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Spasm of Violence in Hong Kong Dampens Luxury Retail Sales

Demonstrations in Hong Kong have continued to escalate, reaching a new level of violence on Tuesday as protesters and police clashed.

News reports said a Hong Kong protester was shot in the chest by live ammunition at close range as crowds called for China to “return power to the people.” Protesters in some locations also reportedly hurled Molotov cocktails at security forces, injuring officers with corrosive fluids.

Tuesday’s demonstrations, now moving into week 17, resulted in police firing tear gas at the protesters in an attempt to disperse the restive crowds. Beijing moved troops across the border into Hong Kong in August, but said at the time that it was a routine rotation.

Many retail establishments in Hong Kong were closed Tuesday, including the city’s large upscale mall IFC, which is home to luxury brands such as Tiffany & Co., Gucci, 7 for All Mankind, Brunello Cucinelli, Calvin Klein Underwear, Chanel, Coach, Loro Piana, Moncler, Salvatore Ferragamo, Sandro,  and Tory Burch.

Separately, MTR Corp. is said to have shut down its metro system to halt demonstrators from moving freely from one location to the next.

Tuesday also marked the 70th anniversary of the founding of the People’s Republic of China. President Xi Jinping led a celebration in Tiananmen Square. The anniversary, a national holiday in China, starts a week-long celebration known as Golden Week. Running from Oct. 1-7, Golden Week marks an opportune time for travel and many shopping malls and retailers offer big discounts during the week-long celebration.

However, retailers in Hong Kong are not expected to garner any benefit from tourism activity due to the ongoing social unrest.

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Chinese tourists from Mainland China are expected to shy away from Hong Kong, as has been their pattern for most of the summer. According to the Hong Kong Tourism Board, 4.8 million tourists from the Mainland visited Hong Kong from January through August in 2018. The data from January from August in 2019 reflects just 2.8 million visitors, a 42.3 percent drop in tourism from the Mainland. Reportedly, 1.2 million tourists from the Mainland visited Hong Kong last year during Golden Week.

The tourism board noted that most of Hong Kong’s visitors hail from the Mainland, and their spending contributes to 5 percent of Hong Kong’s GDP. But the protests that began in March have steeply curtailed the number of visitors to Hong Kong this year.

Hong Kong, a former British colony, was returned to China in 1997 and has operated under a “one country, two systems” approach that provides Hong Kong citizens with certain freedoms not given to Mainland citizens. A legislative bill introduced in Hong Kong in March would allow criminals to be extradited to Mainland China, which in turn triggered the start of demonstrations over the fear of losing certain rights. And even though that bill is no longer on the table, protests have continued as Hong Kong citizens push for greater democracy.

As the escalation of social unrest has worsened, so too has the business landscape in Hong Kong. Some companies have elected to pull back on expansion plans. Others have debated exiting leases, such as Italian luxury brand Prada, which is said to be considering surrendering its existing lease on Russell Street in Causeway Bay.

Annie Yau Tse, chairman of the Hong Kong Retail Management Association, said last month that the “sales value of shops located in tourist areas edged down by 50 percent, while shops selling daily necessities also registered a drop ranging from 20 percent to 30 percent.”

The association also adjusted its retail sales forecast from a single-digit growth projection for 2019 to a double-digit drop for the year. “The magnitude of the drop will depend on the length of the social incidents. In fact, member companies have already implemented tight budget control in order to survive the turmoil,” Tse said.

In a new Knight Frank report from September, David Ji noted that sentiments remained weak for Hong Kong Island as tenants continued to be “very conservative with their outlook and business plans,” while tenants in Kowloon have adopted a “wait-and-see attitude.” Ji is the director and head of research and consultancy for Greater China at Knight Frank.

Ji noted that luxury retail sales have taken hardest hit among the different business sectors in Hong Kong. Retail sales in July, the most recent data available, fell 11.4 percent to 34.4 billion Hong Kong dollars ($4.39 billion), the first full month that was impacted by the protests. The decline also marked the sixth consecutive month of a downward trend. According to Ji, luxury goods–including jewelry, watches and valuable gifts–recorded the larges decrease in sales of all sectors, plummeting 24.4 percent year-over-year. Apparel and footwear sales dropped 12.6 percent, while sales at department stores fell 10.4 percent.

“As there appears to be no end in sight to the social unrest, and there are no positive factors supporting the retail market, especially the luxury goods segment, the fall in luxury retail sales is likely to continue in the coming months,” Ji concluded.

But Ji also noted that luxury sales had already reached their peak in 2013, with 2018 results representing a 27 percent drop from that high. He expects 2019’s “luxury sales figure to fare even worse.” At an estimated 70 billion Hong Kong dollars ($8.93 billion) for 2019, that figure would represent a 40 percent decline from the peak in 2013, a number comparable to results from 2016.