Asian Enterprise

As the economic slump continue to take its toll, Hongkong retailers struggle to survive, reports Launch Asia´s Editor Linette Chua.

Retail Struggles and Survival

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.