HONG KONG — Without the mainland Chinese tourist streams of yesteryear, Hong Kong’s high-end retailers are expecting little Christmas cheer this season.
“What we’re seeing in the market is the promotions came earlier this year and it’s quite deep, as well, so that’s a sign of how weak it is,” CLSA senior consumer analyst Mariana Kou said. “Expectations are for the U.S. dollar to remain strong [to which the Hong Kong dollar is pegged]. That will be the main concern and a good chunk of the local population will be traveling abroad.”
Retail sales have fallen consecutively for eight months and Mainland Chinese tourists arrivals in October, the most recent month for which data is available, fell 4.2 percent compared to a year ago.
Although many brands have halted expansion or eve surrendered some of their shops — Burberry for instance is giving up one floor of its two-story Hong Kong flagship — it hasn’t balanced business. Many retailers are feeling the squeeze.
Looking by categories, watches will be among the hardest hit.
“Especially watch retailers, they have to invest in a lot of stores to maintain the brand name image in order to get the supply from the watch brand owners,” Kou explains. “It will be quite hard for them to move stores because they invest quite a lot in the store renovations. Also in terms of location, brands are quite particular. They have to wait until [rents] fall.”
The holiday period outlook is “not very promising,” according to Joe Lin, CBRE’s executive director of retail services. The downturn is showing up not just in retailers’ wallets but landlords’, too.
“This year in 2015 the rental in the four major retail districts has been decreasing 15 to 20 percent. Next year, we believe the decrease will continue but the pace will decelerate because the rental base has lowered. We believe between 10 to 15 percent,” Lin said.
Falling rents may spell relief for brands, but given the average lease term is two to three years, it might be a year or more away for brands to benefit. It’s not all doom and gloom, however. The correction in rents means mass retailers have a chance to expand in prime locations previously dominated by luxury brands.
“For high street, if they want to expand their footprint now the midrange retail is still doing OK in the market. They can pick up a large prominent location and they should take this chance,” Lin said.
CBRE recently worked with sports giant Adidas to take over Coach’s old flagship in Queens Road Central. Adidas moved in paying just over 6 million Hong Kong dollars a month in rent or $774,000, down from the around 7.3 million Hong Kong dollars a month or $942,000 the New York-based brand was paying.
And after being pushed out of a prime Central location years ago due to rent pressures, Hennes & Mauritz quickly opened three doors this year including a large flagship post in Causeway Bay. Multibranded retailers such as I.T are in a slightly more advantageous position as they can adjust their product offerings according to market whims.
Jeweler Chow Tai Fook has been struggling lately in the current environment. Last month it said its first-half net profit plunged 42.2 percent while sales slid 4.1 percent. A spokeswoman voiced uncertainty about the coming holiday season.
“The luxury market sentiment in Hong Kong and Macau is still uncertain, yet the Christmas and New Year holidays are the peak shopping seasons of the year when many customers love to buy presents for gifting and self-rewarding,” she said.
At IFC mall, a major shopping center in Central, the shift to more affordable names is evident but retailers are finding ways to make the customer experience a more seamless one.
“It’s a difficult scenario. This year is not going to be an easy one,” said Karim Azar, IFC’s general manager. “We have to work harder to get that extra dollar. As far as IFC is concerned, our total volume of sales compared to last year, we should be plus 2 percent.”
The mall is countering the weak environment that with “good interactive displays involving selfies, Christmas trees” and he adds, “new tenants like Lululemon are doing well.”
The appeal of Apple, which already occupies a large and very prominent spot in the mall spanning two floors, is growing strong. The retailer will be opening a third floor this weekend and in order to deal with the overflow of customer traffic, it is doing more sales online or using a click and collect model.
“There’s a big shift in what a lot of retailers are doing online, not in terms of pure sales but click and collect,” Azar said. “With Apple, people can’t be bothered to shop and wait. Lane Crawford also has click and collect. The good thing is that of the 70 percent people who click and collect, they also buy something else when they come to the Lane Crawford store.”
Although retailers are exploring new approaches to the way they do business, the structural decline will also need a macro solution, CLSA’s Kou said.
“Hong Kong’s tourism board is finally admitting they have to do something but it does take a while,” CLSA’s Kou said. “Shanghai is already opening a Disney park there next year and that will take in more of the tourist share. They could be more innovative in creative tourism, but these don’t pop up overnight.”