One of the world’s biggest mega-malls is worryingly empty

On a recent Thursday afternoon, the Haikou International Duty Free City, a sprawling mega-mall on China’s southern island province of Hainan, is worryingly empty. A few families meander through the cavernous building. Without customers to attend to, sales attendants chat to pass the time. Other than your correspondent, a burger-and-shake joint was completely devoid of patrons.

These are troubling scenes for China Duty Free (CDF), the state-owned luxury-shopping giant that opened the mall in 2022 and has a virtual monopoly over tax-free sales in the country. An abrupt slowdown in high-end shopping was apparent in the company’s most recent earnings report. On March 28th it said that revenues for 2024 fell by 16% and profits by 36%.

Such bleak results were not foreseen a few years ago. CDF launched the 280,000 square-metre Haikou mall, one of the biggest in the world, shortly after it had overtaken competitors such as Dufry, a Swiss firm, to become the world’s largest duty-free group by sales. Revenue from China’s travel-retail business, which includes airport shopping, was expected to triple to 280bn yuan ($39bn) between 2021 and 2025. Some luxury brands were notching up 70% leaps in sales in 2021. LVMH, a French luxury giant, credited China for much of its rapid growth that year. Peppy news such as this helped CDF raise $2bn in its Hong Kong flotation in 2022.

Part of the secret of CDF’s success was a state plan to repatriate the country’s unquenchable appetite for European handbags and South Korean cosmetics. For many years most Chinese luxury spending was done in places such as Paris and Seoul. The Chinese government had long hoped to bring that spending within its borders and under its control. In order to convince Chinese shoppers to spend more at home, Hainan was designated as a duty-free zone in 2011. It now offers consumers 100,000 yuan of tax-free spending a year on luxury goods purchased in CDF malls.

These efforts succeeded during the covid-19 pandemic because most Chinese people were trapped within the country. Those who travelled overseas faced quarantine on their return. Hainan, with its seaside resort of Sanya, became a top spot for shopping. The results were so promising that in 2021 industry analysts believed China would become the world’s largest luxury-retail destination by the end of 2025.

Those predictions have proved wildly optimistic for a few reasons. The end of the pandemic freed Chinese shoppers to spend their money overseas. And China’s economy is in a funk. A property crisis has rattled sentiment and dampened consumer spending. Luxury firms have been some of the hardest hit: just 5% of them were able to eke out revenue growth in the first ten months of 2024, according to Bain & Company, a consulting firm. Luxury spending probably fell by 18-20% last year. Chinese sales for Burberry, a British fashion group, fell by 7% in the quarter ending in December.

Another problem for CDF is that Chinese tastes are changing. Locals are buying more local luxury goods, whose quality has improved in recent years, taking some of the shine off flashy foreign brands. Laopu, a Chinese jeweller, increased its net profit by over 200% last year despite the soured sentiment. Chinese people are also splurging on experiences instead of goods. During the lunar new year holiday in January they spent 12% more on services than the year before and over 80% more on leisure. This is a problem for CDF and Hainan, which has been positioned as a shopping paradise. The number of shoppers on Hainan island during the holiday fell by 19%.

This is no bad thing for Chinese people, who appear to be spending more time outdoors than in mega-malls. But the outlook for China’s state luxury giant is gloomy. Its share price has fallen by more than 80% in the past two years. It has been overtaken by Dufry, the Swiss firm, in terms of sales. Bain & Company reckons luxury sales in the country this year will stay flat at best. That means China is unlikely to become the world’s largest luxury market this year—or anytime soon. ■

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