US resident in Beijing Bob Goffman complains that the city's duty-free shops are somewhat lackluster to him.

"I will not visit duty-free shops because I have frequent travel opportunities and can shop at stores in Singapore or Hong Kong," he said.

Goffman complained of the limited selection of products in China's duty free shops.

"The shops do not offer the latest products from major brands. They always offer tea and silk. I like them, but I cannot buy them all the time," he said.

As China opens up, the nation's duty-free shops have lost their previous allure.

China's duty-free products were very popular in the 1980s, when products such as home electrical appliances were in short supply.

Li Mingde, a professor from the Tourism Research Center under the Chinese Academy of Social Sciences, said that people would pay hundreds of yuan for quotas of duty-free TVs and washing machines.

"But the business is lackluster because China's duty-free shops are short of product varieties and brands because the business is not keeping pace with the country's opening-up," said Li.

"Its price advantages are reducing as import tariffs keep declining after China's entry to the World Trade Organization," Li said.

Business at the country's biggest duty-free store in Shanghai, the city's only downtown duty-free shop, has been lukewarm since its opening in November 2001.

The store was also dealt heavy blows by last year's SARS (severe acute respiratory syndrome) and this year's bird flu outbreaks, an official from the store said.

"About 95 per cent of our customers are Japanese and SARS and bird flu had an impact on their shopping habits," said Wu Yun, an official at the store, which sells more than 10,000 types of goods ranging from luxury fashions to Chinese wine.

Wu said the store's sales fell by 50 per cent last year to US$3 million as a result of the SARS outbreak.

"Sales for the first quarter of this year are still slow. We will use various promotions and try to contact more tourist groups in Japan and South Korea to attract more visitors," she said.

But the China Duty-Free Group, the only organization authorized to operate duty-free shops on the Chinese mainland, maintains that the business still has a bright future.

The group currently operates a network of 153 duty-free shops in 90 cities and border regions in 24 provinces, municipalities and autonomous regions.

The group's general manager, Gai Zhixin, said duty-free shops had been hit hard last year by the SARS outbreak.

Growing numbers of foreign tourists visiting China will ensure that duty-free shops have a bright future, Gai said.

The World Tourism Organization predicted that the number of overseas tourists coming to China would increase annually by 8 per cent every year from 2002 to 2020, ensuring the development of China's duty-free products market.

Its report suggested that China will replace France as the world's largest tourist destination by 2020. By that time, 137 million overseas visitors are expected to have spent time in the country.

More than 100 million Chinese will travel or do business overseas, bringing the nation's duty-free business another major group of consumers, Gai said.

Growing numbers of tourists to China have ensured the average growth rate of China's duty-free products market has exceeded 8 per cent from 1995 till now, much higher than the global average of 3 per cent.

The majority of shoppers came from Japan, South Korea, Russia, the United States, Malaysia, Singapore, the Philippines, Mongolia, Thailand and the United Kingdom.

Sales of duty-free products in China reached US$300 million in 2002, according to Gai. But he declined to give the 2003 figure because the business was heavily affected by last year's SARS outbreak.

The group has been one of the world's top 20 dealers in duty-free products.

Gai said the group is undergoing its most drastic reform since it was set up in 1984, in order to forge a closer relationship with the tourism industry.

The group was recently merged with the China International Travel Service (CITS), the nation's flagship tourism company.

The group's business scope will continue to expand following the merger. The group's management team will not only continue to remain stable, but play a greater role in the future, Gai said.

But Gai admitted that, as China lowers its import tariffs, the group will face the increased risk of losing some of its conventional customers.

"We will improve our services," Gai pledged.

He said that, in a bid to attract more customers, the group will try to increase the variety of products available.

Many world famous enterprises and companies have shown great interest in co-operating with the group, Gai said.

As the growth of the duty-free business in China is far greater than the global average, the Chinese duty-free products market is becoming increasingly attractive to international companies in the field, Gai said.

Gai also added that more shops will open to ensure that "all places frequented by foreigners are covered."

Most of the new shops will be located in downtown areas, he said.

China now has three downtown duty-free shops in Beijing, Shanghai and Dalian, with the Dalian store opening last September.

"Xiamen and Qingdao will be the next destinations," Gai said.

Compared with duty-free shops at entry-exit ports, downtown duty-free shops offer more variety and a greater floor space.

The sale of duty-free goods will hardly be able to make any major advances if it relies solely on outlets at international airports, open harbours and border trading ports, where there are a shortage of business sites and a limited variety of goods on sales and where international travellers only stay for a short while in the shops after customs clearance.

Downtown duty-free stores permit foreigners and Chinese living overseas or outwith the mainland to buy goods.

Local residents who hold long-term visas for more than a year and show air tickets are also allowed to buy goods there.

Prices are 10 to 30 per cent lower than in normal stores.

But Professor Li said more increased variety and increased space is not enough to ensure a bright future for China's duty-free business.

"The business should improve its services and advertise more, encouraging tourists to shop until they board," he said.

An international warranty is included with the purchase of many products sold at airports in other countries, giving flyers the chance to change their mind post-purchase.

"If something goes wrong, you can go to a dealer where you stay, there is also a 30-day money back guarantee," Li said.

But China's duty-free shops do not offer such a service.

And shops set up in airports should find ways to solve the problem of overseas tourists' short stay at the airport.

They can send out brochures advertising the products or provide door-to-door services, Li suggested.

Schiphol Airport in the Netherlands, which has a reputation as a traveler’s shopping mall, even has a website where you can preview duty-free purchases.

The turnover of China's duty-free markets is smaller despite the large amount of tourists, Li said.

In terms of retail turnover, the top five airport duty-free zones in the world are London, Singapore, Amsterdam, Paris and Dubai.

The Dubai Duty-Free Shop enjoyed record sales of US$380 million in 2003, higher than the total turnover of China's more than 150 duty free shops.

Li also proposed that duty-free shops should add more Chinese-made goods.

"The shops should provide products with Chinese characteristics," Li said.

Chinese products currently account for 15 per cent of the total sales volume of China's duty-free shops, which are mostly tea, silk and foodstuffs.

"China now has strong manufacturing capacity in electronics and textiles. They are good choices for these shops, since they do not have the advantages of foreign-branded products," Li said.

Some also suggested that the China Duty Free Group should co-operate with foreign operators to learn from their business models.

China did not promise to open the sector to overseas companies during its negotiations to join the World Trade Organization (WTO).

The duty-free business is regarded by many WTO members as a specialized retail business. Therefore, the business is run like a monopoly, said Zhang Hanlin, a professor at the University of International Business and Economics.

Duty-free shops should expand and improve their management and efficiency, but they should not be eager to seek overseas partners to share their profits with them, Zhang said.

(China Daily July 13, 2004)