China Duty Free's luxury empire hits rough patch amid economic slowdown

The Economist reveals in a fresh article that once a bustling hub for luxury shopping, the Haikou International Duty Free City in China's Hainan now stands eerily quiet, with empty aisles and vacant restaurants.

This dramatic shift signals troubling times for China Duty Free (CDF), the country’s state-owned retail giant, as a once-booming luxury market falters under the weight of economic struggles and changing consumer habits.

A few families wandered the vast space, while sales attendants passed the time chatting with no customers to serve. A burger-and-shake restaurant stood empty, aside from the reporter.

This scene is a concerning one for China Duty Free (CDF), the state-owned luxury retail giant that opened the mall in 2022 and holds a near monopoly on tax-free shopping in China. The company’s latest earnings report, released on March 28, revealed a 16 per cent drop in revenues and a 36 per cent decline in profits for 2024, signaling a significant slowdown in high-end shopping.

Just a few years ago, such results seemed unlikely. After surpassing competitors like Swiss firm Dufry, CDF launched the enormous 280,000 square-meter Haikou mall with high hopes. At the time, the Chinese travel-retail market, including airport shopping, was expected to grow rapidly, with projections indicating a tripling of revenue to 280 billion yuan ($39 billion) by 2025. Some luxury brands even reported sales surges of 70 per cent in 2021, with LVMH attributing much of its growth to China. This optimistic outlook helped CDF raise $2 billion in a Hong Kong IPO in 2022.

CDF’s success was partly driven by a government initiative to capture China’s luxury spending, which had previously flowed abroad. In 2011, Hainan was designated as a duty-free zone, allowing shoppers to spend up to 100,000 yuan annually on tax-free luxury goods.

During the COVID-19 pandemic, with many Chinese confined to the country, Hainan became a popular shopping destination. However, as the pandemic ended, Chinese shoppers returned to international markets, and China’s economic downturn has dampened consumer confidence. According to Bain & Company, luxury sales in the country dropped by 18-20 per cent last year, with only 5 per cent of luxury brands seeing growth in 2024.

Additionally, Chinese consumers are increasingly favoring local luxury goods over foreign brands, while also spending more on experiences. During the Lunar New Year, spending on services and leisure rose significantly, a trend that poses a challenge for CDF, which had positioned Hainan as a shopping paradise. Visitor numbers during the holiday fell by 19 per cent.

As consumer habits shift and the economy struggles, the outlook for China Duty Free is grim. Its stock price has dropped by over 80 per cent in the past two years, and it has been overtaken by Dufry in sales. Experts predict that luxury sales in China will remain flat this year, dashing hopes of the country becoming the world’s largest luxury market anytime soon.

By Naila Huseynova