Shopping Makes A Comeback In Hong Kong

As the mainland allows freer travel, tourists are springing for tax-free loot

Just over a year ago, few would have dared to float a retail business in Hong Kong. SARS had emptied the streets, the former British colony was still reeling from the financial crisis of the late 1990s, and deflation made profits scarce. This April, though, things looked bright enough for the owner of Sogo, the city's largest department store, to go public. And since their debut, shares of Lifestyle International Holdings, which owns the 10-story Sogo, are up 24%. "Hong Kong is still a place of opportunity," says Thomas Lau, managing director of Lifestyle.

Lau isn't the only optimist in Hong Kong. Between January and June, retail revenues topped $2 billion per month, the highest level for any six-month period since 1998. Now stores from Kowloon to Causeway Bay are in expansion mode.

Why the turnaround? A recovery has helped, but the big news is a surge in the number of mainland tourists. In mid-2003, China started allowing residents from Guangdong province and later Beijing and other big cities to visit Hong Kong on their own instead of restricting them to group tours. That sparked a badly needed tourism boom. Before SARS, an average of 700,000 mainland Chinese visited Hong Kong every month. By the end of last year, that figure had jumped to more than 1 million. In the first half of 2004, shoppers had dropped $4.3 billion, much of it on goods such as watches and jewelry -- which are heavily taxed in China but not in Hong Kong -- compared with $4.4 billion for all of 2003.

To cash in, Hong Kong store owners have started catering to mainlanders. Stores in shopping districts started accepting yuan-based credit cards in April. Fortress, a consumer-electronics and appliance retailer, runs ads in mainland newspapers with clip-out coupons. And fast-food chain Café de Coral writes some of its menus in the simplified Chinese characters used on the mainland instead of the more complicated, traditional Chinese characters preferred in Hong Kong.


Mostly, though, Hong Kong retailers figure they can serve the tourists -- as well as locals -- by simply expanding. With mainlanders now accounting for 35% of sales at local cosmetics chain Sasa -- up from 25% a year ago -- the company is planning to add 11 new stores to its 39 outlets by the end of next year. "With more traffic, we're favoring bigger stores that cater to a broader range of customers," says Guy Look, Sasa's executive director. British department store Harvey Nichols, owned by Dickson Concepts of Hong Kong, is building a $12.8 million, five-level luxury store, its first outside Britain. Then there's Bossini, a clothing retailer that closed four of its 31 Hong Kong stores last year. Bossini is growing again, with two new stores this year and another three scheduled to open by next March. "We want to capture the opportunity to emerge stronger than before," says Kathy Chan, Bossini's finance director.

Some wonder whether this boom has legs. Retail sales are still nearly 20% below the peak they reached before Britain returned Hong Kong to Beijing's rule in 1997, and the number of mainland visitors hasn't grown much this year. The optimists, though, say there's little to worry about. Beijing is expected to continue easing restrictions on travel, allowing residents of more provinces to visit freely, and the Hong Kong government announced the end of 68 months of deflation on Aug. 24. The spending power of mainlanders, meanwhile, is expected to keep pace with China's 9% annual economic growth rate. It might finally be time for shopkeepers to consider raising prices again.

By Simon Cartledge, with Chen Wu, in Hong Kong

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