By  on October 17, 2008

HONG KONG — With its currency pegged to the U.S. dollar and its economy dependent on exports to America and Europe, Hong Kong is in a state of anxiety. Government officials are doing their best to calm fears, but have begun to warn the public of a recession, which they predict will hit early next year.

“I had previously said the storm was approaching. And now the storm is moving closer,” said financial secretary John Tsang. “Hong Kong, as an international finance center, will unavoidably be affected.”

Indeed, signs of a slowdown here are beginning to become noticeable. Last week’s Golden Week holiday, during which thousands of Mainland Chinese typically stream into Hong Kong for rest, recreation and very lucrative shopping, saw wildly divergent results, with some luxury retailers reporting a 30 percent decrease in sales and others claiming an increase, albeit with targets missed. According to the Hong Kong Tourism Board, although the total number of visitors rose one-tenth to 481,987, the number of tour groups declined slightly to 1,132.

The week also brought the city’s first retail casualty, when casualwear chain store and manufacturer U-Right failed. The company, which is listed on the Hong Kong Stock Exchange, has 95 retail outlets in Hong Kong and another 516 in Macau and on the Mainland. So far, the company has closed 20 shops in Hong Kong and laid off nearly 200 employees, or about half its workforce here. Deloitte Touche Tohmatsu, the court-appointed liquidator, said it’s hoping for a white knight to rescue the retailer.

Shopping malls that rely on big traffic from Mainland Chinese customers are beginning to feel the pinch. At Harbour City, the sprawling shopping center in tourist-haven Tsimshatsui, things are slowing down. Balbina Wong, deputy chairman and chief executive officer of Imaginex Group, which operates stores for brands such as Marc Jacobs, Versace, Diesel and Donna Karan, told WWD last week, “People are nervous and cautious about money. We see less purchases from Mainland Chinese customers.”

Wong is revising her sales projections downward, but says that luxury brands are less likely to suffer in Hong Kong. “I don’t think luxury will be hardest hit, but medium and lower-priced brands will,” she said.

Wong may be right. At International Finance Centre, the high-end shopping mall that is home to Lane Crawford’s flagship and dozens of designer brands such as Kate Spade, Valentino, Tiffany, Salvatore Ferragamo and Ermenegildo Zegna, things are booming. “I don’t know if the market is up or down — I only know about supply and demand,” said Karim Azar, assistant general manager of retail leasing for IFC, “and right now we don’t have enough supply for all the demand.”

At a time when many seem to be rethinking expansion strategies or taking a wait-and-see approach to investment, Azar said the mall cannot meet all the requests it has for more space. “All of the shops want more space,” he said, bemoaning the fact that of the mall’s total 850,000 square feet, only 450,000 is let-able. Rents at IFC are averaging $350 Hong Kong dollars, or $45, a square foot a month; tenants pay a monthly rate or a percentage of sales.

Azar has plenty of evidence to bolster his claim. Agnès b., for example, will depart its smaller second-floor premises in order to open a 6,000 square foot shop on Monday. The grand opening will feature a visit from designer Agnes Trouble. Modeled after a Parisian boulevard, complete with Moroccan-tiled floors and French lamps, the agnès b. Loggia will sell all the brand’s lines including Homme, Femme, and Voyage. The space even includes an agnès b. Le Pain Grillé restaurant and a cake shop.

Similarly, Spanish juggernaut Zara, which has a 10-year lease at the mall, has agreed to give up some space in order to get even more. It is ceding part of its harbor-facing area to Kenneth Cole and gaining 5,000 square feet from a restaurant. Y’s Mandarina Duck and Monclair are set to take over agnès b.’s former space and other international brands are negotiating for larger stores.

Unlike other malls here, IFC’s policy has been to actively pursue brands that are not found elsewhere in Hong Kong. Thus, a large percentage of the 187 stores are names making their Hong Kong debut, including Seven For All Mankind, True Religion, Steve Madden, Christian Audigier, David Yurman and Loro Piana, where sales are said to exceed $5 million Hong Kong dollars, or $645,000, a month. Giuseppe Zanotti will open his first freestanding store in the coming months, as will Japanese labels RPM 45 and Untitled. André 3000, of Outkast fame, is also putting the finishing touches on his first Dressed Salad restaurant here. “We look for well-managed businesses with good track records,” said Azar. “Some work and some don’t.”

Azar said when the lease comes up, they evaluate the success of the store to decide whether to renew. “At the beginning, it was better to do any deal than have an empty store,” he admitted, noting that once the lease is up, IFC feels free to change the mall’s makeup. “That’s why Callaway gave way to Juicy Couture, Ashcroft gave way to Seven and Fila is now Ed Hardy,” he said, describing the revamped third floor.

Azar added that although he sees sales figures monthly and so hasn’t seen results for the first two tumultuous weeks of October, so far things seem to be rolling along. The Four Seasons Hotels and Resorts, which is connected to the mall, is running at 90 percent occupancy, which is a big factor as its guests include big-spending American, Japanese and Arabian customers.

“We really target Hong Kong shoppers, but we are seeing Americans here and the Japanese are coming back,” said Azar, who talks about an increase in visitors from South Korea and Saudi customers who prefer to shop after hours.

He is not concerned about any decrease in visitors from China because IFC doesn’t target those consumers. “Mainland Chinese are only 15 to 20 percent of our traffic,” he said, noting this is due to two main factors: IFC does not promote itself in China except before major holidays and then to only the highest echelon, and the mall does not feature brands such as Louis Vuitton and Gucci, which are coveted by Mainland Chinese shoppers. “We let go of mass market brands to get the niche brands,” said Azar. “We have many, many brands that are still trying to get in — including the big American ones, like American Apparel.”

The combination of shoppers looking for something new and brands looking for a place to sell seems to be working for IFC even as the rest of the world frets.

“There is still a big demand for brands here. I just wish the mall was 50 percent bigger,” said Azar.

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