Retail Challenges in Hong Kong

s e g n e Chall

in Hong Kong

Contents Introduction - Retail Challenges in Hong Kong......... 3 Has the Retail Market become too dependent .......... 4 on Mainland Spenders?

Will it still work in the next 10 years?......................... 5 Tourists may reach 100 million in 2023 It is vital to develop a stronger platform

What risks are tenants facing?...............................

Mainlander’s shift in consumption pattern Shoppers from China to shop overseas China e-commerce market The importance of brand recognition The lack of local brand uniqueness Discrepancies between growth of retail sales and retail spaces Struggling with the lack of restaurant Changes in consumer shopping styles of mainland Chinese

5 5

6-7 6 6 7 7 7 7 7 7

How to develop a stronger platform? ................. 9-10 Government’s initiatives Local infrastructure improvement Plan to develop retail facilities at Hong Kong Boundary Crossing Facilities Island Shopping arcade in Lok Ma Chau control point to to capture the shopping spree Increase retail spaces via building conversions Pilot study on developing underground spaces Mass adoption - trading under the same roof Kai Tak will form a new tourism cluster with attractions and facilities

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Retail Challenges in Hong Kong | March 2014 | Colliers International

9 9 9 9

10 10 10 10

Introduction Retail challenges in Hong Kong The appetite for retailing is growing and Hong Kong is forefront of this growth. The key shopping districts of Central, Causeway Bay, Tsim Sha Tsui and Mong Kok have seen rapid expansion of international brands over the past 10 years. According to the latest report by the Secretary for Commerce and Economic Development, Hong Kong could see a 30% increase in visitors within three years. The report forecast an increase to 70 million in 2017 (from 54.3 million in 2013) to 100 million in 2023, based on a steady rise in mainland visitors and a slight increase in overseas travellers. While Hong Kong’s retail market enjoys the benefits generated by the consumption of the sustained growing number of mainland Chinese visitors, the strong dependency on mainland Chinese underlies a potential risk in the local retail market if their shopping style changes.

In this report, we have identified the risks tenants are currently facing and suggested several important elements so as to develop a stronger retail platform. The discrepancies between the growth of retail sales and retail spaces means that future development is essential to sustain growth and provide new retailers the opportunity to enter the market with an attempt to keep the local retail market competitive.

Hong Kong needs to develop a stronger platform by improving the local infrastructure and developing local brand uniqueness on the back of the advantages we already have including the absence of sales taxes, high-quality services, growing tourist arrivals and solid local consumption with a stable economy. The government has to come up with a more comprehensive master plan to tackle the shortage of retail supply. At present, the control point at Lok Ma Chau is one of the spot with the highest daily passenger throughputs and we believe the place should provide shopping facilities to capitalise on growing passenger volumes. Renowned brands at discounted prices, last minute gifts, and utilization of time are the factors to induce purchase at control point’s retail stores. The government should also look into this opportunity and dig deeper into how opportunities and demand are set to change, by examining the purchasing behaviours of travellers at control point retail outlets and necessary development for better footfall.

Hong Kong needs to develop a stronger platform by improving the local infrastructure and developing local brand uniqueness on the back of the advantages we already have including the absence of sales taxes, high-quality services, growing tourist arrivals and solid local consumption with a stable economy

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Retail Challenges in Hong Kong | March 2014 | Colliers International

Has the retail market become too dependent on mainland spenders?

Hong Kong economy will continue to benefit from China upswing although growth pace will be slow. However, Mainland tourist propensity to consume is strong. Shoppers in China retain a preference for foreign brands, and are willing to meet a price premium for well-known and niche products. There is a potential risk for the Hong Kong retail market that will materialise if the shopping style of Chinese visitors changes, which is not inconceivable.

Visitor Arrivals under the IVS (‘000)

Percentage Growth

Percentage of Mainland visitors under the IVS

667

-

-

2004

4,260

-

34.8%

2005

5,550

30.3%

44.3%

2006

6,673

20.2%

49.1%

2007

8,593

28.8%

55.5%

2008

9,619

11.9%

57.0%

2009

10,591

10.1%

59.0%

2010

14,244

34.5%

62.8%

Year 28 July to 31 December 2003

2011

18,344

28.8%

65.3%

2012

23,141

26.2%

66.3%

2013

27,465

18.7%

67.4%

Source: Commerce and Economic Development

There is a potential risk for the Hong Kong retail market that will materialise if the shopping style of Chinese visitors changes, which is not inconceivable

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Retail Challenges in Hong Kong | March 2014 | Colliers International

Will it still work in the next 10 years?

Hong Kong’s reputation as a shopping paradise remains solid in the short-term, given its advantages of the absence of sales taxes, high-quality services, growing tourist arrivals and solid local consumption within a stable economy. These positive factors are supporting the demand for retail leasing and ultimately local shop rents. Both local and international retailers are still expanding although brands are already in a very mature market.

120

number of visitor arrivals (in million)

100

80

60

40

20

2013 Total no. of visitor arrivals (overnight visitor)

2017 Total no. of visitor arrivals (same day visitor)

According to the latest report by the Secretary for Commerce and Economic Development, Hong Kong could see a 30% increase in visitors within three years. The report forecast an increase to 70 million in 2017 (from 54.3 million in 2013) and to 100 million in 2023, based on a steady rise in mainland visitors and a slight increase in overseas travellers.

It is vital to develop a stronger platform Although there are concerns that Hong Kong’s attractiveness as a shopping destination may be diminishing, compared to a few years ago, retail sales is expected to pose growth in view of a recovery in global trade, rising incomes, and further growth of the inbound tourism. Looking ahead, retail sales growth will be moderated to mid-single digits but nothing like the contraction seen in 2003 and 2008. In order to strengthen local competitive edge, Hong Kong needs to develop a stronger platform by improving infrastructure and developing local brand uniqueness.

Visitor Arrivals in Hong Kong

-

Tourists may reach 100 million in 2023

2023 Total no. of visitor arrivals

Regarding the ten major IVS visitor source cities, Shenzhen, Guangzhou and Dongguan ranked at the top three in the first half of 2013, accounting for 48.8% (6.16 million), 16.3% (2.06 million) and 4.7% (0.6 million) of the arrivals under the IVS respectively.

Details of the ten major IVS visitor source cities are set out in the table below:

Source: Hong Kong Tourism Board

Rank

City

Percentage of IVS visitors

Visitor arrivals (‘000)*

In comparison with the corresponding period in 2012

1

Shenzhen

48.8%

6,162

+22.3%

2

Guangzhou

16.3%

2,061

+24.9%

3

Dongguan

4.7%

600

+22.7%

4

Shanghai

4.2%

528

+17.4%

5

Foshan

4.1%

523

+16.0%

6

Beijing

3.0%

377

+5.6%

1.8%

224

+56.6%

* Figures may not add up to total due to rounding up 7 Jiangmen Source: Commerce and Economic Development

8

Zhongshan

1.4%

183

+35.7%

9

Zhuhai

1.3%

164

+66.4%

10

Huizhou

1.2%

148

+26.0%

86.9%

10,968

+22.9%

Total Source: Commerce and Economic Development

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Retail Challenges in Hong Kong | March 2014 | Colliers International

What risks are tenants facing?

Annual Growth (Overnight vs. Same Day Visitor) 60%

Mainlander’s shift in consumption pattern The Chinese luxury consumer market not growing as quickly as previously; however, Chinese consumers are still willing to spend.

They have become much more disciplined in how they spend their money and what they purchase, with many looking at more experiential consumption. The political anti-extravagance rules in China have not stopped Mainland spenders from purchasing luxury goods, however, the crackdown is more serious than the market projected and will continue to impact luxury gift-giving with people giving smaller and less expensive gifts.

The market has observed the rise of less affluent Chinese tourists vising Hong Kong and the change in tourist consumption from luxury goods towards mid-priced products – daily necessities such as beauty or personal care products. China’s political reforms on anti-extravagance rules might be seen to have deterred luxury consumption. The increasing proportion of middle class affluence is reflected by a faster growth in same-day visitor arrivals. During the first six months of 2013, same day visitors from Mainland China accounted 65.4% of the total to 8.257 million while overnight visitors took up 34.6% of the pie to 4.368 million. We expect the growth momentum of same-day visitors will continue to outpace overnight visitors and it is essential for the government to discover a new retail hub to capture the increasing demand for shopping facilities.

Year-on-Year % Change

50%

40%

Same day visitor grew at a faster pace

30%

20%

10%

0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-10% Total no. of visitor arrivals (overnight visitor)

Total no. of visitor arrivals (same day visitor)

Source: Hong Kong Tourism Board

Shoppers from China to shop overseas Mainland Chinese consumers are renowned for their quick learning curve. A number of the more-affluent ones nowadays prefer to travel to western countries to buy the latest or limited edition international brand products there, rather than coming to Hong Kong for occasional shopping trips as they used to do in the first few years after the IVS was launched. Online shopping is also gaining popularity in mainland China, which threatens the preference of mainland Chinese visitors to visit Hong Kong for shopping.

The Fortune Character Institute projected high-net-worth Chinese consumers, who are the core buyers of luxury products, will increasingly purchase these goods overseas. If this proves true, it is likely to have a ripple effect throughout the economy. The study said that, in the next three to five years, the escape of the core consumers will negatively impact the consumption enthusiasm of marginal and potential consumers, which will ultimately hurt the luxury brands.

Same-day Visitor Arrivals

Visitor Arrivals Under IVS (‘000)

(000’)

Percentage

(000’)

Percentage

2009

10,591

5,052

47.7%

5,539

52.3%

2010

14,244

7,586

53.3%

6,658

46.7%

2011

18,344

10,448

57.0%

7,896

43.0%

2012

23,141

14,600

63.1%

8,541

36.9%

12,625

8,257

65.4%

4,368

34.6%

January to June 2013

Source: Commerce and Economic Development

6

Overnight Visitor Arrivals

Year

Retail Challenges in Hong Kong | March 2014 | Colliers International

China e-commerce market

The lack of local brand uniqueness

Aided by increased broadband and mobile phone penetration, the spread of smartphones and tablet computers and improvements in payments and logistics infrastructure, China e-commerce market is booming. To tap into this massive online market, several luxury retailers have set up online shops in China. The fast spending e-commerce market may redirect retail sales volume away from traditional retail channels, for example, shopping malls and street shops.

The ever-rising expensive shop rental levels have forced some long-established and distinctive local retailers and restaurants out of prime shopping districts. The variety of retail elements, which is so important for the sustainable development of a shopping destination, has gradually declined on these streets.

Discrepancies between growth of retail sales and retail spaces The retail property market in Hong Kong has enjoyed a period of strong growth, driven by retailers competing for space.

However, the demand and supply imbalance means that future development is essential to sustain growth and provide new retailers the opportunity to enter the market. In fact, the increasing trend of retail migration from street shops to shopping malls will benefit the rental growth of malls.

Struggling with the lack of restaurant Shortage of retail spaces has prompted retailers to mark-up prices or sell more expensive products. The upward revision on minimum wage to HK$30 will insert inflationary pressure, in which the food and beverages sector is experiencing a harder hit. Hong Kong is already struggling with the lack of restaurants.

However, when it comes to luxury retails, shoppers are not just looking for the products, they are also looking for the whole luxury experience. In most prestigious luxury boutiques, often, VIPs and elite customers have whole sections to themselves to pursue new collections while tasting high-end food and drink.

Most importantly, they also develop a personal relationship with the sales consultants who provide them with the latest product news and event invitations. Such experience and service are parts of luxury retail that could never be replaced by e-commerce. The store can offer an environment that makes shopping a positive experience that delivers compelling values. Without a doubt, the internet and positive online experience influence brand perception that could ultimately trigger impulse buying.

The key structural risk is the emergence of e-commerce retailing.

If properly executed, goods sold through the internet post a significant price advantage over traditional retail channels and will erode retailers’ competiveness to pay rents.

Now is the right time to plan a response to future changes in consumption pattern The changes in the consumption patterns of mainland Chinese and their consequent impact on Hong Kong’s retail market will not happen all of a sudden; but it may happen at a faster pace than people currently expect. International brands and flagship stores have been a strong focus and driving force in the growth of the local retail market over the past 10 years. However, now is the right time to plan a response to future changes in consumer shopping styles in order to keep the retail market competitive.

For instance, the government and public could consider ways to support and preserve characteristic local shops and restaurants, and diversify the elements of the local retail sector.

The importance of brand recognition A strong brand offering unique and compelling products will provide a basis for a differentiated offer. Simply offering others’ brands without adding significant value will not be sufficient for sustainable competitive advantage. Having a strong brand and a consistent way to measure the perception of your brand is a necessity to capture local demand as well as the rising number of destination mainland shoppers.

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Retail Challenges in Hong Kong | March 2014 | Colliers International

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How to develop a stronger platform?

Government’s initiatives With an attempt to keep the local retail market competitive, the government should take into consideration of several initiatives and assistance packages to support local retailers and restaurants. This can be achieved by improving government’s efficiency in administration and operation such as the issue of license. Initiatives to encourage companies to service excellence and take the lead in raising services standards in their industries.

Local infrastructure improvement To strengthen our competitive edge, Hong Kong needs to develop a stronger platform by improving the local infrastructure and developing local brand uniqueness on the back of the advantages we already have including the absence of sales taxes, high-quality services, growing tourist arrivals and solid local consumption with a stable economy. All these factors are supporting the demand for retail leasing industry.

More control points will be commissioned gradually to handle the projected visitor arrivals to over 70 million. With the completion and commissioning of new control points starting from 2013, the new control points are expected to be commissioned in the following years:

Plan to develop retail facilities at Hong Kong Boundary Crossing Facilities Island The Government plans to develop retail and hotel facilities at the artificial island for boundary crossing facilities for Hong KongZhuhai-Macao Bridge. It is estimated that about 3 million sq ft of commercial facilities could be developed on the island. The Civil Engineering and Development Department and Planning Department plans to conduct a study for the potential for commercial development at the artificial starting from August 2014. It is estimated that the study will take 25 months to complete.

Shopping arcade in Lok Ma Chau control point to capture the shopping spree At present, the control point at Lok Ma Chau is one of the spot with the highest daily passenger throughputs and we believe the place should provide shopping facilities to capitalise on growing passenger volumes. Renowned brands at discounted prices, last minute gifts, and utilization of time are the factors to induce purchase at control point’s retail stores. The government should look into this opportunity and dig deeper into how opportunities and demand are set to change, by examining the purchasing behaviours of travellers at control point retail outlets and necessary development for better footfall.

Expected Year of Commissioning

Control Point

Kai Tak Cruise Terminal* Guangzhou - Shenzhen - Hong Kong Express Link Hong Kong – Zhuhai – Macao Bridge

Liantang / Heung Yuen Wai Control Point

2013 2015 2016 2018

Note: * The first berth of the Kai Tak Cruise Terminal was officially commissioned on 12 June 2013 and the second one is expected to be commissioned in the second half of 2014.

Source: HKSAR Government

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Retail Challenges in Hong Kong | March 2014 | Colliers International

Increase retail spaces via building conversions The market sees increasing competition among local retailers to secure shops in fringe areas. To address this issue, it will be better for the government to come up with a more comprehensive master plan to tackle the shortage of retail supply. It is vital to support and preserve characteristic local shops and restaurants, and the diversity of a local retail sector.

Is this an effective solution to resolve the lack of retail spaces in Hong Kong? Will it open more opportunities for the future? While taking reference to many successful underground cities across the globe, Hong Kong should distinguish ourselves by adding different local features or themes to these zones. For instance, we could create an underground street specifically for selling daily necessities amid the growing number of day trip mainlanders.

There could also be underground spaces for designers to exhibit their works before putting them on the market. Other ideas include using underground spaces to preserve local cultures or for social enterprises.

Tsim Sha Tsui West offers one of the highest potential for development of underground retail malls - especially given the expected influx of mainland travelers arriving at the future Guangzhou-Shenzhen-Hong Kong Express Rail Link terminus near Austin MTR Station.

Mass adoption - trading under the same roof

Pilot study on developing underground spaces To tackle the problem of retail shortage in Hong Kong and seek the possibility of increasing catchment area, the government has recently announced that Hong Kong Park, Victoria Park, Happy Valley Racecourse and Kowloon Park are among areas initially selected for a pilot study on developing underground spaces.

This was contained in a Planning Department paper recently submitted to district councillors. Retail facilities are expected to dominate the underground areas. According to the paper, the target areas in Tsim Sha Tsui are those around Haiphong Road to Kowloon Park and beside Parklane Shopper’s Boulevard. In Causeway Bay, the proposed areas are from Gloucester Road to Tai Hang Road, including Victoria Park. In Admiralty/ Wan Chai, the target areas are from Victoria Harbour to Queen’s Road East, while Happy Valley sports ground and the racecourse could be part of the possible development as well.

Will retail businesses bring to success with increasing retail spaces to meet demand? It is essential to understand the concept of mass adoption. Mass adoption, which brings about industry players and partners together to form a cluster, will provide the opportunity for retailers and F&B operators to trade under the same roof so as to become an important destination in its own right for shoppers looking for a new and unique shopping experience. Struggling with the lack of restaurants, Hong Kong can create the largest concentration with a wide variety of bars and restaurants offering the mix of both local and international dining. Meanwhile, a stronger platform will attract more restaurants from other cities to open their businesses in Hong Kong.

Kai Tak will form a new tourism cluster with attractions and facilities Kai Tak will be one of the tourism clusters with new attractions and facilities, such as hotels, restaurant and shopping malls. The former runway will be developed into a tourism and recreation hub that provides about 3.2 million sq ft of floor space for the development of tourism facilities, hotels, restaurants, waterfront dining facilities and art/ music/ film studio uses. The government, however, still have not mapped out a detail plan on the amount of floor space designated for retail uses.

10 Retail Challenges in Hong Kong | March 2014 | Colliers International

Retail specialists in Asia HONG KONG SAR Helen Mak Senior Director, Retail Services helen.mak@colliers.com +852 2822 0779

INDONESIA Steve Sudijanto Senior Associate Director, Retail Services steve.sudijanto@colliers.com +62 21 521 1400

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TAIWAN Christine Lo Director, Retail Services christine.lo@colliers.com +886 2 8101 1189

Shenzhen Linda Lin Director, Retail Services linda.lin@colliers.com +86 755 8831 8600

THAILAND Asharawan Wachananont Associate Director, Retail Services asharawan.wachananont@colliers.com +662 656 7000

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