Hong Kong still suffering a retail slump, despite signs of recovery
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The retail downturn here is showing signs of recovery ahead of the holiday shopping season, but a further weakening of the Chinese yuan against the dollar could return to haunt the industry.
Retail sales fell for 20 months in a row to reach 36.1 billion Hong Kong dollars ($4.65 billion) in October. However, the contraction in retail sales narrowed to 2.9% year on year, marking the smallest drop since July last year.
Leading the decline were sales of electrical goods and photographic equipment, which plunged 21.7% on the year. Sales of luxury items such as watches and jewelry — popular among wealthy mainland spenders — edged down 0.1%, ending a streak of double-digit declines since September last year.
Some brighter spots include supermarket sales, which were up 3.5% on the year, helped by stronger local consumption. But sales of clothing, as well as cosmetics and medicine, both dived back into negative territory, shrinking 5.1% and 1.8%, respectively.
The government attributed the better-than-expected retail sales to improving tourist traffic. The number of mainland Chinese visitors to Hong Kong declined 3.5% year-on-year in October, against a 5% decline a month before. Overall tourist arrivals were down 2.4%, according to official statistics. “The stable job market and increasing household incomes also rendered support to local consumer sentiment,” a government spokesperson said on Thursday.
Describing the October figures as “rays of hope” for the industry, Retail Management Association Chairman Thomson Cheng Wai-hung expected sales in the next three months to stabilize with the coming of high-spending holiday seasons such as Christmas and the Chinese New Year in late January.
“The stable job market and increasing household incomes also rendered support to local consumer sentiment,”
But Cheng said February will be a more critical time for the industry, referring to the impact of the yuan, which recently slid to an 8.5-year low. With the Hong Kong dollar’s peg to the stronger greenback, after the anticipated hikes in U.S. interest rates, “our goods would be more expensive for the mainlanders,” Cheng added. “It’s a big negative for us.”
A positive dimension is that Hong Kong retailers that do sourcing in Asia are likely to benefit from the region’s weaker currencies resulting from the rate hikes, leaving them “more room” to counteract the currency impact with promotional discounts, Cheng said.
Nonetheless, a turnaround might seem unlikely for some retailers. Hong Kong-listed French premium beauty brand L’Occitane saw Hong Kong as its worst-performing market across Asia-Pacific. Sales in the territory declined 11% on the year from April to September, little improved from the 12% slump reported in the same period in 2015.
“Our Hong Kong business remains challenging, with a continued drop in mainland Chinese tourist traffic and heavy discounts offered by competitors,” said Chief Financial Officer Thomas Levilion on Tuesday, following L’Occitane’s announcement of a modest 1% increase in overall sales, which were helped by growth markets such as Brazil and Russia. With a net opening of 17 stores in Asia, the group shut down two stores in Hong Kong in the April to September period.
Hong Kong mid-tier fashion retailer Bauhaus also closed four of its 80 stores at home and in Macau in the period, citing “stiff headwinds” in the retail market. Its net loss more than doubled to HK$60 million in the half year ended in September, dragged lower by an 18.5% fall in Hong Kong sales. The group slashed its headcount by nearly 14%, with the biggest reduction in Hong Kong.
Bauhaus may also consider relocating some of its stores away from the prime shopping districts to trim costs. “More seriously, intensive discount-driven retail dynamics in recent years have gradually diminished the effectiveness of certain traditional promotional campaigns,” said Chairman Wong Yui-lam in a statement on Nov. 25, adding that there has yet to be “any significant indicator of a rebound in the near term.”
Questions & Answers
Q.What specifically caused the contraction in retail sales to narrow in October, marking the smallest drop in over a year?
What specifically caused the contraction in retail sales to narrow in October, marking the smallest drop in over a year?
The contraction in retail sales narrowed to 2.9% year on year, which was the smallest drop since July last year. This improvement was attributed to better tourist traffic and positive local consumer sentiment.
Q.Why is February considered a more critical time for the retail industry despite the upcoming holiday seasons?
Why is February considered a more critical time for the retail industry despite the upcoming holiday seasons?
February is more critical due to the yuan's recent slide to an 8.5-year low. With the Hong Kong dollar's peg to the greenback, this makes goods more expensive for mainland Chinese shoppers, creating a significant challenge.
Q.How are Hong Kong retailers who source goods in Asia expected to be affected by the anticipated U.S. Interest rate hikes?
How are Hong Kong retailers who source goods in Asia expected to be affected by the anticipated U.S. Interest rate hikes?
These retailers may benefit from weaker Asian currencies, which will result from the rate hikes. This could give them more room to offer promotional discounts and counteract negative currency impacts.
Q.What challenges did L’Occitane and Bauhaus face in Hong Kong during the reporting periods?
What challenges did L’Occitane and Bauhaus face in Hong Kong during the reporting periods?
L’Occitane saw an 11% sales decline, citing reduced mainland tourist traffic and competitor discounts. Bauhaus reported an 18.5% fall in Hong Kong sales, leading to store closures and a significant reduction in headcount.