‘Structural reassessment’ looms for luxury brands in Hong Kong, says OC&C Strategy Consultants partner
International and luxury brands are predicted to embark on a “structural reassessment” of how many stores they really need in Hong Kong, according to an experienced retail analyst.
Pascal Martin, a partner at OC&C Strategy Consultants, told Inside Retail Hong Kong that while rent negotiations are making headlines right now due to the impact of ongoing protests on Hong Kong’s retail sector, an underlying problem has been looming for some time.
“Hong Kong as a retail destination has lost a lot of its attractiveness as a result of a combination of factors: Hong Kong prices are much less attractive than they used to be overall as a result of brands’ global pricing strategies, the reduction in Mainland China duties; and the decline of the RMB.”
Martin says when times are tough, landlords look to carve up larger stores into smaller spaces to increase the yield per square foot. This is especially true with retailers paying variable rents.
Recent examples of this include the reduction in Zara’s footprint at IFC mall to create space for Sephora’s return to Hong Kong. At Pacific Place, Harvey Nichols has just reopened its flagship store in a space just 50 per cent of that it previously occupied (yet offering significantly more brands due to the store’s new offline-online concept).
Such downsizing used to impact only on larger tenants such as department stores. Martin, who before joining OC&C Strategy Consultants was Asia director at Marks & Spencer, recalls when management of Harbour City at Tsim Sha Tsui told the company to give up the lower floor of its two-storey space to make way for a luxury brand to expand its space facing onto Canton Road.
“Then, four to five years after I left, at lease-renewal time the landlord asked M&S to give up their remaining floor in anticipation that the luxury brand would increase its floor space again, with one floor up. M&S got out …. but the released space remained empty for months, while the mall looked for a tenant.
“This kind of downsizing used to only happen to brands like M&S …. now even Zara has to downsize.”
The recent demise of high-profile flagship stores of fast-fashion brand Forever 21 and Abercrombie & Fitch are other examples of brands finding the cost of operating large stores in Hong Kong not being viable (except perhaps as a marketing expense). Forever 21 closed its multi-storey flagship in Causeway Bay in 2017 leaving the building vacant for more than a year until Victoria’s Secret opened there last year. In the US, Victoria’s Secret is battling to retain market share and there are suggestions such store formats will no longer be pursued in the future.
In 2011, Abercrombie & Fitch agreed to pay HK$7 million (US$900,000) a month – double the rent of previous tenant Shanghai Tang – for its 25,600 sqft Pedder Street flagship in Central. But A&F negotiated an exit from that space in 2016, three years before the lease expired, and the store has stood empty ever since. A year later, Abercrombie & Fitch opened a new, smaller store at harbour City in Tsim Sha Tsui.
Martin sees the combination of falling sales and steep rents in prime retail sectors as driving a rationalisation of luxury brands, and a downsizing of the spaces they occupy in shopping centres.
“I think we are going to see a structural reassessment by top brands of how many stores they really need in Hong Kong.”
Martin says his clients in the luxury-fashion sector have experienced “very negative” like-for-like sales in July (down 20 to 30 per cent) and in August (down 40 to 50 per cent) “and I imagine that their numbers are also very negative in September”.
“They are all aggressively pursuing rent cuts from their landlords. But I don’t know how successful they have been so far.”