The local retail industry has experienced the longest business disruption in its history amid the prolonged social unrest and the global coronavirus pandemic. Retail sales have for the first time recorded 11 consecutive months of double-digit decline since July last year. Tourist-focused sectors such as jewellery and watches, cosmetics and luxury fashion took the biggest hit due to sinking tourist traffic, with the value of sales of jewellery and watches plummeting by over 69% over the first five months of 2020.
The local retail industry has experienced the longest business disruption in its history amid the prolonged social unrest and the global coronavirus pandemic. Retail sales have for the first time recorded 11 consecutive months of double-digit decline since July last year. Tourist-focused sectors such as jewellery and watches, cosmetics and luxury fashion took the biggest hit due to sinking tourist traffic, with the value of sales of jewellery and watches plummeting by over 69% over the first five months of 2020.
Sales of clothing and related products also tumbled by 50% over the same period. Declining sales volumes and an uncertain market outlook have prompted retailers to rationalize their footprint, and a number of luxury brands including Valentino, Tiffany & Co., Coach and Prada have already given up their retail outposts on Canton Road in Tsim Sha Tsui and Russell Street in Causeway Bay, two of the most expensive commercial addresses in the city.
Whereas retailers are struggling to maintain their P&Ls, many landlords still believe that the current market turmoil is mostly temporary and are reluctant to offer substantial rent reductions upon renewal. Perhaps more concerning is that more mid-range retailers are joining the luxury brands and have been offloading unprofitable stores in recent months. Swatch has already quit its store on Queen’s Road Central, while Topshop, GAP and Adidas may not renew their leases in Central. Vacancy on prime streets in traditional tourist districts is set to rise.
The post-COVID outlook for Hong Kong’s retail industry remains very challenging. Some structural changes in demand profile and market fundamentals are underway and both retailers and landlords need to adapt and constantly reinvent to stay relevant. A slower-than-expected recovery in the tourism market means that a more balanced approach to local consumers and mainland tourists is warranted moving forwards but the shopping preferences of locals and tourists are of course quite different.
Local consumers are more focused on their “whole of life” needs, prioritizing health and well-being, caring about their family and community, and valuing the local culture and sustainability. Retail categories such as lifestyle brands, health-related products and affordable family-friendly retailers which appeal to domestic shoppers are beginning to have a stronger presence in the market. As an example, Muji and Lululemon have opened their largest stores in Telford Plaza and Harbour City respectively, while Sweaty Betty, a UK women’s activewear brand, is opening its second store in Causeway Bay this month. Following its success in Tsim Sha Tsui and Tsuen Wan, Don Don Donki is opening two more stores in Causeway Bay and Central in the second half of the year.
However, we still expect to see a rise in vacancy on both prime streets and in shopping centres during the third quarter, as retailers continue to face challenges both locally and globally forcing them to rationalise networks which will mean fewer branches and smaller stores. Shopping centre landlords meanwhile will need to be more creative in terms of the way they use vacant space. More pop-ups are expected, while other cultural and educational uses will help to create a positive and unique shopping experience for consumers. Additional recreational areas could also become more common, such as outdoor open spaces, children’s playgrounds and pet-friendly areas, helping to draw traffic and enhance customer engagement.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “Rising vacancy levels continue to plague the market with mid-range fashions joining luxury retailers in rationalising store numbers, but rents appear to have stabilised for now.”
Mr. Nick Bradstreet, Managing Director, Head of Retail Leasing said: “The market has endured a prolonged correction since 2013 but with rents now close to 2003 levels, landlords and tenants are beginning to embrace the new reality and accept new business models and a more creative approach to trade and tenant mix.”