Recovery Road: Where next for Hong Kong retail?
Hong Kong retail sales for the first two months of this year soared 15.7 per cent against – the first double-digit increase in years – and February marked the 11th consecutive month of growth.
Clearly, the city is on recovery road. But will Hong Kong return to the so-called “Golden Era” of 2013?
We present three different views fro retail experts in the territory, first published in the current edition of Inside Retail Hong Kong’s latest magazine edition, written before the February data was revealed, but when the January figures were clearly tipping an exciting year. Nick Bradstreet is MD and head of leasing with Savills Hong Kong, Pascal Martin is a partner with OC&C Strategy Consultants, and Michael Cheng is Asia Pacific & Hong Kong/China consumer markets leader with PricewaterhouseCoopers.
What a difference a year makes. Not too long ago – November 2016, to be exact – Hong Kong’s retail landscape was looking decidedly barren. Sales of luxury goods were still well below peak 2013 levels, fashion sales in general were at a nadir, and crucial visitor arrival numbers were still down.
Jump ahead to November last year, and the picture looks much different. Sales volumes of luxury goods are, on average, up across the board by 5 per cent, fashion numbers are still down, but by just 0.5 per cent rather than the double-digit figures of previous quarters; and retail sales in general crept up by 1.8 per cent year on year. While those statistics pale in comparison to the record-setting levels of the past, and there are still too many vacant storefronts in SoHo and Causeway Bay, upward-trending key indicators provide reason to be cautiously optimistic about Hong Kong’s retailing future.
Some perspective is needed regarding the territory’s retail performance of late. Anything below the whopping 86 per cent sales volume growth recorded between 1997 and 2016 (topping out at more than HK$430/US$50 billion) is going to appear tepid, at least on the surface. During that same period, global-leading retail rents in high-street shops and shopping centres were, by some standards, out of balance and bound for recalibration. Add to that the city’s primary source of retail activity, visitors from Mainland China, becoming entangled in an anti-corruption campaign, and there was a recipe for the kind of retail reinvention that is underpinning the current resurgence and positioning it for the long term.
Tourist numbers have been climbing, and in October the city welcomed more than 5 million visitors, a 6.6 per cent increase year on year. That was the strongest rate of growth in seven months, and most crucially, 75 per cent of those visitors were from China for an 8.3 per cent increase from the year before. Overnight, PRC visitors spiked 10 per cent (despite ongoing caps on cross-border travel), an encouraging number, as the average spend for overnighters is two to three times that of day visitors.
Until those improvements, weak tourist arrivals slowly but surely began to influence how landlords and tenants entered into negotiations. A year ago, landlords holding prime retail space were still unwilling to bend on rental rates. Now, especially in prime locations such as Causeway Bay and Tsim Sha Tsui, both parties have proven more open to agreements that are mutually beneficial – agreements that secure a long-term tenant for the landlord and give the tenant time to cultivate a customer base. More and more often, traffic-generating F&B outlets or brands new to the city are taking advantage of a more welcoming retail property environment.
Taken in conjunction with improving domestic consumption, these signs bode well for retailers. Watch and jewellery sales were among the leaders for the period, measuring improvements of 7.9 per cent, along with medicines and cosmetics at 12.5 per cent, and 3.5 per cent in what the Census and Statistics Department (C&SD) calls “wearing apparel”.
While the fashion industry continues to struggle, trendy brands and “affordable luxury” are still performing well, which could be attributed to the property sector’s reconfiguration. With the aforementioned rental compromises, many international brands that had yet to establish a presence in Hong Kong – such as watchmaker Daniel Wellington, accessories brand Dooney & Bourke, and contemporary UK clothier Whistles – together with targeted local expansion and refocusing (like Lane Crawford’s younger-skewing Lab Concept) are creating a better, richer retail environment from the consumer’s perspective. That needs to continue if Hong Kong retailing is to recover fully.
Not to be outdone, F&B is still Hong Kong’s most promising retail sector because (as with fashion) international brands are finally having an opportunity to open, as well as local experimenters – Tipsy in Tai Hang, La Piola in Wan Chai, Beet in Central, Papi in Causeway Bay.
The added security of a healthy stock market giving locals the confidence to spend along with the trend of tourists increasingly making dining outlets a destination in themselves, F&B is likely to stay a key contributor to Hong Kong’s retail rebound. In the C&SD’s words, “The near-term outlook for retail sales remains positive, as consumer sentiment is buttressed by the favourable employment and income situation, and as inbound tourism continues to recover”.
Will the level of sales Hong Kong enjoyed in 2013 return? Let’s put this question in context: retail sales then reached HK$494.5 billion. Retail sales last year were at $446.1 billion, with overall year-on-year growth 1.9 per cent for the entire year.
But last year’s second-half growth varied between 3.2 per cent (August) and 7 per cent (November). The peak in November was largely driven by a “catch-up” effect in watches and jewellery after a long slump in that sector, and a one-time effect from the launch of the Apple iPhone X.
Underlying local consumption, the growth drivers are very positive: Mainland China and US growth are strong, and they are the main export markets for Hong Kong. Our unemployment is low, interest rates are low, and the stock market and the property market are up, which makes Hongkongers feel wealthy and willing to consume.
Also, the number of foreign visitors to the city is growing again after several years of decline following the 2013 peak, particularly from Mainland China. In last year’s third quarter, quarter-on-quarter growth of Chinese visitors was 3 per cent, then in the fourth quarter at 8 per cent.
But Chinese visitors tend to stay in Hong Kong for a shorter time than do visitors from other countries, and they tend to spend less than they once did, therefore limiting the effect of visitor growth. We are seeing a structural shift in the makeup of Chinese visitors to Hong Kong, and hence their type of spend:
- More visitors are coming from lower-tier cities, and there are more same-day visitors rather than multi-night, for the same reason. Visitors from top-tier cities have moved beyond Hong Kong to other destinations like Japan and Europe.
- In some key categories, a narrowing of price difference between Hong Kong and Mainland China makes Hong Kong somewhat less attractive for shopping. Furthermore, people really looking for price difference will go to the EU to take advantage of VAT arbitrage.
All-in-all, given the experience of the second half of last year, I expect to see Hong Kong retail growth of between 3 and 4 per cent this year.
Growth in January was disappointing at only 2.2 per cent, but this relatively low level was probably primarily because of the different timing of Chinese New Year, as indicated by the 2.6 per cent decline in tourists arrivals year on year. Of course, that means both tourist numbers and retail sales will be up in February for the same reason, and more consistent with the figures for the final two quarters of last year.
So while there is no doubt Hong Kong retail sales will return to the 2013 level, if growth stays around 2 per cent (basically inflation and a little bit more), it will take five years to surpass the 2013 level – that’s 2023. If growth is more steady at 4 per cent, it will take only two years, until 2020. A middle-ground 3 per cent average would mean the 2013 level will be reached between 2021 and 2022… unless a major catastrophe like Sars (unlikely) or a stock-market crash (quite likely) occurs during that period.
The categories most likely to continue to grow are consumer durables and luxury items, like watches and jewellery, that are prime purchasing targets of Chinese visitors. Those that may not grow as much are mainstream clothing and footwear, grocery and food, and fuel.
I do not foresee watch retailers and jewellers starting to expand their store networks again. Although commercial rents in most attractive Hong Kong locations have come down a lot (between 25 and 35 per cent), major jewellery retailers like Chow Sang Sang and Chow Tai Fook may stop or slow down their store closures (Chow Tai Fook closed 10 stores last year), but they are unlikely to start expanding their store portfolios again any time soon. One reason is that their adoption of digital channels is helping expand the reach of existing stores by funnelling customers online into stores.
Also, large jewellery chains have shifted their focus to Mainland China, where they are opening more stores. For example, Chow Tai Fook opened more than 100 stores on the mainland last year.
The main factors that could constrain retail growth in Hong Kong are those impacting the price difference between goods in Mainland China and here: exchange rates and taxes (such as those on imports, luxury goods and VAT). We have not seen major shifts there.
Both hotel capacity and airport runway capacity allow for plenty of growth to be absorbed. For example, the number of Hong Kong hotel rooms will grow by 19 per cent between last year and next. Furthermore, the high-speed train and the Hong Kong to Shenzhen bridge are likely to increase arrival capacity.
I think the main factor affecting retail moving forward will be the increasing importance of online. Smart retailers with brick-and-mortar stores will learn to harness the power of digital channels to bring more traffic and more qualified customers to their stores, therefore needing fewer stores to generate higher sales.
Also, with e-commerce accounting for just 4 per cent of Hong Kong’s current total retail sales, our market is way behind other Asian markets like China (20 per cent), Japan (8 per cent), Korea (19 per cent), Australia (9 per cent) and Taiwan (10 per cent).
As Hong Kong integrates more and more into the greater China commercial environment, I can see Hong Kong increasingly adopting Mainland China e-commerce platforms and therefore gradually catching up with mainland levels.
For these reasons, I don’t see Hong Kong commercial rents returning to the levels of 2013-14 any time soon, because retailers will not need to open as many stores.
Hong Kong retail sales climbed steadily last year, finishing with 2.2 per cent year-on-year growth. Retailers enjoyed a boom period during the traditionally busy month of December, when the value of total retail sales expanded 5.8 per cent to HK$44.8 billion. Overall, this was the strongest performance since 2013.
The city’s advantage as a retail hub is that Hong Kong is still the world’s freest economy, providing high-quality and trustworthy goods under a well-established legal system that provides confidence and an excellent consumer experience. This encourages legal imports and reduces the attractiveness of purchases made through irregular channels, thus bringing long-term benefits to both Hong Kong and the mainland retail sectors, as well as promoting consumption upgrade on the mainland.
Despite some store consolidation and a retreat from main-street locations, luxury goods, especially jewellery and watches, was one of the best-performing sectors last year. After gaining 5.2 per cent through the year, this category is expected to further recover this year, contributing to a further improvement in the overall retail sales in Hong Kong in the immediate future.
In other growth sectors, sales of apparel gained 6.5 per cent in value in December; footwear and accessories 3.3 per cent; and cosmetics (including medicines) 11.4 per cent.
This spending is being driven by record high stock and real-estate markets, both local and global, creating a significant wealth effect and much improved sentiment in consumption. Also, tourist arrival numbers in Hong Kong, particularly from the mainland, have been encouraging and recovered steadily last year under the much better and more stable political and social environment.
Going forward, combined with the low jobless rate and a recent weakening of the US dollar against major currencies, PwC expects Hong Kong’s retail sector should be recovering well in the medium term and exceed the record high of 2013 within the next five years.
Hong Kong’s retail sector still depends very much on tourism, particularly from the mainland. Mainland visitor numbers last year increased by 3.9 per cent; those from areas other than China hit 14.03 million, up 1.1 per cent. A balanced mix of global and mainland visitors can boost domestic consumption and benefit the long-term development of Hong Kong’s retail sector.
The Chinese government recently slashed tariffs on 187 imported consumer goods, including wines and spirits, pharmaceuticals and food. While PwC believes this policy will strengthen domestic consumption in China, it also argues that it will have only a modest effect on Hong Kong retail.
My advice for retailers in Hong Kong – and even globally – is that in order to win over the longer term, they need to be game changers within their industry. Retailers need to transform themselves from being disrupted to being disruptors. Embracing technology and data to provide special customer experiences through diversified platforms and logistics networks are the keys to success.