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Tag: OC&C Strategy

  • Hong Kong ‘losing its edge’ as China Mainlanders look elsewhere

    Hong Kong ‘losing its edge’ as China Mainlanders look elsewhere

    Growth in overnight Mainland visitors to Hong Kong has slumped to a fraction of last year’s figures.

    Total visitor numbers from China’s Mainland in May rose by five per cent year on year – but it’s the day trippers making the numbers, not the cashed up Chinese staying in Hong Kong hotels and splurging on luxury goods.

    The latest Visitor Arrivals Statistics for May released by Hong Kong Tourism Board show the number of overnight visitor arrivals grew a mere 1.1 per cent when compared to last year’s 6.7 per cent.

    Combined with the retail sales for May released earlier this week – which saw a 4.6 per cent seasonally adjusted increase in spending but a 15 per cent slump in luxury goods sales – the drag from the slowdown in tourist spending at retail level is notable.

    Hunter Williams, a partner with OC&C Strategy Consultants, Greater China, believes Hong Kong is losing its edge to attract tourist money in the future.

    Furthermore, he argues, more Chinese travellers are expected to flush all over the world yet the growth in “per pax” spending is likely to be slower.

    The number of outbound Chinese travellers topped 100 million for the first time last year – and that figure is predicted to double by 2020 at the current annual growth of 33 per cent.

    Williams says the problem for Hong Kong and Macau is that both SARs have lost their competitiveness.

    “Hong Kong and Macau are relative losers in the fight for the Chinese travel dollar. Both are seeing lower tourist arrival numbers and significantly lower “per pax” spending. Attempting to shift from exclusively targeting “high rollers” to competing for “middle class” tourists is likely to prove a painful transition,” he says.

    Group travel is still popular amongst Mainland Chinese and draws from “a seemingly bottomless reservoir of first-time travellers,” but the world is now welcoming greater numbers of independent Chinese travellers.

    “We believe there is no longer a “Chinese traveller” per se, but rather, four segments with distinct shopping behaviour.  OC&C Strategy Consultants defines these segments as first-time “travel tasters,” deal-savvy “savvy shoppers,” “white collars” and the high-spending “new elite.”

    Growth in “per pax” spending is likely to be slower, driven by several factors.

    “Firstly, overseas travel is increasingly democratised and open to middle class Chinese, rather than being the exclusive preserve of the elites. Secondly, reacting to exchange rate changes and cuts in import duties, many luxury brands have lowered domestic prices in China, lessening the incentive to shop abroad.

    “Thirdly, China’s anti-corruption campaign continues and “tigers and flies” alike are rightly wary of flaunting ill-gotten gains.”

    A “wealth effect,” says Williams, due to soaring stock market performance could offset some of these factors or a crash could exacerbate them – but the volatility of China’s equity markets makes such speculation problematic.

    Williams also warns retailers to make sure they appreciate how Chinese consumers almost live their lives on their smartphones.

    “From ordering a taxi (Didi Kuaidi); socialising with friends (WeChat); making discounted reservations for dinner (Dianping); shopping the latest fashions (Taobao and Tmall), and even paying for daily necessities at the local convenience store (Alipay), Chinese live on their phones.”

    He says retailers in destinations preferred by Mainland Chinese should expect greater numbers of Chinese travellers than ever this summer.

    “However, these travellers will spend less and will be more digitally demanding than ever. This can be a challenge for the overseas businesses targeting them, as the digital tools and platforms they are accustomed to using are generally China-only.

    “More and more international brands are active on Chinese social media sites like WeChat, but few have a full, 360-degree digital presence.”

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  • Burberry Korea price cut is needed

    Burberry Korea price cut is needed

    Burberry Korea is under fire for cutting prices “too little, too late”.

    It’s not the first time Burberry has been criticised for its Asian pricing strategy. Last May,

    Jack Chuang, a partner with Hong Kong-headquartered OC&C Strategy Consultants, said that of all the luxury brands, Burberry is the one with the most significant price gap between Asian and European markets.

    “Prices in Mainland China are almost 40 per cent higher than in UK, while in Hong Kong, it is 20 per cent higher.”

    The South Korean office of Burberry recently marked down the price of some of its products to reflect the fallen value of the British pound, but only by a small margin compared with the currency’s depreciation, fashion industry officials said Wednesday.

    Burberry Korea dropped the local price by an average 9 per cent as the pound fell after Britain’s decision to leave the European Union in June last year. Industry officials say the markdown, however, falls far short of the 17 per cent fall of the British currency against the US dollar. The pound’s exchange rate against the South Korean won dropped 17 per cent from 1765.90 won in February last year to 1468.13 won as of January 9.

    The price adjustment in Korea also falls behind Burberry’s decision for Hong Kong, where the fashion brand’s product prices were taken down 10-15 per cent in September. Some of the products were down by 20 per cent. The markdown rate was more than the 9.75 per cent fall of the pound against the Hong Kong dollar at the time.

    Burberry Korea declined to talk on the matter despite repeated calls by news agency Yonhap.

    Consumer groups have long complained that foreign brands often take advantage of their popularity in South Korea to push demands they do not make in other countries or exclude South Korea from their market action.

    Swedish furniture maker Ikea caused ire last year when it kept selling dressers in South Korea that were recalled in the US and Canada after reported accidents involving children that resulted in deaths. The company had argued that the dressers meet local safety regulations. Volkswagen, who already settled on compensation to its consumers in the US from faked emissions tests, has yet to carry out full recalls or offer compensation steps in South Korea.

    US credit card company Visa in May came under fire for deciding to raise the processing fee by 10 per cent for overseas transactions, effective in South Korea but not in Japan or China.

    Such discriminatory actions are more stark at duty-free shops, industry officials say, who fiercely compete to host highly sought brands.

    “In case of popular brands, they often insist on excessive requirements, such as the cost of interior decorations when deciding to open their store,” an official at a Seoul duty-free shop said. “The retailers have to be compliant because of the brand power and because they have to attract customers, and they end up having to accommodate the demands.”

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  • More stores closing the door in Hong Kong

    More stores closing the door in Hong Kong

    A “new wave” of Hong Kong store closures lies ahead, because many retailers have over-extended their footprints, says OC&C Strategy’s Pascal Martin.

    Commenting on the sudden closure of the Ralph Lauren flagship store in Causeway Bay this week, Martin said there will be a continuing wave of closures for the next one to two years because the lease contracts attached to each location have different terms, and in most cases tenants wait until the right time in which they can exit without incurring high penalties. The market will probably return to ‘normal’ in 2018, he said.

    “There is a common thread between the closing of Forever 21, Abercrombie & Fitch and Ralph Lauren. These three brands are experiencing challenges in terms of their overall performance. Therefore we think that they probably need to adjust their cost structure.”

    OC&C predicts that luxury and premium brands are more likely to adjust their store networks, the closures ahead “maybe not as spectacular” as the closures of those three flagships.

    More regular size stores will close because many brands over-extended their footprint in Hong Kong when there was a strong stream of Chinese tourists who were hungry for foreign brands.

    “Many of these brands had, and some continue, to have more stores in Hong Kong than in their home city. Now, they are investing more in their home city flagship stores including examples such as Louis Vuitton on the Champs-Elysees in Paris and Burberry on Regent Street in London, putting more emphasis on their roots and history, serving Chinese tourists who have upgraded their travel destinations to such global capital cities. At the same time, they have been closing a number of stores to adjust to a lower but more sustainable business in Hong Kong.”

    Martin said the exorbitant rent levels of flagship stores in Hong Kong can have significant impact on global brands’ overall bottom line. For example, Forever 21 took a big gamble opening in Causeway Bay because it takes exceptional levels of productivity to stay profitable given the level of rent they had to pay for such a large space there.

    “That being said, the Hong Kong retail context is creating opportunities for new players to take over spaces that are freed-up by store closures such as the above. And, new tenants can probably do that with better rent conditions than their predecessors in the same spaces.”

    OC&C predicts that brands that have upward momentum in their home markets and want to accelerate their momentum in Asia are the best candidates to take over large flagship space in Hong Kong, as long as these spaces are in good locations, like Victoria’s Secret taking over the Forever 21 location in Causeway Bay. Brands with on-going strong momentum like Zara and H&M may also be interested in taking up these vacant spaces.

    “Until recently, Hong Kong was often a key part of a brand’s strategy to build brand equity with Chinese tourists in view of entering China. This is still true to some extent, but now brands rely more on building brand equity directly with Chinese visitors in their flagships in Europe and the US, as well as online, rather than in Hong Kong. Therefore they rely less on opening flagships in Hong Kong as they once did. Hence, brands are more rigorous in their pursuit to achieve self-sustaining economics even in their flagship brand-building stores.”

    Martin said landlords will target the ‘up-momentum brands’ first in order to maximise rent.

    “If they are not successful with such brands, they will have to downgrade their expectations to less known but newer brands in smaller spaces, or to more experiential offerings, i.e. gyms, restaurants, who need large spaces but cannot afford apparel-brand level of rents.”

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