More stores closing the door in Hong Kong
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A “new wave” of Hong Kong store closures lies ahead, because many retailers have over-extended their footprints, says OC&C Strategy’s Pascal Martin.
Commenting on the sudden closure of the Ralph Lauren flagship store in Causeway Bay this week, Martin said there will be a continuing wave of closures for the next one to two years because the lease contracts attached to each location have different terms, and in most cases tenants wait until the right time in which they can exit without incurring high penalties. The market will probably return to ‘normal’ in 2018, he said.
“There is a common thread between the closing of Forever 21, Abercrombie & Fitch and Ralph Lauren. These three brands are experiencing challenges in terms of their overall performance. Therefore we think that they probably need to adjust their cost structure.”
OC&C predicts that luxury and premium brands are more likely to adjust their store networks, the closures ahead “maybe not as spectacular” as the closures of those three flagships.
More regular size stores will close because many brands over-extended their footprint in Hong Kong when there was a strong stream of Chinese tourists who were hungry for foreign brands.
“Many of these brands had, and some continue, to have more stores in Hong Kong than in their home city. Now, they are investing more in their home city flagship stores including examples such as Louis Vuitton on the Champs-Elysees in Paris and Burberry on Regent Street in London, putting more emphasis on their roots and history, serving Chinese tourists who have upgraded their travel destinations to such global capital cities. At the same time, they have been closing a number of stores to adjust to a lower but more sustainable business in Hong Kong.”
Martin said the exorbitant rent levels of flagship stores in Hong Kong can have significant impact on global brands’ overall bottom line. For example, Forever 21 took a big gamble opening in Causeway Bay because it takes exceptional levels of productivity to stay profitable given the level of rent they had to pay for such a large space there.
““There is a common thread between the closing of Forever 21, Abercrombie & Fitch and Ralph Lauren.”
“That being said, the Hong Kong retail context is creating opportunities for new players to take over spaces that are freed-up by store closures such as the above. And, new tenants can probably do that with better rent conditions than their predecessors in the same spaces.”
OC&C predicts that brands that have upward momentum in their home markets and want to accelerate their momentum in Asia are the best candidates to take over large flagship space in Hong Kong, as long as these spaces are in good locations, like Victoria’s Secret taking over the Forever 21 location in Causeway Bay. Brands with on-going strong momentum like Zara and H&M may also be interested in taking up these vacant spaces.
“Until recently, Hong Kong was often a key part of a brand’s strategy to build brand equity with Chinese tourists in view of entering China. This is still true to some extent, but now brands rely more on building brand equity directly with Chinese visitors in their flagships in Europe and the US, as well as online, rather than in Hong Kong. Therefore they rely less on opening flagships in Hong Kong as they once did. Hence, brands are more rigorous in their pursuit to achieve self-sustaining economics even in their flagship brand-building stores.”
Martin said landlords will target the ‘up-momentum brands’ first in order to maximise rent.
“If they are not successful with such brands, they will have to downgrade their expectations to less known but newer brands in smaller spaces, or to more experiential offerings, i.e. gyms, restaurants, who need large spaces but cannot afford apparel-brand level of rents.”
Questions & Answers
Q.What is causing the new wave of store closures in Hong Kong, according to OC&C Strategy?
What is causing the new wave of store closures in Hong Kong, according to OC&C Strategy?
Pascal Martin of OC&C Strategy states that many retailers over-extended their footprints in Hong Kong. This, combined with challenges in overall brand performance, is contributing to a continuing wave of store closures expected over the next one to two years.
Q.Why are brands like Ralph Lauren and Forever 21 closing their flagship stores now, rather than sooner?
Why are brands like Ralph Lauren and Forever 21 closing their flagship stores now, rather than sooner?
Brands typically wait for the right time to exit without incurring high penalties, as lease contracts for each location have different terms. This allows them to manage their departures more strategically from costly flagship spaces.
Q.What kinds of brands might take over the large, vacant retail spaces in Hong Kong?
What kinds of brands might take over the large, vacant retail spaces in Hong Kong?
Brands with upward momentum in their home markets and a desire to accelerate in Asia are good candidates, especially if spaces are in good locations. Also, brands with ongoing strong momentum like Zara and H&M may be interested.
Q.How are global brands now attracting Chinese tourists compared to previous strategies involving Hong Kong?
How are global brands now attracting Chinese tourists compared to previous strategies involving Hong Kong?
Brands now focus more on building equity directly with Chinese visitors in their European and US flagship stores, as well as online. They rely less on Hong Kong for this purpose, adjusting to updated travel destinations for these tourists.
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