From fashion hubs like Shanghai to hinterland boomtowns like Chengdu, foreign visitors to China can now put 9 percent of their purchases back into their pockets if they shop at hundreds of designated stores.
The government’s new value-added tax refund scheme was expanded this month, and officials have high hopes for the program, saying it will boost local spending, bolster luxury retail sales and spur international tourism.
However, based on data from the first batch of stores allowed to offer tax-refund forms as of July, the impact on business appears limited.
During the first five months of the tax-refund program, hundreds of brands and shops in Shanghai handed out an average of 500 forms a month on median total purchases of $912 each.
“That’s really not a lot,” said Samuel Coopersmith, an associate with consulting firm Smith Street Solutions, headquartered in Shanghai.
Experts like Coopersmith said in the long run, the scheme could push luxury sales and contribute to the economy, but only if several hurdles are overcome. The main one, he said, is the simple fact that tourists generally don’t shop in China.
“Right now, as a tourist country, people come to China for culture and heritage. They come for the sights — but not for shopping,” Coopersmith said.
Globally, shopping safaris and weekend shopping trips are becoming an increasingly popular niche in the tourism industry.
“Shopping has converted into a determinant factor affecting destination choice, an important component of the overall travel experience and, in some cases, the prime travel motivation,” Taleb Rifai, secretary general of the World Tourism Organization, said in the organization’s 2014 Global Report on Shopping Tourism.
In China, it’s not an incentive.
“VAT refunds on tourist shopping is not new, and has been implemented successfully for years in more mature economies. As an example, Chinese tourists in general are well aware of this refund while shopping across Europe, the United States, or developed Asian countries such as Japan,” said Angelito Tan, cofounder of RTG Consulting.
While tourists are a key driving force in luxury retail sales in cities such as Paris or Hong Kong, they are rarely seen more than window-shopping on Shanghai’s West Nanjing Road or Beijing’s Wangfujing Road. What’s more, tourists in Shanghai interviewed by WWD said they were unaware of the tax refund scheme, and that shopping wasn’t part of their itinerary.
“Foreign tourists generally believe that luxury and premium goods in China are overpriced,” Tan said.
They aren’t wrong. Taxes in China, especially for luxury goods, are high. Luxury conglomerate LVMH Moët Hennessy Louis Vuitton has said a Louis Vuitton handbag will cost 30 percent more in China than in France.
With VAT returns, the same handbag would now get slightly cheaper.
For every purchase above 500 yuan, or about $75, at designated stores, visitors who hold an overseas passport and aren’t living in China are eligible to claim 11 percent of their total in VAT returns once they leave from an international airport. A processing fee is taken off the top, which leave visitors with a refund equal to 9 percent.
“I think a lot of it comes down to price,” said Renee Hartmann, cofounder of China Luxury Advisors. Nine percent may be a decent savings, but only if comparisons aren’t drawn.
“After tax returns, how does the price compare to other markets, like Europe, Japan or Hong Kong? It’s still going to be higher after the tax rebate, so you’d still buy it in your home market,” she said.
Still, Hartmann said offering tax refunds was a good start and could be of merit for luxury brands in the long run, particularly as such labels are looking into ways to equalize pricing across borders. Last year, Chanel aligned global prices for three of its signature handbags. The move was expected to increase sales in China, where prices for the 11.12 and the Boy bag came down by 20 percent. If more brands follow Chanel’s lead, VAT returns in China could make a shopping spree worthwhile for overseas tourists.
It could then also, as the government hopes, help lure more foreign visitors to China.
Tourism to China is already growing. More than 133 million international travelers visited the country last year, up by 4 percent from the previous year, the China Tourism Research Institute said in its annual report, released earlier this month.
Chinese overseas tourists were expected to spend $229 billion in 2015, up 23 percent from the previous year. By 2020, CLA estimates that their spending will almost double.
But while its own citizens are known to be some of the biggest spenders on luxury goods when they travel abroad, the VAT refund system is unlikely to attract similar tourist spending in China, even in the long run. What it can do is help establish price parity and begin to change China’s luxury retail perception for foreign tourists — if it’s well promoted, Tan said.
That’s where China is running into another hurdle.
So far, there is little to no promotion, nor are signs advertising the VAT refund scheme at the designated shops and malls.
Reel Mall, which carries fashion brands such as Gucci, Ralph Lauren, Balenciaga, Stella McCartney and Lanvin, was among the first Shanghai outlets to join the program in July. In the shiny halls and the neat shops, nothing indicates that VAT return forms are available.
A sales assistant for Alexander McQueen said they had handed out “very few” forms. There are no signs and no information is displayed. The assistant said she brings the VAT return option to the attention of shoppers she believes to be tourists — at least once they are in the store, signaling that they are already inclined to buy in China, never mind the price.