After 6 months of protests, Hong Kong recorded its biggest retail slump on record in October when sales contracted 24.3 percent to HK$30.1 billion (US$3.9 billion), the government said, extending a slide that brought the economy into a technical recession last quarter.
The government, which estimates the economy will shrink by 1.3 percent in 2019, is preparing to unveil its fourth round of stimulus soon.
At the beginning of the situation, the hope of getting back to normality was there, but today businesses are working on contingency plans to limit the damages.
There are no official sources, but the feeling within the retail industry is that companies are considering transferring staff to other markets, if lucky enough to have regional operations or try to explore opportunities just across the border. Hospitality companies operating at a global level are experiencing the same situation. However, local branches of businesses mainly relying on Chinese consumers will soon have no choice other than shutting down their stores.
All businesses relying on Chinese consumers have already started cutting costs. Simon Wong Ka-wo, president of the Hong Kong Federation of Restaurants and Related Trades, said to the SCMP, that from June to September this year more than 200 restaurants shut their businesses in those four months, leaving people out of work.
During the seven-day “golden week” holiday from October 1st, a traditional business peak, the number of visitors coming to Hong Kong from Mainland China was around 672,000 – down more than 55 per cent from the figure recorded over the same period last year. Mainland visitors accounted for about 80 per cent of all Hong Kong’s tourist arrivals before the August downturn.
This situation is spotting the ephemeral and volatile nature of the economy in a place where where Tycoon landlords are not playing their part in the retail ecosystem. Tenants will have no other choice but to redistribute their Hong Kong retail footprint.
Bluebell Group, a family-owned business with an annual turnover of US$2 billion, operating 150 luxury, premium and lifestyle brands in Asia and employing 3,800 people, is asking Hong Kong landlords to share the pain by scrapping the base rent in shopping malls, saying a slump in tourist footfalls will push even more retailers out of business in the coming months.
With over US$50 million of sales in Hong Kong last year, Bluebell Group is reviewing the leases on two stores, each with 1,500 sq ft of floor space, Ashley Micklewright, President and CEO for the group, said to SCMP, declining to name the location. Rents for both amount to HK$1.3 million a month, or about HK$433 per sq ft.
Bluebell has obtained rent reduction from five landlords, averaging about 15 percent of base rent, Micklewright disclosed. Still, that is of little comfort because rents typically account for a high 50 per cent of turnover in luxury stores, and 35 to 40 percent of lifestyle stores.
At Harbour City, the mall owner has not granted any relief although sales have been reduced to 30 percent of normal volume, he added.
Sun Hung Kai Properties has waived rents only on days when its malls are totally shut because of protests.
Bluebell Group would like to see landlords as part of the solution, being an integral part of the retail eco-system. The actions of the Group’s brand partners have been swift by taking back stock, and giving discounts on purchased stock. “We have frozen all new store openings, suspended marketing expenses, and put the back office on contingency expenses reduction plan. Our retail staff are all well aware of the compromises, as their own sales commissions have been affected”, Micklewright shared. However, landlords have been slow to respond, and Bluebell is asking them to adopt a flexible rent model based on a percentage of sales due to the extraordinary circumstances.
The concessions that they have been making so far do not reflect the size of Bluebell’s call also echoes a plea by the Hong Kong Retail Management Association for more relief to help its 9,000-odd members beat the slump in the coming year-end season. “So far, we have not seen any sign of the social unrest easing,” said Annie Tse Yau On-yee, chairwoman of the industry group. “On the contrary, the market situation has worsened with more and more retailers shutting down.”
“Like any business, retail is cyclical, and the current situation will have a longer term impact on Hong Kong’s retail scene – our point of view is that the market will recalibrate to cater to the local demand”, Micklewright explained.
Recently, high-end shopping malls have been reviewing their tenant mix, enlarging their F&B and entertainment offering. This shows there is awareness about the need to diversify and attend to the local population demands.
Landlords should start understanding that the era of tourist shoppers has a new dimension, which is not only the result of the current social unrest movement, but started much earlier with VAT reduction in China, EFEX, and other events. Now more than ever, Hong Kong retail ecosystem needs team players to redefine its role and remain a relevant retail destination. “For that to happen, landlords have to be part of the solution, and begin to address the immediate needs of the brands, to lower the rents based on the new productivity trends”, Micklewright said.
“Hong Kong’s role as a pure “luxury” player in retail will change, with other markets across Asia becoming important hubs for ‘luxury shopping’. Rents coming down will be an encouraging first sign that the market is entering into a new era of retail in Hong Kong. Hong Kong remains a very attractive place to visit and live, and we are confident it will reinvent itself by offering diversity to Asian shoppers”, concluded.
This is aligned with what Jean-Marc Pontroué, CEO of Panerai, a unit of Swiss luxury firm Richemont, said last month to China Daily in regards to the fact that Hong Kong’s decade-long position as the largest market for Swiss watch exports will not last as other regions see accelerated growth.
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“People are changing their habits to travel, and people are going to new destinations,” Pontroué said. “We are compensating close to 100% what we lose in Hong Kong by big business increases in mainland China, Korea, Japan and Singapore.”
After months of reviewing the numbers, closing the year on a call for consideration of a new scenario to come, and a positive note to welcome 2020.