Coronavirus Could Send Hong Kong into a Deeper Recession

While the coronavirus continues to spread at an unprecedented rate, it’s also further segregating China from the rest of the world, particularly regions that are in political conflict with the mainland, namely Hong Kong. On Monday, Hong Kong, which now has 15 confirmed cases of the virus, has been reducing the flow of mainland visitors into the city by temporarily closing key points of entry with mainland China. On the same day, the New York Times reported that more than 2,500 medical workers went on strike, pressuring city officials to close all borders completely.

Needless to say, this is particularly bad timing for Hong Kong’s retail market, which has historically relied on mainland shoppers for much of its sales growth. Border closures are just the latest barrier to the city’s economic recovery from losses caused by the ongoing protests that began last September. Just a month ago, before the coronavirus had spread to Hong Kong, reports showed the local economy falling into a recession near the end of last year’s Q4 due to the social unrest.

But more importantly, the closures are fueling discontent from wealthy mainland shoppers who see the action less as a way to remain safe amid an epidemic crisis and more as a symbolic gesture from this Special Administrative region that wants to be “cut off” from the mainland.

“The coronavirus epidemic sits in the very center of the vortex of anger at an incompetent Hong Kong government, distrust of Beijing, and anti-mainlander xenophobia — all issues that have driven the past seven months of protests in Hong Kong — and, as such, risks becoming a ‘perfect storm’ of discontent,” explains Antony Dapiran, a Hong Kong-based lawyer and author of “City of Protest: A Recent History of Dissent in Hong Kong,” to the LA Times.

Because of intensifying segregation at the Hong Kong border, we have looked at the various long-term strategies that brands and landlords are using to save their businesses amid this worsening situation:

Accelerated expansion in mainland China vs. betting on local consumers

Hong Kong has historically been a key region for many luxury retailers, and while the city can represent single-digit sales to a brand’s global business, it’s also where many APAC heads reside. For those decision-makers, it’s close enough to observe the mainland China market without having to be in it. But time has asked a more immersive role in both markets.

Moncler, whose business in Hong Kong accounts for 6 percent of its global business, responded in its latest earnings call in October of 2019 that it’s protecting the productivity of its stores while opening flagship stores in key cities like Shanghai and Beijing. Others reacted to the situation more aggressively. In 2020, Hong Kong’s largest jeweler, Chow Tai Fook, plans to close about one-fifth of its stores in Hong Kong and will instead focus on the mainland market by where it will open an additional 600 stores on top of its current 3,636 stores.

“It’s a very delicate job,” says Luciano Santel, Chief Corporate and Supply Officer of Moncler. “We are postponing and putting on hold some investments in communication, but what we are working on is direct communication with our clients.” These changes are highly dependent on a company’s CRM strategy. Like Moncler, many brands rely on their CRM tools to communicate with clients across regions, and it’s especially useful for engaging with Hong Kong-based consumers.

Temporary closedowns vs. opening pop-up shops

Luxury brands are acting quickly to try and curb their losses in this changing landscape, and some of the most acclaimed ones like Prada and Louis Vuitton are opting to save money by temporarily closing stores in Hong Kong’s world-renowned luxury shopping street Causeway Bay and in its high-end Times Square Mall. Many brands have been negotiating rent reductions with their landlords since early protest days of September, and some landlords have even suggested rent cuts depending on a tenant’s circumstances. This proves that simply collecting rent from what used to be one of the most desirable locations in the world doesn’t work now, and many landlords are taking proactive measures.

“What a lot of people don’t understand is that the landlords’ business model has become disrupted,” suggests Raymond Chow, executive director for commercial property at Hongkong Land, during a conference at Luxury Symposium in Hong Kong. “They have to shift their thinking to be more like retailers.” Landlords must bend to the current demand by hosting more pop-up shops, for example. Chanel opened a J12 watch pop-up shop in July at Wharf REIC’s Time Square and Gucci opened one in Harbour City this January. Some malls are also opting to dedicate as much as 20 percent more of their space to food and beverage service to facilitate a stronger desire for new experiences that go beyond just shopping.

Price Adjustment?

Landlords struggling to make a consistent income is just one problem looming in Hong Kong’s future, but it also begs a bigger question: Can Hong Kong ever return to being the high-end shopping destination as it once was? If not, what city would be the alternative?

Pricing has primarily been the top reason why mainland consumers enjoy shopping in Hong Kong, but will this still be the case in the next two-to-five years? Cusson Leung, JP Morgan’s head of Asia property research, tells the Wall Street Journal that the high-end retail decline was structural because of a narrowing price differential with the rest of China as well as increased online competition.

And it looks like, as of now, management is hesitant to call for a flat gap with China given the historic high-end shopping stature of the Hong Kong market. For example, even within this declining retail market, Moncler is firm about retaining the 10-percent price gap between Hong Kong and China. “What can we do to make Hong Kong a true destination so that people can come back for something new?” asks Alain Li, CEO APAC of Richemont. Can Hong Kong’s luxury market transform with fewer retail stores and by shifting the focus toward its residents? Only time will tell.

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