Hong Kong's retailers are hurting. The luxury goods market, so long a staple for the city's shopping malls, is evaporating as Chinese growth slows and mainlanders fret over excessive consumption. Visitation from across the border is down for a host of other reasons as well, not least the sense that mainlanders get that they're no longer welcome in the "Fragrant Harbour."
The latest kick in the cargo shorts came with word that Abercrombie & Fitch (ANF) will shutter its four-floor flagship store on Pedder Street, right in the heart of Central. The 25,600-square-foot darkly lit, highly perfumed store opened with great fanfare and a lot of bare-chested body-sculpted male models in 2011 with the casual-clothing chain paying a monthly rent of HK$7 million ($903,000).
But things are so bad that the company will not see out its lease, which runs through 2019. Instead, the store is scheduled to close by the middle of next year. Abercrombie will have to pay a penalty of $16 million for its early exit. That will leave Hong Kong without any Abercrombie stores, although the company plans to open five more stores in mainland China by the end of January.
Hong Kong retail sales fell 9.6% in the first three quarters of 2016, with jewelry and watch sales particularly poor. In terms of retail landlords, Mizuho has an underperform weighting on Champion REIT HK:2778, a spinoff from the developer Great Eagle Holdings HK:0041 that owns the huge and gleaming Langham Place shopping mall in Mong Kok.
Likewise, it is most negative on Sino Land (SNLAY) , a developer that has a broad portfolio of residential, office and retail in both Hong Kong and the mainland. That includes the Olympian City mall in Kowloon, the retail space at the Gold Coast marina on Hong Kong's northwest coast, and another 34 retail malls in Hong Kong.
Although Mizuho didn't rate them in its latest report, Sun Hung Kai Properties (SUHJY) , Hysan Development (HYSNY) , Swire Properties (SWROY) and Hongkong Land (HNGKY) operate large luxury shopping malls in the city.
Other notable retail withdrawals include the Korean-influenced, California-based fast-fashion brand Forever 21, which is closing a huge store in the heart of Causeway Bay, Hong Kong's most-famous shopping district. The American leather-goods brand Coach (COH) is also abandoning its flagship store.
The situation is positive, however, for retailers who decide to remain in the city, particularly if they sell cheaper products. It's a bit of a revolving store door. According to CBRE, Hong Kong was still the world's most-popular place for new retail entrants, with 73 new international brands entering the city in 2015, up from 58 the year before.
British high-fashion brand Burberry (BURBY) has extended its contract for a three-floor store in Tsim Sha Tsui, the main hotel area in Kowloon, at a 30% discount. That cuts its rent to "only" HK$4.5 million ($578,000) per month. But the extension is a short one -- it runs only through this coming February.
Victoria's Secret, at the direction of its parent L Brands (LB) , is moving into Forever 21's space. Its rent is HK$7 million ($903,000) per month, according to the commercial brokerage Jones Lang LaSalle (JLL) . That's a 49% drop from what the previous tenant was paying, but still pretty eye-popping.
That's because Causeway Bay remains the second-most expensive location to rent a store in the world, according to commercial brokerage Cushman & Wakefield. Despite declines, the average rate of $2,878 per square foot per year is outdone only by Fifth Avenue in New York, at $3,000 per square foot.
There are several factors at play in Hong Kong's poor retail performance. The Hong Kong dollar, pegged to its U.S. counterpart, is of course very strong at the moment. With the Chinese yuan on the decline, destinations such as Japan are becoming much more popular, the weak yen offering a substantial discount on Japanese goods.
Chinese travelers, having first been allowed to travel independently to Hong Kong rather than on a state-sponsored tour in 2003, are also more adventurous and keen to explore farther afield. The wish list for Chinese tourists, if money were no object, starts with the United States and on through France, the Maldives and Australia, according to the brokerage CLSA.
But President Xi Jinping's crackdown on corruption has also been a major driver. At one point during the Occupy Central protests in late 2014, I was inspecting the protest camp on Nathan Road, the main artery flowing through the crowded Kowloon neighborhood of Mong Kok. Looking around me, I saw eight jewelry stores from one location, with at least two Chow Tai Fook (CJEWY) outlets, which sell expensive watches and mid-range gold or diamond baubles.
"Who is really occupying Central?" I laughed to myself. Jewelers and the mainland tourists they serve. But the Occupy Central demonstrations against Beijing's interpretation of how democracy should be implemented in Hong Kong have fed into widespread dissatisfaction with Chinese rule. That has manifested itself in a "localize" movement, some of whose members advocate Hong Kong independence.
Many Chow Tai Fook stores have morphed into cosmetics shops such as SaSa International HK:0178, as the corruption crackdown discouraged luxury spending. That has left day trippers and budget travelers from mainland China to fill the void. Not trusting the goods sold in their own country, they bring their Samsonite (SMSEY) wheelie suitcases and pack them full of toothpaste, milk powder, makeup and street fashionwear.
Many young people in Hong Kong resent the rising influence and spending power of mainlanders. A group even took out newspaper advertisements decrying the mainland "locusts" who rob the stores of basic essentials. This bubbling discontent also dissuades some mainlanders from visiting Hong Kong.
Nevertheless, Hong Kong remains the cultural capital of China. Brands such as Abercrombie & Fitch and Forever 21 used the city as a beachhead into China. Their Hong Kong flagship stores are typically loss leaders, a three-dimensional billboard projecting into China. If something is popular in Hong Kong, the mainland thinking often goes, it must be cool.
So while the jewelers may be on the retreat, retailers selling "the basics" and fast fashion are on the ascendance. "To gain a 'stamp of approval' for their brand, it is essential to have a store in major cities such as Hong Kong," Joe Lin, the executive director of advisory and transaction services for the retail sector at CBRE in Hong Kong said.
The smart investment play? Shift away from Chow Tai Fook and their luxury-spend friends, and into makeup brands, fast fashion and landlords with lower-end malls.