Ongoing social unrest has decimated Hong Kong’s economy, plunging the Chinese territory into a recession and rattling the luxury brands that operate stores in the city of more than 7 million.
Data shows that Hong Kong slid into a recession in the third quarter of 2019, its first in a decade. The social unrest reared first its ugly head in March, with the pro-democracy protests intensifying by June. Just days into 2020, demonstrations are now no longer limited to the weekends only.
Retail data paints a less-than-pretty picture unfolding in Hong Kong.
Total retail sales in November–the most recent monthly data point available–fell 23.6 percent to 30 billion Hong Kong dollars ($3.9 billion) from year-ago figures. That follows a 24.4 percent year-on-year October decline. For the first 11 months of last year, the estimated total value of retail sales fell by 10.3 percent, compared with the same period in 2018, according to data released Friday by Hong Kong’s Census and Statistics Department.
The volume of total retail sales in November fell by 25.4 percent versus year-ago volume. By category, department store sales fell 32.9 percent, while jewelry, watches and clocks and valuable gifts suffered a steep 43.5 percent drop. Apparel sales sagged 31.9 percent, while footwear and other apparel accessories saw sales shrink 31.5 percent.
Some luxury brands reporting first half earnings last November detailed the financial impact from the social unrest. At Burberry Group plc., Chinese visitor spend retreated 22 percent in the half, with sales in Hong Kong falling 38 percent in the second quarter, Julie Brown, the luxury firm’s chief operating and chief financial officer, said during the company’s conference call on Nov. 14. The British premium label expects sales to remain under pressure for the balance of its fiscal year, she added.
Many luxury brands operating in Hong Kong rely on Chinese tourists from the Mainland, but protests last year have also roiled transportation hubs in the city, causing delays and disruptions at the city’s International Airport.
In October, Prada decided to close its store in the city’s Causeway Bay district when its lease at Plaza 2000 on Russell Street expires in June. Rent for the 1,393-square foot space reportedly totals about 9 million Hong Kong dollars ($1.2 million). And just last week word surfaced that Louis Vuitton is reportedly making plans to shutter its 10,000-square-foot store at the Times Square mall. The landlord reportedly declined to lower the monthly rent, estimated at 5 million Hong Kong dollars ($643,497), the South China Morning Post said. Following the closure, Louis Vuitton will still have seven stores in operation throughout the city.
More than 500 shops so far have closed across four main shopping districts: Causeway Bay, Tsim Sha Tsui, Central and Mong Kok. And the pace of store closures is likely to continue.
The Hong Kong Retail Management Association in September had written to all landlords, urging them to slash rents by half for six months to assist struggling retailers. Many retailers had already instituted austere measures, like asking staff to take unpaid leave or requesting landlords defer rent payments.
Some have offered commercial rent reductions of as much as 40 percent, said many real estate consultants, but that concession might be insufficient to save fashion retail so long as protesters continue to disrupt business as usual.
The HKRMA Conference on Nov. 29 set forth a less-than-promising outlook for 2020.
The Hong Kong economy is currently at its weakest since the global financial crisis and the retail sector is expected to stay weak due to subdued local demand, Samuel Tse, economist at DBS Bank (Hong Kong) Ltd., told attendees.
And on the commercial real estate front, prime street shop rents have fallen or been substantially adjusted in core shopping areas, while landlords were also responding to the economic backdrop by reducing their dependence on fashion retail and adding other retail categories such as wellness and lifestyle offerings, according to Barrie Chan, deputy senior director and head of retail leasing at Savills (Hong Kong) Ltd.