Rethinking Hong Kong's luxury future

A newly imposed national security law, protests and trade tensions are putting an already struggling retail sector on the line.
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Political unrest in Hong Kong has restarted over China’s new security law, marking almost a year of disruption.

Luxury brands including Prada, Valentino, Tiffany & Co. and Chow Tai Fook have already permanently closed retail outposts in the city while others are reevaluating their presence. With new tensions flaring up, both on the streets of Hong Kong and internationally, and tourism (the biggest driver of sales) not likely to recover any time soon, brands are cautiously looking at the future of their long-term footprint, say property agencies and retail consultancy groups, casting doubt over the sector’s future.

“Some [luxury] brands have already quit the Hong Kong market to focus their attention on mainland China,” says Daniel Wong Hon-shing, CEO of property agency Midland IC&I, one of Hong Kong’s biggest property agents. “Most of the brands are in the Hong Kong market just because it is good for the mainland region. When they have already established their brands in Hong Kong and in the heart of the mainland residents, they have no need to station their retail shops in Hong Kong anymore.”

The protests will likely continue, says Albert Park, head of the department of economics at the Hong Kong University of Science and Technology. The approval of the security law might lead to another six to eight months of protests. If Park’s forecast materialises, companies that might have thought the disruption was temporary in 2019 could be pushed to make more drastic decisions.

“As soon as [businesses] start to think this might be long-term, that's when you really get people starting to relocate and close shops,” he says.

Retail sales in the city declined by a record 43 per cent in March 2020. Clothing, footwear and related products saw an even bigger slump, declining 66.4 per cent. Savills Estate Agents expects vacancies and closures to rise in the upcoming months as many retailers have reported plunges in sales between 50 and 80 per cent in the first quarter of 2020.

Hong Kong economy at a crossroads

While the approval of the national security law has reignited social unrest, protests have seen smaller crowds compared to previous years. Participants have remained in the thousands; last year, organisers said up to two million people descended on the streets. (The Hong Kong police said turnover was 338,000.) Some businesses and retail operators say the security law, which allows for a stronger enforcement apparatus, could ultimately bring in stability, restoring favourable economic conditions and reassuring the markets.

“The proposed security law... has a positive and stabilising effect in the long term for the further integration of Hong Kong with the Chinese economy, which will generate more benefits for the luxury companies to cultivate their presence in Hong Kong,” said Maggie Hu, assistant professor of Finance and Real Estate at the Chinese University of Hong Kong, in an email.

The New York Times reports that some companies and employees have also been pressured to show support for the security law.

When asked about the intention of closing one or more of the 12 stores in the city, Burberry’s chief financial officer Julie Brown said that the brand had “no specific plans as of yet”. Other brands have been reticent to comment on the situation. In a comment, Valentino said there is “no plan to change our current retail store structure in the near future.” (Prada declined to comment; Chow Tai Fook declined to comment as the company is in its pre-earnings blackout period; Tiffany & Co. didn’t reply to a request for comment.)

“As usual, in any part of the world, when leases come up for review we take a good look at the future prospects of that lease in light of the market conditions that we see and the trade, and so we will do exactly the same in Hong Kong,” Burberry’s Brown added.

Kering’s CFO Jean-Marc Duplaix said repatriation of spending from tourist locations to countries like China “will push us to consider our store network, it's too early at this stage to provide more information about what we will decide, but it will lead to a reshuffle of the distribution”, during a call with analysts in April.

Local consumers and high rents

The Covid-19 pandemic, which forced Hong Kong to close its borders in March, further unsettled tourism, with arrivals dropping by 98.6 per cent year on year in the same month. Much of the city’s luxury consumption relies on tourists, especially those coming from the mainland. “Protests that seemed defined in time have now become perennial protests, so Hong Kong is not playing anymore the role it had in the region as a shopping destination,” said Antonio Achille, global head of McKinsey's luxury sector, during a presentation to members of the industry.

To recoup some of the lost spending, many luxury brands have expressed the intention of focusing more on local Hong Kong customers. “The local market has strong spending power,” writes Cathie Chung, senior director of research at JLL, adding that local shoppers were seen queuing up in front of Chanel and Celine shops at the Harbour City mall in early May. “Retailers should take advantage and adopt a more balanced model between local shoppers and tourists.”

But reports are mixed. Burberry's share of total sales in Hong Kong halved to four per cent in its third quarter to 28 December 2019, when inbound tourism dropped 51.5 per cent and protests intensified. According to Chloé Reuter, founder of Reuter Communications, a luxury intelligence and marketing agency based in China, usually 85 per cent of Harbour City mall shoppers are from mainland China. "There has been a rebound of local consumers, but the infrastructure that has been built in Hong Kong over the last couple of decades, which mainly caters for Chinese travellers, cannot be sustained by the local Hong Kong market," she says.

Commercial rents in Hong Kong are also among the most expensive in the world. According to property consultant Cushman & Wakefield, Hong Kong’s Causeway Bay was the world’s most expensive shopping street in 2019, with rents amounting to $2,745 per square foot per year. Rent in the mainland is often 10 to 20 per cent what retailers pay in Hong Kong, says Midland IC&C’s Wong Hon-shing. While prime street and shopping centre rents have declined 14 per cent and 16.5 per cent in Q1 2020, and some landlords are offering temporary 30 to 50 per cent discounts, the Hong Kong Retail Association says more measures are needed to prevent up to 15,000 retail stores from closing by the end of the year.

“If luxury brands are going to rely on local customers, they probably don't need that many stores,” says Veronica Wang, a senior partner at strategy consultants OC&C, adding brands should consider closing some, particularly ones that served tourists.

The future of Hong Kong as a financial and luxury hub

The new national security law has also reignited trade and political tensions between mainland China and the US, which will inevitably weigh on Hong Kong. On 30 May, Donald Trump moved to revoke Hong Kong special status, which grants the territory different import tariffs from the ones applied in mainland China, among other specific custom and travel regulations.

The window of multi-brand clothing stores I.T. in the Causeway Bay district of Hong Kong was smashed on 24 May, during protests against a proposal to enact new security legislation in Hong Kong. 

Isaac Lawrence / Getty Images

While Trump failed to provide specifics of what will change in practical terms, higher tariffs on US imports to Hong Kong could further damage the retail landscape. The luxury price difference between mainland China and Hong Kong is one of the main drivers for mainlanders to travel to the city.

According to Hu, while the city will likely remain a luxury and financial hub, Hong Kong is likely to lose traction from a retail point of view. Its staying power will depend on how much the security law, which is expected to take effect in September of this year, will actually affect the jurisdictional, financial and cultural nature of the city.

Uncertainty will be the most likely outcome according to Hong Kong University’s Park. “More protests and more enforcement could lead to conflict and more destabilisation,” he says.

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