China Duty Free Group (CDF Group) is the dominant

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1 China Duty Free Group s ambitious vision of the future China Duty Free Group (CDF Group) is the dominant force in the fast-developing Chinese duty free industry, and is strongly positioned within the most important emergent market in the global travel retail business. The group manages or operates over 150 shops and is the exclusive supplier to most duty free stores in China, except for some outlets in special economic zones. This powerful state body, founded in 1984, celebrated its 20th anniversary at a gala dinner in Beijing on 20 November. And it had additional cause for celebration, as ten days earlier it had formalised a merger with another powerful state enterprise China International Travel Service (CITS). The new entity, CITS Group Corporation, has become a travel-to-retailing superforce, offering huge potential for CDF Group which will retain its own branded and structural identity to build its operations on the back of an organisation right at the heart of China s travel industry. The man entrusted with running this powerful new body is Gai Zhixin, the long-time President of China Duty Free Group and, since March, President of CITS Group Corporation. A fluent French speaker with wide international experience, Gai is an eloquent and passionate advocate for China and for its duty free and travel industries. Already he has made his presence felt by putting in place a new, strengthened management team at CDF Group. And he has made it clear that he wants the group to truly become a travel retailer of international standing. Plenty has been written about China s duty free industry, much of it ill-informed. In a major interview with The Moodie Report, Mr Gai separates fact from fiction. What will the new CITS Group Corporation structure mean for the duty free industry in China? What is the real impact of China s accession to the World Trade Organization? Will CDF Group retain its long-time stranglehold over the business? What does DFS Group s arrival in the marketplace mean? How is the China Power relationship with King Power progressing? And what are the ramifications of the public flotation, announced in November? These are all key questions that will help shape this fascinating group and the Asia Pacific travel retail industry for years to come. In a major statement of policy and ambition, Mr Gai spoke to The Moodie Report Publisher Martin Moodie and Deputy Editor Hui Min Neo about the new-look organisation and how he sees the industry s future in China. New management [In October China Duty Free Group announced new appointments to its management team. Experienced and respected executive Li Gang, an active force in the highly-successful 2002 China Travel Retail Summit, is now the group s General Manager, with Zhao Feng as his Assistant. The two Deputy General Manager posts are filled by Lu Lu and Chen Jianshan.] 26 The Moodie Report

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3 The Moodie Report: Mr Gai, following the merger between CITS and CDF Group, China Duty Free has named a new, strengthened management team. Can you tell us about them? And, following the merger, what is China Duty Free s initial focus? Gai Zhixin: The new management team for CDF Group has just been created, and the rejuvenation of that team is the most visible characteristic here. These newly-appointed key managers are mostly less than 40 years of age. I believe this will be a vigorous team and I hope that they will quickly demonstrate their strong potential through their work. Working in harmony: Gai Zhixin aims to transform CDF into a world-class retailer The key task of the new management team is to implement the company s development strategy. At the heart of this strategy is a desire to tap CDF Group s advantages as the sole distributor to Chinese duty free, and to fully develop that potential. We want to anchor ourselves firmly as both the leading distributor but also the leading retailer in Chinese travel retail duty free and duty paid. We want to tap the current strengths of our businesses, while actively developing new retail businesses, pushing forward CDF Group s transformation from its traditional role of wholesale distributor to a product supplier and retailer. What are the immediate priorities for the management team? enterprises. CITS was founded in 1954 as a state-run travel agency for international tourists. In the past five decades, CITS has hosted over ten million international travellers, reaping foreign currency income of more than US$3 billion. The travel service ranks first in China s inbound tourism business. Founded in 1984, China Duty Free now has 154 duty free operations in more than 90 port cities and border regions. Its annual sales revenue has reached US$200 million for the first ten months of 2004.] The merger between China Duty Free and CITS brings together two powerful state bodies with mutually-related, though distinct, interests in the travel market. How will this change CDF Group s operations? And how closely will the two work together? CDF Group and CITS have forged a deep working relationship in the form of CITS Group Corporation. We are retaining the individual business names of CITS and CDF Group, even though they now make up a single corporation. CDF Group and CITS are the pioneers of China s duty free and travel industries, having been in the business for 20 and 50 years respectively. Duty free and travel have a very close relationship. The opportunity for co-operation between the two companies has now been increased significantly following the merger. And many of our resources can now be pooled to our mutual advantage. We have several immediate and pressing priorities. These include helping the company make the transition from the role of wholesaler to retailer; strengthening and developing current duty free businesses, as well as seeking out new opportunities; growing new business areas, including the development of China s national products; and developing the distribution of brands. We have to work on other issues as well. The merger [The new corporation represents a powerful coming together of two of China s most significant state The merger clearly strengthens China Duty Free s position. What are the main advantages of the agreement and how will CDF Group be maximising them? CDF Group and CITS represent the pinnacle of their respective industries. Both companies are in varying sectors of the travel industry but remember that CITS customers are also CDF Group customers. The full development of CITS requires input and assistance from other elements of the travel industry. For it to provide a seamless service to travellers it needs other 28 The Moodie Report

4 Standing tall: CDF Group headquarters in Beijing very interested to know how CDF Group plans to develop as a retailer not just a supplier in the future. What can you tell us? After the merger, CDF Group has much greater room for expansion. Not only will it have greater influence within China but it can now also extend its reach overseas. From now on CDF Group will look at a thorough streamlining of its operations. It will be seeking to increase the efficiencies of delivery and addressing the problems of a shaky foundation. Other issues that CDF Group has to resolve include strategies and structures on product pricing, establishing a distribution centre in southern China, raising supply chain efficiency, and tightening and improving communications systems. related sectors of the industry to work towards similar goals. Similarly, CDF Group s development is dependent on CITS traveller base. So the merger could be said to be a marriage of two highly dependent businesses which can now pool their resources to nourish each other s growth. Operationally, how will the two co-operate? In terms of operations, the restructuring gives CDF Group a much better grip on and access to the traveller. It can now tap into the rich customer base of CITS bringing travel retail and sightseeing together, for example thus providing a seamless service. At the same time CDF Group can ride on the sound reputation of CITS brand name and the concept associated with CITS all-round travel service. That way CDF Group s own reputation is improved and refined. In addition, CITS has many branches in its overseas network. CDF Group can now also potentially use these branches as travel retail outlets, expanding our reach overseas. This is especially important, as downtown shops are key to the promotion of our company s brand name. They can also make a valuable contribution to the expansion of our company. Retailing vs supplying CDF Group is China s largest duty free company operating as an exclusive supplier in many cases and as a retailer in others. International readers will be How CDF Group manages the transition from supplier to retailer is a key question. We want to realise this transformation in harmony with both the rhythm and the rules of the global duty free industry, in order to build a healthy and sustainable retail structure. To be more specific, such an approach entails good management of downtown stores as well as strengthening the expansion of our sole distribution and retailing roles. As mentioned earlier, we also plan to develop new businesses, particularly in growing the market and distribution for China-made goods which have huge potential. Exclusivity [With the exception of special economic zones like Zhuhai and Shenzhen, most duty free retailers in China have to source their products through CDF Group. That status, bound in government decree, has been the subject of much speculation in certain sectors of the press.] Much has been said about China s accession to the World Trade Organization (WTO). There have been suggestions in some quarters that, as a result, CDF Group will be obliged to give up its virtually exclusive grip over the Chinese duty free market. Is this true? We wish to be clear on this. According to the regulations, the Chinese government has no obligation to liberalise the duty free industry. And, indeed, the government is adopting a very cautious attitude towards doing so. For the immediate and foreseeable future, other than in special areas, the Chinese duty free environment will maintain the current structure, with CDF Group having 30 The Moodie Report

5 LET S HEINEKEN! Now available; new range of Heineken gift packs exclusive for travel retail Picture pack, with 3 cans and can shaped camera for multi use Game pack, with 3 cans and some game articles Sound pack, with 3 cans and a can shaped radio Sun pack, with 3 cans and a pair of sunglasses Small in size, convenient to carry High quality items, high market value Promotional support available

6 an exclusive hold over the market. Quite simply, CDF Group will work hard to implement its strategies and develop the business, in order to strengthen its position as the leader of the duty free business in China. One of the most interesting duty free developments in China this year came when DFS Group announced that it had obtained a ten-year master concession for retail operations at Hainan Meilan International Airport. One report suggested this signals that CDF Group s grip on the Chinese duty free market in China is loosening. Is that true? What role does Beijing Capital International Airport is one of CDF Group s key supply contracts Inbound traffic to China: Nov 2004 and Jan Nov 2004 vs 2002 Key arrivals Change November Change January November markets 2004 vs vs 2002 Indonesia % +38.7% Malaysia +57.7% +25.0% Germany +49.5% +28.0% Russia +48.7% +41.8% South Korea +44.3% +33.0% India +42.0% +45.0% Mongolia +36.4% +21.2% Australia +35.5% +28.0% Singapore +33.3% +27.9% France +31.6% +25.1% Thailand +28.8% +20.6% UK +23.6% +21.7% Canada +18.5% +18.8% US +14.9% +16.7% Japan +11.6% +13.8% Philippines +11.7% +7.6% Source: China National Tourism Administration; The Moodie Report CDF Group play in Hainan, and what role will it play in the future? We read that report. It lacks any credibility. As far as we know, the to-be-opened DFS store will be located in the domestic departures hall of Hainan Meilan Airport. DFS Group s operations will therefore be restricted to duty paid goods. They will not be allowed to operate a duty free business. For the moment, CDF Group remains the sole operator of Meilan s duty free business. What kind of relationship does CDF Group have with DFS Group? DFS is an influential and experienced multinational company. CDF Group very much respects both its status and its ability within the industry. And, in many areas, CDF Group has much to learn from DFS. Post-SARS recovery and outlook for the future [China s travel market was devastated in early to mid-2003 by the SARS epidemic which hit the mainland and Hong Kong so badly. But it has bounced back with remarkable speed and vigour: for example, in September some 9.2 million people arrived in China, +13.6% more than the same month last year and +16.1% more than in September All of China s 16 main inbound markets posted doubledigit growth for September compared with the same month in Outbound travel, too, has surged back. For the first half of 2004, some 13.4 million Chinese travelled abroad. That is an increase of +87% from the same period in 2003 and +136% over The WTO estimates that 100 million Chinese could be travelling internationally by 2020.] Travel in and out of China has improved tremendously in the year since the SARS epidemic hurt the travel industry so badly. How is CDF Group 32 The Moodie Report

7 January 2005 FOCUS ON CHINA Gai Zhixin interview Ready to climb another Summit in 2005? Mr Gai (second from right) with Antares Cheng, Managing Director of King Power Duty Free Group and China Power Duty Free Group (second from left) at the extraordinary China Travel Retail Summit Gala Dinner, held at the Great Wall of China in May 2002 performing business-wise? Have sales recovered to pre-sars levels? And what kind of targets are you hoping to achieve by year-end? You re right; from January to September 2004 China s inbound travel grew immensely. It has now recovered from the impact of SARS and is performing well in many respects. Led by the strong growth in the travel industry, CDF Group exceeded its targeted sales for the January to September period. It has even surpassed pre-sars levels. According to our estimates, CDF Group will achieve a historical record high in annual sales this year. Can you give us some precise numbers for the year to date? By the end of October 2004 CDF Group had already made US$200 million in sales, exceeding sales for the whole of It has fully put behind it the impact of SARS in By categories, fragrances and gifts grew faster than any other sectors. In a recent interview with the China Daily, you spoke about new downtown stores in Xiamen and Qingdao. Can you give us an update on progress and any other big new plans? In 1999 the State Department of Internal Affairs approved CDF Group s plans to open four new downtown stores in Shanghai, Dalian, Qingdao and Xiamen. So far the Shanghai and Dalian downtown stores have been built and have begun operations. Our plan is that once these two stores have attained a certain level then we will begin building the Qingdao and Xiamen stores. We don t want to be overly ambitious. We should be realistic and do our job well first in the locations that we have opened. Let s talk about the relationship with King Power through China Power Duty Free Group. This brought CDF Group and King Power together, essentially as a buying operation covering certain categories. What is the nature of the relationship, and how will it grow in the future? China Power has now been operating for over three years and both parties have gained something positive from this relationship. In the future, both companies will try to improve the operational efficiency of China Power. Hopefully we can both encourage and stimulate each other. The 2002 China Travel Retail Summit was a critically-respected conference and certainly one of the most spectacular events in duty free history. Is there any chance of a repeat? The 2002 China Travel Retail Summit was a hugely successful event. If possible we would like to continue holding such events at a suitable place and a suitable time. In November it was announced that CITS Group Corp would be taken public in the relative short term future. That is clearly a major development. What is the strategy? The CITS Group includes CITS, CDF Group, property companies and so on. The group s plan is for its subsidiary CITS to put part of its travel business up for a listing overseas. Our preliminary plan is to go for a listing on the Hong Kong Stock Exchange. But while the plan is still under way everything is still at a preliminary stage, so there are still lots of uncertainties. It s been a time of great change for China and for CDF Group. How would you sum up the overall outlook for the group in the future? We think that in the future CDF Group will not only be able to weather any storms in this highly-competitive industry but also to achieve substantial success. I hope that CDF Group can become a world-class travel retailer that can stand up against other first-class international operations around the world. But besides our commercial success, in the future CDF Group management and staff must be able to deliver the historical edict of sharing the joys and extending the enjoyments of travel. The Moodie Report 33