State-owned travel enterprise looks toward Southeast Asian markets

China International Travel Service Group Co Ltd is accelerating moves to expand its duty-free shop business overseas, part of its drive to transform itself from a traditional State-owned tourism enterprise.

"We are seeking opportunities to open duty-free shops in Southeast Asian markets like Cambodia to expand our global presence," Zhang Bin, general manager in the strategy department of the CITS Group, told China Daily.

In July, subsidiary China Duty Free Group Co Ltd signed a cooperation agreement with Beijing Huachao Investment Co for a duty-free shop project in Cambodia.

Zhang said that the CITS Group's first overseas duty-free shop will open within the next three years. The overseas expansion is part of the group's strategy for coping with a more competitive environment and finding new profit drivers.

The CITS Group will also step up activity in the field of resort management, building on its cumulative tourism advantages.

CITS Group had its origins in the China International Travel Service Ltd. In 2004, it restructured and took over China Duty Free Group.

The move made the organization into a wide-ranging tourism business that includes travel agencies, goods retailing and resort development. Now, it's seeking even further expansion and diversification.

Last year, China Duty Free Group and the world's third-largest cruise company, Star Cruises (part of the Genting Hong Kong Ltd cruise and resort holding company) reached an agreement making China Duty Free Group the sole supplier and operator of all duty-free shops on luxury Star cruises.

"Our staff are also doing market research into the China (Shanghai) Pilot Free Trade Zone, where we plan to open duty-free shops," Zhang said.

China Duty Free Group is one of the world's top 15 duty-free operators.

Over the past five years, its earnings have increased by an average of 18.7 percent annually, surpassing the global average for the duty-free industry. Last year, revenue stood at 5.14 billion yuan ($841.6 million), up almost 33.2 percent year on year.

"The company is upgrading from the traditional duty-free sector to a travel retailer based on nationwide retail and logistics networks. Developing from a tax-free goods distributor to China's largest luxury goods operator, China Duty-Free Group has been pursuing diversified business development," the company said.

According to the 2013 China Duty-free Report from the Fortune Character Institute, Chinese consumers buy luxury goods at a broad range of domestic stores, overseas stores and duty-free shops. Among the three, duty-free shops are the first choice of consumers.

The duty-free market in China was worth about 16.8 billion yuan last year, and the market will surpass 30 billion yuan by 2015, the institute said.

"The duty-free business is already driving and contributing much to the revenue growth of the entire CITS Group," Xiang Kairun, a travel industry analyst, said.

Financial statements of the CITS Group show that for the first half, revenue from goods sales was up 27.3 percent to 3.33 billion yuan. The gross profit margin was 45.3 percent for the same period. Revenue from the travel sector was up 10.7 percent to 4.43 billion yuan.

"Duty-free shops are becoming one of the core business sectors for CITS," Zhang said.

With investment from the CITS Group, the world's biggest duty-free shopping center, occupying 82,250 square meters, is under construction in Sanya, Hainan province.

The project, called the Sanya Haitangwan international shopping center, will be a full-service mall with commercial, catering and entertainment facilities.

Gai Zhixin, chairman of the CITS Group, said that the Haitangwan shopping center is a high-quality, sustainable core project for the CITS Group.

The project will improve the scale of the group's assets and revenues, establishing a foundation for further development of urban complexes based on duty-free facilities.

In the future, the CITS Group may even get involved in the air transportation market to build a full industry chain, according to Gai.