Prada seeking lower rents in Hong Kong, Macau amid China slowdown
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Italian fashion house Prada is trying to negotiate lower shop rents in Hong Kong and Macau to reflect weak sales and the dwindling flow of wealthy tourists from mainland China, its chairman said last week.
However, the Hong Kong-listed group does not plan to shut stores in China, which accounts for more than a fifth of its global sales and has been hit by a rout in stock markets and last month’s surprise devaluation of the yuan.
China’s economic slowdown is hurting the two shopping hubs, forcing several luxury brands to close shops or at least attempt to lower sky-high rents – with little luck so far.
“Like our competitors we’ve started re-negotiating rents for shops in weak spots such as Hong Kong and Macau but landlords are not being very receptive, they’re rather rigid,” Prada chairman Carlo Mazzi said.
“China has gone from being an El Dorado to being an interesting market. We believe it can return to be a fairly good market but it’s hard to say how long it’ll take.”
Asia-Pacific is Prada’s biggest market, representing 36 per cent of total revenues. Greater China alone accounts for 22 per cent, or €774 million (HK$6.67 billion).
Betting on fast-rising Chinese consumer demand, Prada picked Hong Kong for its market debut in mid-2011 and used the cash to repay debts and fund a costly retail expansion, opening 260 shops worldwide in four years.
But after being the growth engine of the luxury sector for years, China has become a headache for big brands as its economic growth began to slow. The main stock market index has slumped almost 40 per cent since a seven-year high in mid-June.
The Milanese group has seen profit margins fall in recent quarters as revenue weakened while costs rose. Retail sales in the Asia-Pacific region fell 17 per cent at constant currencies in the three months to the end of April, rising marginally only thanks to the foreign exchange boost.
“But after being the growth engine of the luxury sector for years, China has become a headache for big brands as its economic growth began to slow.”
Prada said last month trends in the Asia-Pacific region were little changed due to persistent difficulties in Hong Kong and Macau.
“Boosting sales is not an easy goal at this time,” Mazzi said. “The phase of massive retail investments is behind us … We need alternatives to the shop network expansion,” he added, citing e-commerce and improving returns at existing shops.
Luxury groups are still reeling from Beijing’s clampdown on lavish gift-giving and the blow to tourism in Hong Kong from last year’s pro-democracy protests.
Mazzi expects sales in the former British colony, where Prada has 22 shops, to recover over time but growth rates are likely to be more modest than in the past.
“We’re limiting expansion projects in Hong Kong and Macau,” Mazzi said.
But “even with lower sales our Chinese stores continue to have positive – though much smaller – margins. Closing shops in China is not on the table,” he added.
“Let’s not confuse China with South American markets, knocked down by falling oil prices. China is not down on its knees, it just needs to correct some issues it has with its economy.”
Prada, which also owns brands Miu Miu and Church’s, has just over 600 stores globally, of which 94 are in Greater China. No clear alternative market has emerged and Mazzi said Prada was not targeting expansion in any particular country.
“There are uncertainties that hold back investments in markets where we had planned to boost our presence, such as Africa,” he said, also mentioning logistical and political problems in India.
Questions & Answers
Q.Why is Prada seeking to lower shop rents in Hong Kong and Macau?
Why is Prada seeking to lower shop rents in Hong Kong and Macau?
Prada is trying to negotiate lower rents due to weak sales and a reduced flow of wealthy tourists from mainland China. The chairman notes this reflects the economic slowdown impacting the region.
Q.How significant is the Chinese market to Prada's global business?
How significant is the Chinese market to Prada's global business?
Greater China alone accounts for 22 per cent of Prada's total revenues, amounting to €774 million. This region is a substantial part of their biggest market, Asia-Pacific, which represents 36 per cent of total revenues.
Q.What alternatives to shop network expansion is Prada considering?
What alternatives to shop network expansion is Prada considering?
Prada is looking at e-commerce and improving returns at its existing shops as alternatives. The company has stated that the phase of massive retail investments is now behind them.
Q.Are there plans to close any Prada stores in China despite the economic challenges?
Are there plans to close any Prada stores in China despite the economic challenges?
No, Prada does not plan to close stores in China. Despite lower sales, their Chinese stores continue to have positive, albeit much smaller, margins, making closures unnecessary.
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