FEATURE ARTICLE
Retail Struggles
and Survival
Asian Enterprise
As the economic slump continue to take its toll, Hongkong
retailers struggle to survive, reports Launch Asia´s Editor
Linette Chua.
When Hongkong, Asia´s
retail capital, caught the deadly financial bug in 1997,
it left behind an economy badly-beaten, beleaguered, weak,
and desperate.
These days, business
confidence at the Hongkong Special Administrative Region
(SAR) remains at all-time low. The numbers prove this,
GDP growth is forecasted to shrink to about 1 percent
this year, unemployment which peaked in 1999 continues
to stand at 5.5 percent and this year's budget deficit
could reach a high of HK$12.8 billion or 7.5 percent of
the GDP.
To date, retail sales,
which form an important part of the consumption figures
that comprise about 60 percent of Hong Kong's GDP, is
still 20 percent below 1997 levels.
"It´s still
very difficult. We are facing low sales and deflation,
which has stretched for 36 consecutive months." Mr.
Yu Pang Chun, chairman of the Hongkong Retailers Management
Association (HKRMA), describes the dismal state of the
local retail industry to Launch Asia.
Consumer spending
- weak and fragile
The global economic
downturn has severely eroded consumer confidence and spending
in Hongkong continues to be weak and fragile.
The bust of the local
property market is the deadliest blow suffered by Hongkong
people who have invested and come to rely heavily on the
real estate boom in the mid-‘90s.
The collapse, which
had prices tumbling down as much as 60 percent from their
1997 highs, has more than 200,000 middle-class families
steep in debt, owing more on their properties than their
real wroth. And once values of properties drop, banks
often demand higher interest rates, forcing owners to
make higher monthly payments on money-losing properties.
Losing their hard-earned
wealth on the property illusion, residents are forced
also to contend with losing their paychecks.
Facing nominal profit
margins, companies had to streamline operations, resulting
to massive layoffs to bring down labor costs. Companies
like Cathay Pacific, Ottoasia, and HSBC have opted to
relocate their offices, and back-end operations to China
where costs are much lower.
These have been critical
setbacks to Hongkong people who find themselves with no
job security, decreased financial wealth, and uncertain
about the future.
Local retailers
- worst hit
Because perceived wealth
has gone down, local consumers have tightened their purse
strings in anticipation of worsening times ahead.
"People prefer
to spend money on a rainy day than spend it now. They
wait for prices to come down to their comfort level or
they will buy a cheaper product to substitute for it,"
Yu, who´s also the Deputy General Manager for Yue
Hwa Chinese Products Emporium Ltd, points out. He sees
steep discounting and earlier than usual sales promotions
reappearing this year as a result of sluggish sales.
Retailers, who are
among the worst hit in Hongkong, ran after customers through
slashed prices, discounts, sales promotions, and freebies.
Esprit is giving out
as much as 50 percent discounts on their clothes. G2000
and Baleno are promoting their buy-1-take-1 polo shirts.
Park and Shop and Wellcome are killing each other with
their 'lowest priced goods'.
Intelligent consumers
are no longer satisfied with a mere 10 percent discount,
forcing retailers to cut prices by between 20 to 50 percent
to boost sales.
W.S. Chan is a bachelor
who works in one of Hongkong´s top banks. He´s
part of the middle-income group of the region, earns well,
ten years ago, he bought a flat in suburban Tsing Yi.
He waits for "yellow price tags" in supermarkets
and stocked up on them. Like most consumers, he compares
prices, canvasses, and chooses the product with the lesser
price.
Chan represents today´s
typical consumer, who is price sensitive, has low perception
of product differences, shows less customer loyalty, and
accepts reseller brands.
"The market is
tough. We have very demanding consumers," says Yu.
"At one side,
we have prices coming down, cutting down on already very
thin retail margins; on the other side, we have lowering
consumer confidence and costs coming up," explains
Yu.
Hongkong retailers
are getting the flak from all sides.
Retailers are also
struggling hard to survive the high operating costs. Rising
rents is one. In the annual survey of global retail rents
conducted by global property consultants Cusham &
Wakefield and Healey & Baker, Hongkong ranks as the
most expensive retail location in Asia for the third year
in 2001. The report indicated that prime rents in Causeway
Bay, which has one of the most expensive rents in the
Asia Pacific region, is pegged at HK$400 per sq ft. And
rates are still going up 20 to 30 percent annually, adds
Yu, in Hongkong prime areas.
Another is the government’s
introduction early last year of the Mandatory Provident
Fund which has put added pressure on operating costs for
retailers as well as dampening possibilities for pay rise.
There´s also
the growing trend of outward spending by Hongkong residents.
Latest figures from HKRMA show that on the average 220,000
Hongkong people choose to travel through Lo Wu in Shenzhen
to Southern China to spend their weekends and holidays.
These people are banking on cheaper shopping, leisure,
and entertainment, especially in Shenzhen, which are reputed
for its fake branded products.
It is estimated that
Hongkong people have spent between HK$18.7 billion to
over HK$30 billion in China last year. And these expenditures
account for about 15 percent of Hongkong’s total
retail sales and 3.6 percent of total private consumption.
The government has
tried to help by building more shopping centers to stimulate
demand but Yu disagrees. This doesn’t solve the
root of the problem. "This only spreads out the consumers
more. It puts more stress on the retailers because they
need to open a shop there to maintain market share. Yet,
it doesn’t necessarily mean double sales but it
is definitely double their costs."
Hongkong economy
tough and resilient
Despite a battered
economy and a vulnerable retail market, Yu is still hopeful.
He points out tourist arrivals were up 15 percent last
year compared to 2000 and 1999 figures and overall spending
was up 9.4 percent although visitors were spending on
the average HK$252 less.
The HK government recognizes
the important role that tourism plays in retail sales
growth and is now engaged in discussions with China to
increase tourist quota of mainland Chinese to visit Hongkong.
Hongkong´s high-end
apparel side is still very strong. High-end fashion houses
Mango and Moo Gee have come back to set up shop in the
city, once again, proving Hongkong´s attractive
pull.
"Hongkong is always
very exciting and very quick moving," Yu smiles.
The city has a critical mass of human and financial capital.
Although, China boasts of promising opportunities and
cheap labor; it still lacks the financial, legal, and
technological structure of Hongkong. Plus the city has
always been known for its fair and democratic system,
which has endeared itself to businessmen all over the
world.
In the end, Yu points
out, the greatest asset and survival skill of Hongkong
lies in its sensitivity and willingness to change and
to move forward. And everyone is watching what surprises
Hongkong can offer.
HIGHLIGHTS:
In Hongkong, low price
no longer exists.
The greatest asset
and survival skill of Hongkong lies in its sensitivity
to change and willingness to move forward.
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