When nobody can cross borders, what happens to the duty-free shops?
Lesson summary
Hi there, thanks for joining us for this Thursday edition of Plain English. I’m Jeff; JR is the producer; and this is lesson 349. You can find the full lesson at PlainEnglish.com/349.
Coming up today: one of the quirkiest parts of the retail industry is duty-free shopping. It’s that oasis in the airport where you can buy expensive products without paying hefty taxes. But to take advantage, you need to be an international traveler. And I’m guessing most of you were not international travelers in the past year. So today we’ll talk about duty-free shops and how this industry has been affected by the depressed international travel. I’ll give you a hint: duty-free shopping is not suffering everywhere.
The expression we have in the second half of the lesson is “add up” and JR has a song of the week. Let’s get going!
Duty-free shopping
Duty-free: two words that conjure up images of perfumes, liquor, jewelry, beauty products, and luxury handbags. If you’ve ever traveled internationally by air, you have undoubtedly seen these brightly-lit stores staffed by attentive salespeople offering spritzes of fragrances and samples of beauty products.
The prices are high, but they’re still a good deal: these shops are exempt from paying international import duties and often local taxes. That means the stores can offer bargain prices on watches made in Switzerland, handbags made in France, Scotch whiskey made in Scotland, and beauty products made in Asia.
Duty-free shops take advantage of a loophole in tax rules. International travelers in airports are exempt from paying taxes that a country’s residents, and indeed foreign visitors, would normally have to pay. On liquor or luxury watches, for example, taxes and import duties might add up to 30 percent of the product’s price in a shop in the center of a city. Shops in airports can legally sell those products without charging those extra taxes and duties. That’s why you see “duty-free” shops in international airport terminals selling liquor and luxury goods to travelers as they wait for their flights to depart.
Duty free got its start in Ireland. In the early days of air travel, planes departing the United States and Canada for Europe had to stop and refuel as soon as they were over land, in the westernmost point in Europe. That was a town called Shannon. A local entrepreneur noticed that the liquor sold on cruise ships was really cheap: when the cruise ships sold alcohol in international waters, they weren’t in any country and didn’t have to pay any taxes or duties.
The entrepreneur, Brenan O’Regan, thought that airports should have the same privileges. The passengers in the Shannon airport were international passengers just moving from one place to another. So he convinced the Irish government to allow him to sell products duty-free. He could sell products for lower than typical prices, but still make a hefty profit.
He started selling Irish food products; in the first duty-free shop in 1951, you could buy Irish butter. Pretty soon, watchmakers and liquor manufacturers wanted to get in on the action . It was a huge success; soon, other countries followed suit .
Prior to the pandemic, duty-free was a huge industry: it generated $68 billion in sales in 2017. Many luxury retailers have entire divisions dedicated to serving duty-free travelers. The rents from duty-free shops help finance airport expansions around the world. For a long time, you had to show an international boarding pass to be able to shop at a duty-free store. That was proof that you were on a journey from one country to another, and therefore eligible to not pay the duties. But what happens to duty-free shopping when nobody is traveling across borders?
Traditional duty-free shops got hammered. Heinemann, which operates shops in 74 airports worldwide, is Europe’s biggest duty-free operator. It reported that sales in the first half of 2020 were down 60 percent. Dufry, another industry giant, said its sales were down by two-thirds in the first nine months of 2020. Industry analysts don’t expect travel retail to recover until 2023 or 2024.
There is one exception to the overall doom and gloom in the duty-free industry, and that is China. The island of Hainan is a vacation hotspot in the South China Sea. In 2011, China decided that even domestic visitors to Hainan could shop duty-free, subject to limits. That proved to be a lifeline for Chinese shoppers who were unable to travel internationally in 2020. They just went to Hainan for their vacations and luxury shopping. To encourage duty-free shopping in Hainan, the government in July raised the duty-free allowance to about 100,000 yuan, which is about the equivalent of $15,000 US dollars—that’s a pretty good shopping spree.
Even non-travelers can start to take advantage of duty-free shopping in China, now. There are duty-free shops in Beijing and Shanghai. To shop there, all you have to do is prove that you were an international traveler, just a single time, to anywhere, at any time since 2019.
A subsidy for rich travelers
There was a good episode of NPR’s podcast “Planet Money” about the history of duty-free shopping. If you want to check that out, then go to today’s lesson transcript and you’ll see the links to that article at the bottom of the page. All members of Plain English—free and Plain English Plus+ members—can see the links I use to prepare the lesson. Those always appear at the bottom of the main lesson transcript. Today’s is at PlainEnglish.com/349.
I can’t say that I’m a fan of the duty-free model. I’ve never shopped there because I don’t buy beauty products, cologne, or liquor, so I have no real reason to. And I don’t think I’d make a big purchase like a watch in an airport shop: just not my style.
But more than that, think about what this is. International travelers are among the wealthiest people in a country. And so the richest people get to save money on taxes as they buy luxury goods, just because they went to an airport. But the person who can’t afford an international holiday has to pay taxes on a bottle of wine or a case of beer at his neighborhood liquor store. To me, that’s not fair.
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