and mono-brand stores and manage most local retail activities. This model has traditionally been effective in driving volume and sales, but also shows potential risks in the delivery of consumer experiences arising from a lack of control over consumer engagement and retail operations, generating disparity in pricing with possible negative consequences on brand equity and sales cannibalization in the domestic market.

A managed DFO wholesale model

Brands could adopt a managed DFO wholesale model, facilitating more coherent efforts between DFOs and brands to bring consistent customer service and experience and to minimize the current risks of the DFO wholesale model.

Adopting the right governance model

On top of this, brands could optimize the governance structure, facilitating communication and collaboration between the HQ team, Travel Retail team and the China domestic team to ensure the effective management of overall business and a new operating model.

Retailization: Building the foundation for setting up directly owned stores

Going forward, to prepare for Hainan’s complete transformation into a free trade port in 2025, brands should start strategy formulation and mobilization of resources for retailization, beginning the set-up of a dedicated subsidiary and the development of directly owned duty-free stores.