(Yicai Global) April 18 -- The Chinese island getaway of Hainan, which has been transforming itself into a duty-free shopping hub, is facing stiff competition now that the country has lifted its zero-Covid policy and more travelers head offshore to do their shopping at more mature duty-free markets in places such as South Korea and Hong Kong.

Some 71 percent of Chinese buyers of luxury goods said they would join overseas tours once travel restrictions are lifted, according to a survey conducted by UK professional services firm KPMG and Digital Luxury Group, an online agency for luxury brands, early this year.

In the first quarter, Hainan’s duty-free stores logged a 29 percent jump in sales from the same period last year to CNY20.3 billion (USD2.9 billion). The southern province welcomed 26.8 million tourists, an increase of 20.2 percent, while tourism-related revenue surged 25 percent to CNY53 billion (USD7.7 billion).

However, Hainan faces stiff competition from South Korea, the world’s largest market for duty-free products which is two-and-a-half times that of Hainan. Last year, South Korea’s duty-free shops logged KRW17.8 trillion (USD13.5 billion) in sales, a return to 70 percent of 2019’s level, according to data from the country’s association of duty-free stores.

And although Hainan offers a good selection of makeup and perfumes, its positioning in luxury brands is far behind that of Hong Kong, market insiders said.

But the situation could soon improve. Hainan is in the process of turning the whole island into a duty-free zone, which means luxury labels will not have to work with retailers with duty-free licences, but will be able to sell their goods at tax-free prices through a direct sales model. The new sales model is likely to come into place before 2025.

“Once the whole province becomes tax exempt, brand operators need to decide whether their business model falls under tourism or under retailing,” said Huang Wenkai, vice president of KPMG China.

In anticipation of the favorable retail conditions, some firms have already started to build a strong presence in Hainan. DFS, a travel retailer of luxury products that falls under the French luxury goods company LVMH’s umbrella, is building the Guanlan Lake Duty-Free Shopping City in Haikou together with Shenzhen State-Owned Duty-Free Goods. DFS plans to open at least four duty-free shops in Haikou, Sanya and other cities. It is even mulling locating its China headquarters in Hainan.

Editors：Shi Yi, Kim Taylor