A stroll down Queen’s Road Central reveals the changes that the drop-off in mainland Chinese tourists has wrought in this once-exclusive shopping area.
U.S. luxury handbag maker Coach shut down its four-story shop here last August, and its place was soon taken by Adidas, which is preparing to open its first Hong Kong flagship store by June. The German sports brand has also rented a two-story space in Causeway Bay, a prime shopping district, for 3.5 million Hong Kong dollars a month ($449,000), some 30% less than what analysts say the previous tenant paid.
Mass-market brands like Adidas are fast filling up the space vacated by luxury brands. Spanish fast-fashion chain H&M Hennes & Mauritz opened a four-story outlet in Causeway Bay in October, and a few streets away, HMV has rented a 40,000-sq.-foot (3,716-sq.-meter) space for a crossover music store/cafe.
PERVASIVE GLOOM
Hong Kong and Macau have long been the top destinations for mainland Chinese going abroad. With those visitors keeping a tighter hold on their purse strings, the two markets have had to adapt on a dime.
The change in tourism trends comes against the wider backdrop of China’s economic slowdown, the weakening of the yuan against the U.S. dollar, and Chinese President Xi Jinping’s anti-corruption campaign. In the last two years, China has also tightened rules on the frequency of visits to the two cities, their use as transit stops and visitors’ use of mainland payment cards. Protests in Hong Kong against cross-border bulk shoppers and the death of a visitor during a tour group stop at a jewelry store have put off some would-be travelers from the mainland, as well.
Three-quarters of Hong Kong’s visitors come from the mainland, but their arrival numbers last year fell almost 3% from 2014. Macau, similarly dependent on China, saw a 4% drop.
Chinese tourist traffic to the two cities began to soar in 2003 after Beijing opened up the flow of individual visitors from designated mainland cities to compensate for a decline in arrivals related to that year’s outbreak of severe acute respiratory syndrome. Most mainlanders were previously required to travel with tour groups. A year later, the opening of the Sands Macao casino launched an era of gambling competition in Macau.
Soon, luxury goods stores, pharmacies and other tourist-oriented shops were crowding out those serving local needs. Real estate services company Jones Lang LaSalle estimates mainland visitors now account for a third of Hong Kong retail sales and that they spent an average of HK$3,900 per visit in 2015.
HARD REVERSE
The recent downturn is hitting luxury retailers hard because it comes after years of booming sales that saw them open ever more and bigger stores. Burberry said its Hong Kong sales in the October-December quarter fell 20% from a year earlier. The British fashion brand plans to shrink its largest store in Hong Kong from two floors to one.
Overall sales of jewelry, watches, clocks and similar gift items in the city fell 20.6% in November, according to government figures, while retail sector employment has fallen by 2,663 positions since peaking in late 2014.
“Christmas sales were already worse than expected,” said Thomson Cheng, chairman of the Hong Kong Retail Management Association and executive director at retailer Lane Crawford Joyce Group. “It will be worrying if we don’t see much recovery during the Chinese New Year [in February], which is a traditional shopping season.”
Chow Tai Fook Jewellery Group reported that sales in stores in Hong Kong and Macau that have been open for at least a year fell by a quarter in the October-December period. This compares with a drop of 6% for outlets in the mainland. Managing Director Kent Wong Siu-kei said retail conditions will remain “very challenging” and that as a result, the company will close six regular stores and open three discount outlets in Hong Kong and Macau. “Opening outlets will be our future strategy,” he said.
One factor behind the fall in spending is that prices in Hong Kong and Macau are no longer competitive, due to the Hong Kong dollar’s peg to the U.S. dollar and the link, in turn, of the Macau pataca to the Hong Kong dollar. According to brokerage CLSA, a popular Louis Vuitton handbag costs about 20% more in Hong Kong than in Japan and South Korea and 40% more than in France or the U.K. And unlike those countries, Hong Kong doesn’t levy any sales tax.
“Hong Kong is not as attractive as I thought,” said Huang Danqin, who was visiting the city for the first time from her hometown of Ningbo, in China’s eastern Zhejiang Province. “Hotels are expensive. The diversity of shopping is also not very interesting compared with Japan and South Korea. I’d rather shop online for handbags these days for better deals.”
Growing tension between locals and mainland tourists is another headwind for retailers. Protesters in Hong Kong have complained that visiting shoppers cramp the city’s already crowded streets and transport system.
“This is a capacity issue because of the limited space we have,” said Qiu Hanqin, a tourism professor at Hong Kong Polytechnic University. A slowdown in mainland tourist arrivals could be a chance for Hong Kong to “take a break” and rethink its tourism policies, she said.
Just an hour’s ferry ride west, Macau, too, is suffering. Gaming revenues declined for the 20th straight month in January and were down nearly a third for all of 2015, to 230.8 billion patacas ($29.6 billion), according to official data.
With mainland high rollers staying home or heading elsewhere, many of the so-called junket companies that handled their trips to Macau have closed up shop. The government, which depends on casino taxes for most of its income, announced budget cuts of 5-10% on most spending in September, and officials reported a 24.2% decline in third-quarter real gross domestic product from a year before. Li Gang, China’s top representative in Macau, has signaled Beijing is preparing measures to support the city’s economy once again.
MORE TO OFFER
Analysts expect the heavy declines in gambling revenue to continue through the first half of 2016. But some think new openings could help stem the slide.
“We feel like a lot more happening in Macau will attract tourists,” said Aaron Fischer, regional head of consumer and gaming research at CLSA. He expects year-on-year monthly gaming revenues to turn positive by June and ultimately grow 1% for the year.
The brokerage has a “buy” rating on the Hong Kong-listed shares of Wynn Macau. The developer is set to open the $4 billion Wynn Palace this year, its second casino resort complex in the city.
In addition to Wynn Palace, three other casino resorts are scheduled for completion this year. But this time, the mantra of “build it and they will come” may not hold true.
On a weekend visit in January to the newly opened $3.2 billion Studio City casino resort, operated by Melco Crown Entertainment, dealers beckoned visitors to take a seat at one of the many empty baccarat tables. Spots on ferries to and from Hong Kong, which previously needed to be booked in advance, were available on demand.
Some analysts think Hong Kong could use new draws, especially once the mainland’s first Disneyland theme park opens in Shanghai in June, potentially dampening interest in Hong Kong’s smaller park. “Policymakers in some other destinations have been more active in trying to grab a larger piece of the Chinese tourism pie,” said Mervyn Tang, associate director of Asia-Pacific sovereign ratings at Fitch Ratings in Hong Kong.
Instead, Financial Secretary John Tsang Chun-wah has signaled that he will include measures to support the local tourism industry in the city’s annual budget to be unveiled Feb. 24.
Not everyone is discouraged about Hong Kong’s prospects. Tokyo-based Tokyu Malls Development in December opened a HK$20 million Shibuya 109 department store in the tourist district of Tsim Sha Tsui. The company projects sales volume of HK$100 million this year, as it expects Chinese tourist traffic to remain heavy even after recent declines.
“There is still ample room for selling Japanese brands [in Hong Kong],” said Hiroyuki Wada, president of Tokyu Malls. “Hong Kong will keep its position as Asia’s shopping capital in the long term.”
