Hong Kong's Retailer Blues

Stores that once bustled with shoppers aren't crowded these days, not with tourism down, unemployment up, and locals heading to the mainland

By George Pence

It's Saturday morning at the Landmark -- Hong Kong's answer to Beverly Hills' Rodeo Drive. In this marble-tiled mall, high-end retailers such as Christian Dior, Prada, and Tiffany & Co. try to woo the city's fashion-savvy elite. Just one problem: Shoppers are scarce. A saleswoman leans against a dressing-room door at the Kenzo boutique, while two others slouch over a display case filled with silk scarves. A sign advertising "Further Reduction -- 60% Off" hangs in the store window. Hong Kong has long had a reputation for being a shopper's paradise for everything from luxury silks and custom-made suits and shirts to the latest electronic gadgets. A few years ago, the lines at the Landmark often stretched out into the mall lobby, as Japanese tourists clamored for Gucci, Louis Vuitton, and other luxury goods that sold for a fraction of what they fetched in Tokyo.

That was the high-water mark of Hong Kong's retail scene. But now, retail prices in this city of 7 million people have fallen for 20 months in a row. Retail sales have plunged by nearly one-fifth from their 1997 peak of $30.1 billion. The damage to the economy has been considerable. Back in 1997, retail accounted for a respectable 18% of GNP. Today it's down to 14%.


  What's wrong? Tourism is down and Hong Kong unemployment is up. It's running at 4.5% -- more than double the 1997 rate of 2.2%. "More companies are cutting staff, freezing hiring, or even going out of business," says Anita Bagaman, executive director of the Hong Kong Retail Management Assn. (RMA). "That's not good news for the retail industry. People become more prone to save, not spend."

For those shoppers still turning out, there are bargains to be had. Lately, retailers have banked on discounts of 50%, 70%, even 90% off regular retail prices to keep merchandise moving off the shelves. Even lower-end retailers such as Giordano, Bossini, and U2 are offering unprecedented bargains, such as stylish $5 stretch t-shirts.

At least for now, these sales have shored up sagging revenues. In May, volume was up 6% over last year and the value of total retail sales was $2.1 billion, a 4% increase over the year-earlier period. Analysts and retailers worry, however, that those numbers will peter out as soon as the big discounts end. "There's hope that the consumer, after three years of tightening wallets, is spending again," says Ian Perkin, chief economist at the Hong Kong General Chamber of Commerce. "But most of those in retail attribute the May figures to extended sales."


  Still, a long-term fix will depend on answering the question, what happened to all the tourists? After some lean years following the mid-1997 handover to China, there are signs they may be coming back. Last year, total visitors to Hong Kong topped 13 million, exceeding the 1996 record of 12.9 million. Yet many of them apparently forgot their wallets. Last year's tourists spent one-third less than the $12 billion they spent in 1996. Meanwhile, the Japanese free-spenders have either found their purses thinned by recession or moved on to European shopping capitals such as London and Paris. In their place are mainland Chinese, who aren't about to shell out for high-end brands -- especially when they can get near-perfect knock-offs back home.

While mainlanders come to Hong Kong for gold rings and diamond necklaces, increasingly cash-strapped Hong Kongers are headed to China for cheap clothes and pirated DVDs. From the downtown rail terminus, the bustling border city of Shenzhen is only an hour's ride away. Shenzhen's shops have become so popular that guidebooks now advise tourists of their whereabouts.

Hong Kongers spent $3.8 billion in the mainland last year, equal to 16% of total retail sales in Hong Kong. "We see that trend inevitably growing," says the RMA's Anita Bagaman. By contrast, mainland tourists in Hong Kong spent only two-thirds that amount.

Twenty miles and a world away from Shenzhen's shopping paradise, Kenzo's bored saleswomen wait amid an array of rainbow-colored shirts and white linen suits. In the long run, it's going to take more than bright signs screaming "Sale, Sale, Sale!" to pep up Hong Kong's retail scene.

Pence is an intern in BusinessWeek's Hong Kong bureau

Edited by Douglas Harbrecht

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