Hong Kong’s K11 Musea: A retail success story in peril?

As Hong Kong’s retail sector grapples with a continued slowdown despite improving tourist arrivals, K11 Musea, located at Victoria Dockside in Tsim Sha Tsui, has stood out as a beacon of success. In a market where many luxury retail spaces are struggling to attract tenants or sit vacant, K11 Musea, owned by New World Development Co (NWD), has expanded its retail footprint and maintained a high occupancy rate. However, while the mall’s approach has largely been successful, the potential sale of a sister property and a major executive shakeup raise questions about the future of K11 Musea and whether it can maintain its unique positioning. On September 26, amid whispers and rumors — NWD replaced Adrian Cheng, the third-generation scion, as CEO – a rare move in Hong Kong’s property industry, where family-run conglomerates typically adhere to meticulously planned successions. In a company announcement, NWD stated that Cheng would be replaced immediately by its chief operating officer, Ma Siu-cheung, a former Hong Kong development minister also known as Eric Ma. This CEO transition could have far-reaching consequences for key NWD assets. Earlier this month, the state-owned property developer CR Longdation – a subsidiary of the conglomerate China Resources Holdings Co – reportedly made a $1.2 billion offer for K11 Art Mall, which raises concerns about the mall’s future. Under the stewardship of NWD and Adrian Cheng – one of Hong Kong’s most well-connected and prolific art collectors – K11 Musea has thrived through its “cultural commerce” model and ability to mount high-profile events and exhibitions. However, the possibility of Cheng’s replacement and the specter of NWD selling off assets raises questions about whether K11 Musea’s model is sustainable over the long term. Cultural commerce At the core of K11 Musea’s strategy is its “cultural commerce” model, which integrates culture, art, and retail to create a distinctive shopping experience. This model has been instrumental in attracting both local consumers and international tourists who seek more than just a retail transaction. Benefitting from this model, K11 Musea recorded all-time high revenue in 2023, with overall sales up 120% from pre-pandemic levels. Luxury brands within the mall saw a 260% increase in sales, highlighting the effectiveness of this integrated approach. The mall’s high-end customer segment contributed significantly to this growth, with active membership in Klub 11’s Black Card Members – the highest spending consumer group – rising by 210% compared to the pre-pandemic level. By hosting high-profile art exhibitions, workshops, and events, such as Louis Vuitton’s Men’s Pre-Fall 2024 show in November 2023, K11 Musea has positioned itself as a shopping destination merged with a cultural incubator. This blend of culture and commerce has resonated with consumers and attracted the interest of luxury brands and groups. Over the next four years, K11 Musea plans to further expand its luxury footprint, with brands like Audemars Piguet, Balenciaga, Brunello Cucinelli, and Van Cleef & Arpels doubling their presence. This enlargement underscores the success these brands have seen within the center, even as Hong Kong’s broader retail market faces economic pressures. Luxury under pressure Despite K11 Musea’s successes, much of Hong Kong’s retail sector faces significant challenges, particularly in the luxury segment. Retail sales in July stood at HK$29.1 billion ($3.73 billion), down 11.8% YoY. This decrease followed a contraction of 9.7% in June, with sales of jewelry, watches, and valuable gifts falling by 25%. The broader economic context further complicates the outlook for luxury retail. The city’s property developers, once buoyed by sky-high rents and a booming tourism industry, are now grappling with rising interest rates, falling property values, and declining consumer confidence. Hong Kong’s government has flagged these issues, noting that changing consumption patterns, a strong currency, and increased outbound travel by residents are contributing factors. In the first seven months of 2024, retail sales fell 7.3% YoY, with most segments, including luxury, facing significant year-on-year declines. This turbulence has exacerbated the issues facing NWD. For the year ending June, the company reported a staggering $2.6 billion loss – its first annual loss in two decades. In the meantime, the city’s economic challenges pose serious threats to the profitability of property developers like NWD. Adding to these, K11 Musea’s reliance on luxury retail makes it particularly vulnerable, given the recent drop in mainland Chinese consumer spending on luxury goods in Hong Kong, despite rising numbers of tourist arrivals. For K11 Musea, the big-picture question centers around the sustainability of its “cultural commerce” model, which currently depends heavily on Cheng’s numerous connections in the global art world. Will it survive the demands of new leadership, or could ongoing financial pressures lead to a shift in strategy – potentially making K11 Musea just another mall in a city full of them?

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Hong Kong’s K11 Musea: A retail success story in peril?