[SCMP Column] Shopping City Losing its Sheen

November 14, 2016

May Hong Kong as a “Shopper’s Paradise” rest in peace. The last nail is in the coffin and it is ready to be lowered into the ground. The words on the headstone are being carved: “Here once Hong Kong’s economy boomed”.

The last nail was of course the miracle of China’s “Singles Day” E-shopping orgy, with a record US$17.8bn being spent, mainly over smartphones, in the single day.

E-shopping is reshaping retail across China, with E-sales now accounting for over 11% of all retail spending and growing at a breathtaking pace. While Singles Day has been running since 2009, this is the first year it has formally come outside the Mainland, to Hong Kong and Taiwan. We have seen nothing yet.

E-retailing is of course not the only nail – though it may ultimately prove to be the most important. The crash in the number of Mainland shoppers flocking to Hong Kong is a second important nail. So too is Beijing’s protracted anti-corruption campaign, which has crushed the flamboyant conspicuous spending that so enriched Hong Kong’s luxury retail stores up to 2013.

A fourth nail – quiet and creeping but no less important for that – comes from Hong Kong’s landlords. So ruthlessly have they strangled the retail economy that in spite of no taxes or duties on virtually every product, Hong Kong’s retail offerings end up being among the most expensive in the world. Hong Kong’s retail landlords have squeezed all life out of a shopping paradise that was once the envy of the world. In a city where income inequality is among the highest in the world, the wealth gap resulting from asset inequality is nowhere more vivid than here and is an even more profound source of deep inequality.

Analysts in property agencies faithfully track the present retail gloom even as landlords reluctantly trim rents. But even with rental market corrections of more than 40% being recently reported, rental costs still often account for a half or more of the amount shoppers pay for goods on retail shelves. When Adidas replaced Coach renting 13,000sq ft in the heart of Central, the industry celebrated the 22.5% fall in monthly rental to HK$4.34m a month. My only reaction was: what on earth makes Adidas think it can squeeze profit from such a deal? How many items at what mark-up does it have to sell every month to make ends meet?

So too when Victoria’s Secret announced it will replace Forever 21 with a flagship store in the heart of Causeway Bay. It is no surprise that Forever 21 has given up the ghost, walking away from a 10 year deal agreed in 2011 that started at HK$11m a month. But what irrational hubris makes Victoria’s Secret think they are any likelier to make profit, even though the burden of the strangler fig landlord has been cut by a third to HK$7m a month. How many millions of sets of pretty underwear will they still need to sell – and at what mark-up – even to afford to pay their shop assistants a minimum monthly wage?

Mainland visitors are down by more than 10% with per capita spending sharply down too. Even after recent rent-cuts, average shopping centre rentals, at more than US$15,600 per square metre in Hong Kong mid-year, were almost three times higher than our nearest “rival” in Asia for this dubious honour – Sydney, with averages of US$5,900. However accurately these analysts are tracking recent gloom, they err in suggesting this is all cyclical. On the contrary we are talking about profound structural change in which the government – and the hundreds of thousands who work in the retail economy – need to begin considering and training for alternative futures.

As for Mainland visitors, even if Hong Kongers were willing to abandon recent hostility and lay out a big welcome mat, the golden era of Mainland shoppers is almost certainly past. More and more Mainlanders have many choices for their naughty foreign luxuries. Not only can they directly visit more places themselves, but the infamous “daigou” system by which they acquire European luxury goods from “agents” based in cities like Paris and Rome and the “haitou” system that is replacing it (this involves foreign goods being held in warehouses inside China) are reducing the need to come shopping in Hong Kong. Beijing’s recent move to slash duties on cosmetics and other high-duty luxury items has also reduced the incentive to flock to Hong Kong.

And finally, the E-Commerce revolution symbolized by Singles Day has only just begun to affect us, and is set to generate massive structural challenges for Hong Kong’s overpriced retail economy. Most of my Chinese neighbours are regular Taubao shoppers, and even I am buying garden chairs through Taubao for HK$100 that would cost me HK$1,000 in Ap Lei Chau. Websites like Collector Square are pandering increasingly effectively to luxury shoppers, and many luxury retailers are relying more heavily on on-line purchases while retail outlets are used for collection.

At present, it is the luxury sector that is hurting most obviously. Food retailing remains steady for now, as do niches like booksellers and Chinese medicine stores, but it is surely just a matter of time.

If this change is indeed structural, then we in Hong Kong face a significant social and economic challenge. We have a large proportion of our workforce facing a stagnant and declining future. Significant policy attention must be paid to finding the well-paying job opportunities of the future. Noteworthily, Shenzhen may be leading the way, with an economy being built around innovative green and high-tech activity – from Huawei’s telecoms to DJI’s world-leading drones.

Hong Kong’s “Shopper’s Paradise” economy has always been home to mean-paying and low-skilled job opportunities, so perhaps this massive challenge is a blessing in disguise. It may be a good time to bury the coffin after all.
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