Last week, the latest figures for Hong Kong’s retail market were released reaffirming that the situation remains bleak. Despite some positive signs in recent months, retail sales for July 2016 were down 7.7% year-on-year recording the 17th straight month of decline. For the first seven moths of 2016, the value of retail sales decreased by 10.1% compared with the same period in 2015.
A number of brands, especially those in the luxury sector, have been vocal about the impact the downturn has been having on their overall business. So what are the key reasons for the slowdown and should we be surprised that the wave of success many brands have experienced over the last few years has flattened?
While there had been rumblings of disenchantment towards what was happening at a political level, very few brands understood its seriousness and how 18 months on from the Occupy Central protests, retail sales would still be lagging. The protests did not just have an impact on the foot-traffic in key retail areas as people stayed away from the trouble. The bigger factor has been the slowdown in the number of mainland Chinese shoppers with many deciding to stay away, initially under the guidance from the Central Government. However with a growing resentment to their shopping habits, this has lead to uncomfortable scenes portrayed over the local social media platforms. If they do not feel welcome, they will simply go and shop in other markets such as Taiwan, South Korea, and Japan which as well as having in recent months a favourable exchange rate, also appreciate the Chinese customers and what they are doing for the local economy. Whether they like it or not, the Hong Kong retail market has become heavily dependent on the mainland Chinese shoppers and now they are paying the price wth a stuttering economy leading to weak consumer sentiment.
While enormously influential, the protests are only part of the problem. The other reason that is probably a far greater contributing factor is that in the last few years, the retail offering has become misaligned with what the consumer wants and therefore the consumers are bored. Apart from the price of certain goods, there is little that now differentiates the Hong Kong market from that of mainland China. The line between Hong Kong and especially mainland China’s tier I cities is blurring with the brands and shopping malls all very similar. A number of the malls have become meccas for the same brands, resulting in little differentiation. The issue is that as the sophisticated consumer evolves, they are not all chasing the same luxury brands, instead wanting something different.
The luxury groups which dominated Hong Kong’s retail landscape have now become oversaturated leading to a very sterile shopping environment. As a result, many are suffering from brand fatigue in turn driving the consumer to look further afield to markets such as Japan, South Korea, Europe and the United States where there is a wider selection of brands and products to choose from. Due to the accessibility of these luxury brands, many have lost their exclusivity with the consumer who are turning their attention to the cheaper, bridge brands. A number of brands are starting to consolidate their store portfolios. While this will have positive implications on the brand’s overall rental bills, we do not see this having a detrimental effect on their overall sales.
In July, arrivals by mainland Chinese grew by 2.2% - the first year-on-year increase in 13 months. Is Hong Kong already turning? It is hard to tell, but likely to be a result in the Chinese tourist wanting to stay closer to home deterred from travelling to Europe due to the recent terrorist attacks together with the strengthening of the Japanese Yen.
In order for Hong Kong to return to its dizzy heights of only a few years ago, fundamental changes need to be made not only by the brands but also the landlords. One of the main ways to address the problem is for both the landlord and retailer to have a clear understanding of who their target customer is and how they like to shop. While historically, the mainland Chinese consumer were drawn to the luxury brands with prominent logos, this trend over the recent years has dissipated. The majority of the consumers who are now visiting Hong Kong are Millennials. They are not so focussed on luxury brands for status and are instead buying brands that are on-trend. They are being drawn to areas which offer the latest trends and associated brands.
What does this mean for Retailers looking at Hong Kong?
Despite the difficult times the S.A.R is experiencing, it would be foolish to write off Hong Kong and we believe that the long-term future remains bright with it remaining one of the key global retail cities.
With closure of a number of existing stores together with the continued steam of new entrants wanting to enter the market, this is providing landlords with the perfect opportunity to freshen up their tenant mix and reflect the changing attitudes of the consumer. While there are some landlords adapting quickly to the changing environment, these are in the minority with the others continuing to chase the same luxury brands. They need to appreciate that while luxury will continue to have a place in the retail landscape, luxury means exclusivity. For Hong Kong to maintain it’s position in the Region, it is important that everyone learns from the previous mistakes; they should not all chase after the same brands as this will return to the market to a sterile retail landscape, not attracting the needed inbound tourism.
The big question that remains at the forefront for a number of brands is what is going to happen to the rental levels? With Hong Kong's limited supply and the high demand for space as many brands looked to capitalise on the visiting mainland Chinese as well as using it as a foundation for their assault into mainland China, this resulted in the rental levels for some areas to significantly escalate. While we are starting to see rentals in some areas come down by 30 - 40%, there are other pockets that are holding firm and it is our view that in the 'ultra prime' areas, we could even see a rental increase as brands fight for prime space.
The short-leases offer retailers a level of flexibility with some taking a step-back to review their position in the market before deciding on their next steps. Even if they start closing stores in high profile locations now, they will still be able to re-enter these areas in the short-term once positive signs emerge.
The advantage that both the new and less exposed brands have is that they will bring something fresh and are therefore in high demand. However, it is important they remain resilient and don’t get caught up in the moment accepting every opportunity they are offered as it will result a different brand, same story scenario. In the long-term, no one benefits - the brand, the landlord and certainly not the consumer.
07.09.2016