What This Luxury Goods Transect Means for Hong Kong’s Luxury Retail Sector

In the digital age, the future of luxury brick-and-mortar stores has arrived at an intersection. Some experts project that e-commerce platforms may help physical stores if the online-to-offline (O2O) connection is utilized properly. A more mainstream belief, however, is that physical stores—both luxury and non-luxury—are inevitably dying.

This theory is not without merit. Women’s Wear Daily reported big luxury retail giants such as Macy’s, Ralph Lauren, and Abercrombie & Fitch are closing a total of 124 stores in the United States, including Ralph Lauren Polo’s Fifth Avenue flagship store. This phenomenon is also apparent in China; last month, a Bernstein report revealed that China has experienced more luxury stores closure than anywhere else in the world from 2016 to 2017, with the most closures coming from Burberry and Dunhill—both time-honored luxury European brands.

Amid the debate on the wellbeing of brick-and-mortar stores, investment company Exane BNP Paribas conducted an interesting market investigation. A Singapore-based salesperson at the investment company performed a “luxury goods transect” observation of 37 luxury brand brick-and-mortar stores including Ermenegildo Zegna, Givenchy, and Rolex. All the stores were inside IFC, one of Hong Kong’s most high-end department stores. During his observation, the salesperson kept track of the number of visitors to these stores within the 6 p.m. to 7 p.m. time period on September 25. The results paint a compelling picture.

Among the 37 brands, two luxury timepiece brands—Audemars Piguet and Officine Panerai—had the highest store traffic, but the numbers are insignificant: they each had five customers visiting the stores during the one-hour observation period.

The brands that followed are: Dior Cosmetics and Rolex, each with four visitors, and Ermenegildo Zegna and Kenzo, each with three visitors. Well-known luxury brands such as Givenchy, Gucci, Celine, and Tory Burch had zero visitors.

The observation did not acknowledge whether the customers made any purchases. In addition, the observation was not intended to be a strict marketing survey, rather merely an experiment to compare store traffic across the various luxury brands, according to Luca Solca, Head of Luxury Goods Department at Exane BNP Paribas.

Regardless, a great number of people might find the results surprising no matter which side of the argument they are on. Given that Hong Kong IFC Mall is located at one of the city’s busiest transit junctions—it is interconnected to two major subway stations, Hong Kong, and Central, both of which are accessible from inside the shopping compound and have a daily flow of 2,500,000 commuters—geographically, IFC Mall should receive nearly the same amount of commuter traffic as the subway stations. The mall is at the heart of Hong Kong’s financial center, where the city’s most wealthy people work.

The interpretation of the transect is open-ended; but it’s worth taking a deeper look. Since the observation was conducted on a Monday during rush hour, one interpretation is that if the stores see this few visitors during the busiest time of the day, they will surely not see more visitors at other times. Another interpretation is just the opposite: the reason these stores have so little traffic is that rush hour is when people are rushing home from a full day of work and have no interest in stopping to shop.

“It is tough to generalise from these observations,” said Solca. “The idea is to provide real-life data points, comparing traffic across different stores, no matter the time.”

Like Solca said, no definitive conclusion can be drawn without a more controlled survey. One thing is for sure, however, that political tension and government policies play a major role in Hong Kong’s luxury market, especially for physical retail stores.

In the aftermath of Occupy Central Movement in Hong Kong in 2014, the Chinese government issued an update on the entry permit policy in 2015. More restrictions were put on Mainland citizen’s ability to obtain the permit, and more importantly, the unlimited entry permit issued to residents of Shenzhen—a Mainland metropolitan city adjacent to Hong Kong—was evoked.

All mainland citizens who hold the tourism entry permit are allowed to visit Hong Kong only once per week at a maximum. Many have interpreted this move to be punitive, and it has indeed since then affected Hong Kong’s economy which relies heavily on tourism and shopping.

Solca is reluctant to conclude that the transect projects a negative image of Hong Kong’s luxury brick-and-mortar stores. “I wouldn’t agree that the analysis would necessarily make you see negativity on Hong Kong,” he said, pointing out the positive, as the two luxury brands that had the most visitors were watchmakers. “On the contrary, watch sales in HK have been rebounding for the good part of a year now,” he added.

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Case Study, Market Trends, Retail