The future of retail in Hong Kong

Friday 18 December 2020

Article

Hong Kong has lost its status as the ultimate shopping destination for Chinese tourists. Hong Kong’s price advantage vs. mainland China, which used to be in the 30-40% range, has shrunk to a mere 10-15% - not worth a trip from Beijing or Shanghai.

Higher income seasoned travelers now prefer “exotic” destinations in Europe and America and are being replaced by lower income, lower Tier city, first-time visitors with less spending power.

Day trippers from nearby Guangdong may also soon find a Hong Kong shopping trip less compelling than it used to be. This is due to the number of new malls that have opened up in key Greater Bay Area cities, and where major brands have extended their store networks and have become more accessible.

Finally, the emergence of Hainan as a major tax-free domestic destination for Chinese travellers is also contributing to Hong Kong's retail decline.

As a result, brands focused on Chinese tourist demand, such as Chow Tai Fook or Sa Sa, are reducing their number of stores in Hong Kong. So are Louis Vuitton, Tiffany and other luxury brands who have announced plans to adjust their store footprint over the next few years.

What does this mean for Hong Kong retailers? We see four major opportunities:

• Target locals
• Build closer relationships with customers
• Grow online
• Go GBA

Targeting locals is about identifying Hong Konger needs that were not properly addressed and offering products that cater to these needs with the right value proposition.

As commercial rents have started to come down, brands catering to local needs are finding more opportunities to break into the Hong Kong retail scene.

For example, French sport retailer Decathlon identified outdoor activities as a growing trend in Hong Kong.  Available brands were skewed towards luxury and premium offerings (e.g. Montcler, The North Face, Arcteryx, Patagonia) targeting Chinese tourists, which didn’t necessarily match the needs of Hong-Kong casual outdoor enthusiasts seeking quality products at affordable prices.

Decathlon first entered the Hong Kong market via online channels in 2015, then opened two small offline stores in “second choice” locations that were not appealing enough to luxury brands. In 2019 the brand announced the opening of a third store, this time consistent with their original “big box” concept at 36,000sqf, with an outdoor sports playground of the same size. In 2020, two more stores opened, in Kowloon Bay and on Central’s prestigious Queen’s Road.

This would not have been possible without significant rent concessions from landlords who have started to integrate the new Hong Kong reality into their asking prices.

Japanese discount megastore Don Quijote is another example of a brand “clicking” with Hong-Kongers hunger for quality affordable goods and opening stores in prestigious downtown locations like Causeway Bay, Nathan road and Queen’s road.

Building closer relationships with customers has become a “must” for Hong Kong retailers. For as long as HK retail was focused on Chinese visitors, then keeping in touch with customers was not a priority. However, in the post-COVID Hong Konger-centric market environment, it is essential to stay close to customers.

The Dairy Farm Group and its partners Hang Seng Bank and Jardine Restaurant Group recently announced the launch of Hong Kong’s biggest customer rewards club application, named “yuu”, on multiple platforms including Apple, Google and Wechat. The app connects a wide range of brands and services together, including Wellcome supermarkets, Mannings drugstores, 7-Eleven convenience stores, Ikea furniture stores, KFC, Pizza Hut, Market Place supermarkets, 3hree6ixty fashion stores, Oliver’s delicatessen, and a number of delivery platforms, allowing members to earn more points in more places and redeem more rewards faster than ever.

No physical cards are needed with yuu as the app does it all: updating point balances after each transaction and also enabling customers to share points among friends or donating points to local charities. The program also makes daily personalised offers to its members.

Online to offline convenience has also become more widespread: For example, Decathlon has introduced the concept of “Click & Collect” on their “Decat’ Easy” Hong Kong mobile app, providing a fast and seamless shopping experience to their customers, as well as a free and fast service where users simply scan products for instant checkout.

Decathlon is also analysing customer and traffic data to boost traffic to their recently opened stores. They first partnered with a data agency to analyse their target audience – people seen at sports centers, sports complexes, competitors’ stores (Marathon, Nike and adidas) to define target profiles. This has helped define target groups to whom they send mobile ads to members of these groups walking near Decathlon stores. For its 3rd store opening event, a marketing campaign using this approach attracted an impressive 150,000 visitors in 7 days.

Going online is the third growth opportunity for Hong Kong retailers. With only 5% penetration and 11% growth in 2019, Hong Kong’s E-Commerce is behind other major markets, particularly China. But the COVID crisis has accelerated Hong Kong’s e-commerce penetration, which is forecast to more than double by 2024.

A particularity of Hong Kong’s e-commerce landscape is that it has been relatively neglected by global platforms. This has facilitated the emergence of a local champion, HKTV. Launched in 2015, HKTV is a one-stop shop for Hong Kong consumers, offering a very wide range of products (over 450k SKUs) and fast, super-convenient delivery options, including a large network of physical pick-up points, mobile pick-up trucks and smart lockers. They are now the largest local e-commerce player, ahead of Amazon, Apple, Yahoo, eBay, Zalora, ASOS and Tmall.  

Many Hong Kong retailers are trying to embark on the e-commerce band wagon at the demand of their COVID-weary customers. A key challenge will be their relative lack of scale to invest in the technology and capabilities required to become credible e-commerce players. To catch-up, they will probably have to enter partnerships – as many of their counterparts in Europe and the US have had to.

Expanding beyond Hong Kong, into the Greater Bay Area, is the next big opportunity for Hong Kong retailers: a population size equivalent to France, with five major cities above 5 million inhabitants, generating 12% of China’s GDP.

Many new shopping malls – some of them already among the best performing in China – have opened in the region, creating new opportunities for brands to expand their footprint. Several Hong Kong based chains are showing the way in the GBA:

• Watsons recently opened their 3800th store in mainland China and launched Watsons One Pass, a membership program that can be used in all stores of the 11 cities where they are present in the GBA
• Café de Coral operates 90 restaurants in the GBA and entered a partnership with property developers to accelerate their openings
• Sa Sa runs 230 stores across HK, Macau and Mainland China, and are accelerating their pace of openings in Mainland China. They also introduced a credit card in collaboration with the Bank of China, offering special discounts to their GBA customers

In this context, retailers looking at the future of Hong Kong must ask themselves five key questions:

• Are your mid-term plans in sync with HK’s ongoing structural shifts?
• What actions are you taking to better address Hong Kong local demand?
• How close are you to customers? How do you engage with them?
• How will you leverage e-commerce for growth?
• What is your expansion plan in the Greater Bay Area? 

Find out more about Pascal Martin, Partner