Hong Kong Retailers Suffer Collateral Damage as Protests Rage

(Bloomberg Businessweek) -- When tourists come to Hong Kong to shop, they head for a six-block stretch of Nathan Road in the Mong Kok neighborhood. There they can find more than 30 high-end jewelry stores, including 10 outposts of Chow Tai Fook, the world’s second-biggest jeweler after Tiffany & Co. That’s not counting almost a dozen standalone watch stores, which include Rolex, Tissot, and Longines. And global luxury retailers such as Chanel and Louis Vuitton operate boutiques farther up the merchant-lined thoroughfare.

Nathan Road is much quieter than usual these days. The anti-Beijing protests have scared off tourists from around the world—particularly Chinese mainlanders, who’re especially important to Hong Kong’s retailers. Compared with tourists from other places, Chinese spend more money on shopping; they’re also more likely to buy high-end goods. They make up almost 80% of total annual visitors to Hong Kong. In November, after the protests became more violent, the drop in visitors from the mainland was a record 58%, according to the Hong Kong Tourism Board. That month, retail sales fell by a quarter from the previous year, with jewelry and watch sales plunging 44%, according to the city’s statistics department.

That sluggish performance might be here to stay, economists and retail industry analysts warn. China’s state media have emphasized incidents of anti-Chinese violence and harassment during the protests, amplifying fear and resentment among mainlanders who’ve only gotten more nationalistic during the trade war with the U.S. “In the eyes especially of mainland tourists, Hong Kong as a destination has changed permanently,” says Tommy Wu, senior economist with Oxford Economics in Hong Kong. “Part of it is how it’s been portrayed on the mainland—there has been news of anti-mainland vandalism and violence. The image is quite negative.”

Any long-term reduction in visitors will have a dramatic economic fallout. The Hong Kong Retail Management Association estimates that thousands of Hong Kong retailers, big and small, could shut down within the first six months of 2020. The city, the world’s biggest market for Swiss watches for the past decade, is expected to lose that distinction to the U.S. and the mainland, according to Jean-Marc Pontroué, chief executive officer of luxe watch brand Officine Panerai, a unit of Swiss luxury conglomerate Richemont SA.

Prada will close a store in the Causeway Bay shopping district, one of seven Hong Kong locations, after the final shopping push of Lunar New Year. Louis Vuitton will also shutter a store nearby, leaving it with seven in the city. Chow Tai Fook plans to close about 15 of its 91 stores in Hong Kong, and cosmetics chain Sa Sa is tentatively planning to close about 20% of its locations there over the next 18 months. “ Retailers have accepted the fact that there are fewer tourists,” says Annie Tse, chairwoman of the retail management trade group. “In the past, Hong Kong’s retail market expanded based on a high level of visitors. Now everyone is consciously considering their scale for the future.”

Two decades ago, Hong Kong merchants were most concerned about how fast they could expand. In 2003, China began issuing individual tourist visas for travel to Hong Kong, kicking off the retail boom. To keep pace with the voracious appetites of some 60 million visitors a year, the city’s retail landscape has developed far beyond the needs of its 7.5 million residents. It counts about the same number of Louis Vuitton outposts as New York City does and three times as many Gucci stores.

Long before the protests began last year, forces had already been chipping away at Hong Kong’s regional dominance in shopping. The growth of busy airline hubs in Beijing, Shanghai, and Guangzhou means many well-heeled mainland travelers can fly nonstop to cities around the world, bypassing Hong Kong. And the huge expansion of Chinese e-commerce platforms such as Alibaba, JD.com, and others has provided new competition.

Meanwhile, China has been encouraging luxury brands to open stores on the mainland. The Chinese government has cut mainland import taxes, and retail prices have fallen as a result. Goods that used to cost 25% to 35% more in Beijing or Shanghai, for example, now sell at a much smaller premium, says Amrita Banta, managing director at Agility Research, a consulting firm that focuses on the affluent. At an Hermès store in Hong Kong, a calfskin wallet sells for HK$26,700 ($3,438). Chinese online platform Tmall advertises the same wallet, which ships from Italy, for 24,580 yuan ($3,589), a premium of less than 5%.

That’s a “much more fundamental” issue for Hong Kong, Banta says. “You can’t just depend on one nationality to support the industry. This round of protests is a good reminder to adjust to the new normal. Hong Kong cannot totally depend on shopping.” Banta says she remains bullish on the city’s future as a tourist mecca because of a litany of other attractions, including its mountains and beaches, top-flight restaurants, and long history as a cultural bridge between East and West. “Shopping is still important, but it’s part of a more holistic travel experience,” she says.

For struggling retailers, the Hong Kong government has rolled out rental support in buildings that it owns and urged private landlords to be sympathetic to merchants’ needs. And even if Chinese tourists don’t return en masse, Hong Kong still offers a wider variety of luxury goods and more reliable consumer products than are available back home.

Daigou—the Mandarin term for shopping surrogates—say they’re still doing swift business buying goods in Hong Kong, then selling them to customers on the mainland at a markup. “When tourists don’t dare to come to Hong Kong, we navigate for them,” says Li Yuan, who’s been a daigou for seven years. —With Eric Lam and Sheridan Prasso

To contact the editor responsible for this story: Janet Paskin at jpaskin@bloomberg.net, James Ellis

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