THE ASIAN EDGE
Byline: Josephine Bow, with contributions from Joanna Ramey, Washington
HONG KONG — The Asian-Far East market is a lot more than Japan these days. From Beijing to Bangkok, glittering shopping malls in other Pacific Rim markets are also beckoning to moneyed consumers with Western branded goods. But shoppers, beset by political and economic uncertainties and jaded by the sheer glut of merchandise, are playing hard to get, leaving merchants inventory-heavy and cash-poor.
Following is a look at how the rest of 1996 is shaping up around the Pacific Rim.
With less than 18 months before the territory is handed over to China, Hong Kong residents have a lot more on their minds than shopping. The press is filled daily with accounts of political squabbling between Beijing’s appointees on the various transition committees and local grass-roots parties that champion democratic rights.
Compounding the political uncertainty is a lackluster economy. Growth rates for 1995 barely topped 5 percent, while inflation held at a stubborn 9 percent.
Most disturbing are unemployment rates that reached a 10-year high of 3.5 percent, reflecting the inability of low-skilled workers to adapt to an increasingly white-collar, service-oriented economy.
While the Hang Seng Stock Exchange is enjoying a healthy bull run, the property market is languishing. That’s welcome relief for Hong Kong retailers, who suffer from some of the world’s highest rentals. There is a giant game of musical chairs as retailers renegotiate leases and shift locations. Upscale Joyce recently announced plans to consolidate many of its single-label shops into a mutilevel complex.
Although Hong Kong enjoyed average annual retail sales growth of 12.2 percent from 1984 to 1993, that figure has since dived to as low as 3 percent. In the final quarter of 1995, however, total clothing and footwear sales surged slightly, and department stores posted their first inflation-adjusted rise for nine months.
Luxury retailers, protected by exclusive rights to top designer labels and a loyal customer base, continue to report profits. Joyce chalked up a 10.5 percent profit growth for the six months ending September 1995, while Dickson Poon, who markets Polo, Ralph Lauren and a host of other brands, saw 30 percent profit growth for Hong Kong.
But the big questions about Hong Kong’s future as a world-class business center, and how individual rights and fortunes will fare under Chinese rule, remain. And the territory’s pampered classes as well as its less well-heeled feel a malaise that no amount of shopping can dispel.
It’s no secret that the price of getting a foothold in China’s lucrative retail market is steep. Since opening to direct foreign investment in late 1992, players have been almost exclusively Asian and profits remain elusive.
Western retailing giants are proceeding cautiously. Wal-Mart joined with Thai heavyweight CP Group, whose well-established mainland presence comes from its agricultural and food processing activities, and then called off the partnership in January. (Wal-Mart plans to proceed with the Shenzhen and Shanghai outlets, but is looking for new partners.)
Marks & Spencer, whose Asian operations account for a growing share of both sales and profits, has announced on-again, off-again plans to enter the market.
Foreign retailers face a host of difficulties — escalating rents, distribution problems, competition from China’s giant state-owned department stores, a slowdown in consumer spending and, most significantly, the still-modest purchasing power of the majority of Chinese consumers. Those who have made some hard-earned headway are about to be beset by another problem — the oversupply of new retail space scheduled to flood the market in the next few years. Shanghai alone, whose 1.5 million square feet of grade-A retail space is currently found in two dozen foreign-invested department stores, will claim some 10 million square feet by 2000.
Similar master plans are in the works for Beijing, Guangzhou and most secondary cities. But property developers’ get-rich schemes are at odds with retailers who are forced to open new outlets as each major complex opens, diluting precious sales and pushing up expenses.
Esprit, which has more than 30 outlets, including 10 in Shanghai, is just breaking even, as shoppers shy away from the pricy tags on its casual looks. Until China’s still-prohibitive import duties drop, only retailers producing domestically have any chance for success. But recent measures designed to reduce tax incentives for foreign investors are playing havoc even for those operations.
With inflation on food and consumer goods running between 25 and 30 percent, disposable income continues to shrink. Even luxury goods retailers are feeling the pinch as an ongoing credit crunch and property slowdown reduce the ranks of big spenders. But for deep-pocketed professionals who are in for the long run, China may still prove to be a gold mine. As a result of savvy marketing and patient, persistent expansion, Procter & Gamble now accounts for more than two-thirds of all foreign-brand shampoos sold in China.
Retailers in this prosperous island nation, where per capita income tops $22,000, continue to sing the blues. A massive glut of space — premier shopping artery Orchard Road alone holds 40 shopping centers and malls — and ruthless discounting has translated into red ink for three years. Worse, new space continues to appear, much of it in suburban areas, further draining downtown sales. Despite sustained 8 percent GDP growth, overall retail sales were down 4.8 percent for the first half of 1995. A strong Singapore dollar has cut into foreign tourist spending, while many locals are going across the straits to buy in less-costly and fast-modernizing Malaysia.
After the luxury label frenzy of the late 1980s, Singapore’s yuppies are aging. They are spending less on consumer goods and more on housing, travel and investment. Residents are notorious bargain hunters, but the month-long island-wide August Great Sale, inaugurated in 1994, elicited only modest success last year. Beleaguered retailers are looking to state-of-the-art entertainment facilities to revive consumer excitement, but payback is uncertain.
Department stores are among the hardest hit. Oldtimer C.K. Tang and Isetan Singapore each reported more than $10 million in losses for the year ending in March 1993, the second consecutive year of red ink. Newcomer Lane Crawford of Hong Kong posted a wrenching $16 million in losses in its first year of operations and has already cut space from five to three floors.
Amid the gloom, however, some single-label retailers note a resurgence in spending for expensive items. Guess is maintaining its impressive $2,000-per-square-foot annual turnover, while brands such as Chanel report record sales — an indication the recent “value for money” phase may be passing.
Retailing in Thailand is still on the rise, as department stores post healthy annual growth of 8 percent. After an era of high import duties, tariffs are now on a steady downward path as foreign labels continue to pour in. As retailing is still officially closed to direct foreign investment, overseas companies are franchising or entering joint ventures.
Thai consumers are fashion-hungry, and disposable incomes are surging. About 15 percent of the country’s 6.7 million urban households earn annual salaries of more than $15,000, and an equal number is in the $10,000-$15,000 bracket, almost all in Bangkok.
But the market is threatened by the same dangers as the rest of Asia — too much space and too much merchandise for too few customers. The supply of high-grade retail space in Bangkok is exploding with the growth of giant shopping centers, many anchored by one of the city’s 100-plus department stores or discount outlets.
Widespread satellite television is rapidly upgrading consumer awareness of Western brands and fostering a growing battalion of local copycats for high-grade goods and services. Thai advertising is improving tremendously, and campaigns regularly pick up international awards.
More sophisticated consumers expect to be wooed. Like all affluent Asians, Thais travel frequently and are familiar with name-brand stores overseas. If a local branch is less well stocked, the shopper will quickly talk down the label.
With Thailand’s year-round muggy weather, retailers must make adjustments to suit local tastes and market conditions without hurting the label. But for strong names, pleasant surprises can occur: Some 15 percent of purchases at Bangkok’s fast-expanding Marks & Spencer outlets are for heavy sweaters and overcoats by customers stocking up for overseas trips.
Indonesia looks set to join the retailing expansion craze that has swept Asia for a decade. Consumer purchasing power is still low — only a third of the country’s 6.3 million urban households boast annual incomes of more than $3,000 out of a 180 million population. But that hasn’t stopped property developers. Jakarta is in the throes of megamall mania. There were virtually zero only five years ago; today, there are nearly 10 million square feet of modern mall space in the capital, and that figure is set to double by 1997. How to fill the new malls with shops and shoppers is anybody’s guess. Wal-Mart and Penney’s have signed on for the giant Super Mall built by the powerful Lippo Land group, but so far there is little sign of life on the premises, located in a suburb an hour from the city. Analysts say developers are overestimating the growth of Indonesia’s emerging middle class. Wealth has traditionally been thinly spread — and a work week recently reduced from six to five days and a 20 percent boost in the minimum wage won’t help retailers brandishing expensive foreign goods that much.
Import tariffs are going down, but foreign retailers still need to tie in with locals. And while significant room for expansion exists in untapped secondary cities, established Indonesian retailers are readying for the fight.
Local giant Matahari, which commands half the country’s department store space, is hitting every retail segment — hypermarkets, general merchandise outlets and upscale department stores — aided by a growing corps of marketing professionals boasting U.S. MBA degrees.
Political jitters over relations with mainland China have been affecting retailers’ bottom lines for three straight years.
Everyone’s holding their breath for the outcome of the country’s first presidential elections, scheduled for late this month.
Per-capita income is high, at well over $10,000, and GDP growth healthy at 6 to 6.5 percent, with inflation manageable at 3 to 4 percent. Western labels — from luxury European brands and casual Benetton and Esprit — are well represented in Taipei and the secondary cities of Kaohsiung and Taichung.
But a poor shopping environment may be more responsible for weak results than political anxieties. There are no well-defined shopping areas in Taipei’s urban sprawl, and upscale single-label boutiques sit next to street-level noodle shops. Parking is a nightmare.
The Mall, the city’s only dedicated upscale shopping center, stands alone in a semiresidential area. Ten minutes away by foot is a small cluster of street-level boutiques housing Ermenegildo Zegna, Bally of Switzerland and Gianni Versace — again, without parking facilities and no apparent drawing power.
Department stores are crowded and surprisingly small-scale. Prices are high for imported goods and saleswomen, who work on commission, are aggressive. Local shoppers say they prefer to buy in Hong Kong, where prices are lower and selections wider.
Taiwanese are less fashion-forward than their Hong Kong cousins. The 38,000-square-foot World of Joyce is still struggling. “It’s the law of diminishing returns,” said general manager Florence Lo, referring to the outlet’s generous floor space.
The country is well on its way to losing its reputation as Asia’s sick cousin, with GDP growth forecast at 7 percent for 1996. The power shortage has been largely resolved, and labor unrest and political instability quelled, as President Ramos heads down the back stretch of his single six-year term.
Filipinos may be Asia’s most avid shoppers, as witnessed by the throngs at any of Manila’s jumbo ShoeMart Megamalls, where weekend traffic can top 250,000. But purchasing power remains low, with per-capita income hovering around $1,000, and the vast majority of merchandise is still locally manufactured.
Import duties have dropped from 60 percent to 30 percent. By mid-1996, the retail sector is scheduled to throw open its doors to foreign companies. Those investing at least $10 million will be allowed to have 100 percent foreign-owned retail shops. These moves are aimed at enhancing Manila’s appeal as a major tourist shopping destination.
For the time being, there’s a smattering of upmarket labels — Max Mara, DKNY, Prada and Emporio Armani, the last three opened by Joyce. But amid the surrounding noonday crush, the shops are empty.
More accessible are locally manufactured licensed goods, such as Wrangler and Levi’s.
Although prices for local goods are affordable, quality problems abound and there’s plenty of room for well-marketed, well-made regional labels. Hong Kong’s Theme, which specializes in reasonably priced careerwear for the 20-30 age range, is doing well, although Episode is considered too expensive.
The Filipino social calendar is packed with dress-up events, but Western labels have to compete with traditional dress. Formal attire for men continues to be the long-sleeved, embroidered barong shirt, which can retail for as much as $200-$300.
With a per-capita income of $250, Vietnam seems a long way from supporting a substantial first-world retail sector. But the economy is growing at an annual rate of 8 to 10 percent, and the population — currently 75 million — is expected to exceed 100 million by 2005, so the future for retailing is actually pretty bright, according to Vietnam watchers.
One sign of Vietnam’s retail future is the continued aggressive entrance of consumer product companies looking to lay claim to the market and develop a distribution system. Their presence now amounts to selling goods in the myriad family-owned storefronts of Ho Chi Minh City or Hanoi and, crucially, courting future customers in hip television advertisements or billboards.
“Even if they are losing money, major consumer companies have to be there,” said Josuha Jake Levine, editor of the Vietnamese Business Journal, listing Estee Lauder, Procter & Gamble, Disney, Evian, Panasonic and Coca-Cola among the foreign names pushing their way into Vietnam. “Most of these companies are in Vietnam because it fits into their regional, long-term plans.”
Vietnam will test demand for modern-day retailing in two commercial centers scheduled to open by 1998. One is the 30,000-square-meter Hanoi Commercial Centre, a joint venture between the Hanoi Commercial Co. and Dragon Properties Asia Ltd. of Great Britain, where shops and a 5,500-square-meter supermarket are planned. The other center is set for the ground floor of Saigon Centre, an 11-story high rise. The names of potential tenants haven’t been released, Levine said.
But one only has to see street vendors hawking fans and VCRs, or the waves of $4,000 Honda motorcycles that buzz around the cities, to know that Vietnamese, often pooling their family resources, are itching to buy.
“People are very definitely buying consumer goods now — kitchen appliances, electronics, cosmetics, apparel,” said Virginia Foote, president of the U.S.-Vietnam Trade Council. She said residents of Hanoi and Ho Chi Minh City are more fashionably dressed than even two years ago, when the U.S. dropped its trade embargo against the Communist country and global investment began returning in earnest. Vietnamese apparel, however, is by and large not from leading labels but comprises knockoffs produced in the country, China and Eastern Europe.
Among the obstacles facing Vietnam’s retail market is restoring confidence among consumers in the national currency, the dong, Levine said. It’s still very common for families to save money in U.S. dollars and gold, a stash typically kept at home. Increasing the country’s exports — which will stimulate the country’s standard of living — is essential and well under way, as foreign investors look to establish Vietnam as an assembly base, particularly for textiles and apparel.
Then there is the problem of retailers having to compete with low-priced and pervasive unauthorized distribution channels. It’s very common to see brand name goods from Europe and the U.S., like Donna Karan and Calvin Klein, in mom-and-pop stores or in flea markets. Their origins are always sketchy and can be traced to either Vietnamese-American relatives who buy the merchandise or through one of the counterfeit operations that have taken root in the country.