Chinese tourists' evolving consumption pattern hurts Hong Kong retail market

They're chasing affordable products now.

In addition to the slowing rate of growth towards the end of 1H14, the lower spending and changing shopping patterns of Chinese tourists, who increasingly prefer spending more on affordable luxury and mid-priced products instead of expensive goods, also started to weigh on the market.

According to a release from JLL, retail sales retreated by 0.2% y-o-y from January to May, with April sales plunging 9.9% y-o-y; the most in a month since February 2009.

The release said that the slowdown was mainly led by a decline in the sales of jewellery and watches, which dropped 20.6% y-o-y during the first five months, although it was partly attributable to a high comparison base due to the gold sales spree last year.

Tom Gaffney, Head of Retail at JLL Hong Kong, said, “The government’s ‘proposed’ plan to impose a quota on the IVS, coupled with the changing consumption pattern of Chinese tourists, will inevitably raise concerns in the market.

Against this backdrop, we have seen retailers starting to adopt a more measured approach towards opening stores and negotiating on rentals. Looking ahead, we believe the retail market will be driven increasingly by sales of mass market and affordable luxury goods.
Meanwhile, retail rentals will likely grow in the modest range of 0-5%, although rents in some High Street shops may experience a slight contraction.”

Here’s more from JLL:

The growth in mainland Chinese tourist arrivals, albeit at a slowing rate, continued to provide support to Hong Kong’s retail property sector. Through the first five months of 2014, the total number of mainland Chinese visitor arrivals into Hong Kong increased by17.6% y-o-y, contributing to about 77% of all visitor arrivals (24 million).

By comparison, the total number of visitor arrivals grew by just 13.6% y-o-y over the same period. Among mainland Chinese visitors, around 67% travelled under the IVS, and an increasing number were inclined to take day trips, resulting in 18.9% y-o-y growth in same-day visitors from China from January to May this year.

Vacancy in prime shopping locations remained extremely low. However, slowing retail sales raised market concerns over rental growth prospects and as a result, retailers were increasingly hesitant on bidding up rentals bringing about greater vacancy and rental pressure for shops off the High Streets..

Despite headwinds in the inbound tourism sector, the sustained local consumer market that is underpinned by extremely low unemployment rates, should help drive retail sales higher in 2H14.

In addition, according to JLL’s latest retail research report, international brands still view Hong Kong as the most favourable destination to open their flagship stores in the Asia Pacific region, while mid-tier brands are projected to outpace luxury labels in expanding their footprint in the city’s retail scene for the near future.