Silvia Aloisi, Mimosa Spencer, Sophie Yu

BEIJING/PARIS, (Reuters) – Louis Vuitton may open its first duty-free store in China in the new luxury island of Hainan. This would be a bold move for the luxury brand that is the largest in the world.

The brand, which is the main profit engine of French luxury giant LVMH, is known for maintaining an iron grip on distribution  and famously never offering discounts on its leather monogrammed bags.

Sources said that executives were still looking into the possibility of opening an office in Sanya’s Haitang Bay Shopping Centre, via an agreement with China Duty Free Group.

A person familiar with the event said that brand executives unveiled their plan to help Louis Vuitton capitalize on Chinese buyers’ pent-up demand.

Louis Vuitton refused to answer a question about the plans to open a Hainan duty-free shop. This city has been a popular shopping spot for high-end goods since COVID-19, when many Chinese were unable to travel overseas. China Duty Free Group (the largest duty-free operator in China) did not respond to our request for comment.

Some European and U.S. brands including Kering-owned Gucci and Ferragamo – both of which are highly exposed to travel retail compared to peers – sell products in the shopping centre, and there are signs of growing interest from high-end watch and jewellery labels.

LVMH’s more well-known fashion and leather brands such as Dior aren’t present in Hainan, except for selling their cosmetics and perfumes. The island’s Louis Vuitton duty-free shop would be among a few such outlets for the brand worldwide.

Global duty free was worth $86 Billion in 2019 before the pandemic, which brought it down to $45 Billion in 2020. Generation Research is a provider for statistics about travel retail, duty free shopping, and other stats.

According to Bernstein analysts, international travel restrictions have led to spending being quickly repatriated to China. The Chinese government wants to maintain this trend, Bernstein says.

China’s government doubled the amount consumers were allowed to buy in Hainan duty-free, from 100,000 Yuan ($15.635) annually, and raised certain purchasing limits.

Pandemic caused disruptions in international transport which hurt grey market. “Daigou” are professional buyers who purchase high-end goods abroad for mainland Chinese.

The duty free sales have increased fivefold in Hainan compared with pre-pandemic levels. A government target of sales of 700 millions yuan by 2030 would indicate an annual growth of 37%. Bernstein analysts agree.

According to them, “International travel will be back but strong companies presence in Hainan is going to become crucial.”

A foothold in Hainan allows luxury brands to reach a wider customer base. Louis Vuitton, like its competitors, is wary about discounting, as this can reduce the exclusivity of their products and create a grey market for their handbags or clothes if they are more affordable in certain places.

Jean-Jacques Guiony, chief of finance at LVMH Finance told analysts during an October earnings presentation that “as long as [we are] talking to real clients, end customers and not to daigou…we are okay with doing business here in Hainan.”

He stated, “If Hainan turns into a hub to daigou. that will be another story.”

Bruno Lannes is a Shanghai-based partner in the consultancy Bain’s retail and consumer practice. He said that luxury products at lower prices would not harm a brand’s image.

According to “When you return to the original definition luxury, it is exclusive and excludes consumers. That’s the problem.” ($1 =6.39 Yuan).