Downturn in retail market drives new trends

(18 January 2017, Hong Kong)  – The decrease and changing profile of mainland tourists has been one of the key contributors behind the downturn in Hong Kong’s retail market over the past two years.

Yet at the same time, it has created a new retail landscape within the city’s most well-known retailing precincts. About 67% of shops on Russell Street in Causeway Bay, once the most expensive shopping strip in the world, were luxury watch and jewellery retailers in 2014. Today, these retailers account for just 43% of all shops leased, according to JLL’s latest Retail Atelier report. These changes are now returning diversity to the city’s most iconic retailing strips. Moreover, retailers and shopping malls are now introducing an array of new shopping experiences to help Hong Kong maintain its status as a shopper’s paradise.

Overall visitor arrivals and visitors from mainland China have decreased by 5.4% and 7.8% year-on-year respectively through January-November last year. Retail sales were also down 8.6% y-o-y over the same period. While a large number of retailers have been stung by the drop in business volumes, which have reverted back to 2011 levels, retail rents have also dropped, down 37% from their 2014 peaks. In addition to falling rents, retailers have also benefited from the increased availability of shops. These factors combined, are driving new trends in the market:

1. A more diverse retail offering

The contraction of luxury watch and jewellery shops on Russell Street, the must-go shopping distinction for mainland tourists, has been offset by the growing presence of fashion and beauty retailers along the street, which has increased from 11% and 7% in 2014 to 29% and 14% respectively in December last year.

2. Retailers to introduce new shopping experiences

The activewear and sports apparel sector has been a front-runner in elevating in-store experiences for shoppers. Adidas recently added a virtual reality fitting room in their flagship store in Causeway Bay, giving customers the chance to test new products in a training run simulation that mimics winter weather through a temperature control system.

Nike’s new flagship store on Granville Road in Tsimshatsui offers customized T-shirts and sports bras, as well as a personalized coaching section where customers can test running shoes on a treadmill to see if they are the right fit.

Terence Chan, Head of Retail at JLL, expects that 80% of retailers will have additional entertainment element or another unique offering.

3. Omni-channel retailing

The progression of omni-channel retailing-through physical and online stores and mobile apps is another trend that looks likely to gather traction in 2017. According to the Hong Kong Trade and Development Council, on-line sales account for less than 5% of total retail sales among retailers with an omni-channel sales platform within the city. This could change as more retailers turn towards social media platforms to promote their goods.

4.  Shopping malls to increase entertainment and F&B elements

2017 promises a further shift away from traditional shopping mall tenants mixes towards an increased focus on entertainment hubs and food courts. Many developers are already starting to reposition their portfolios with Swire Properties at the forefront of this movement. Its Pacific Place Mall has increased the F&B footprint by more than 20% in the space of 12 months and added a new VIP House to increase footfall to the mall and attract new customers.

Denis Ma, Head of Research at JLL, said: “Shops that were commanding rents as high as HKD2,500 per sq ft just two years ago can be leased today for HKD1,000 per sq ft. Lower rents and opportunities to secure shops in prime retailing locations has opened up the market to a new range of retailers that were previously overlooked, such as cinemas and even cooking studios.”

Terence Chan said: “For 2017, the market looks less likely to focus on the luxury sector it has been famed for in the past, and more likely to target shoppers seeking affordable luxury and mid-market products, food and beverage options and even tangible in-store experiences. Retail rents in prime shopping districts have dropped significantly over the last two years, which has created opportunities for new brands to enter the market, for existing retailers to expand, and for shopping mall operators to diversify their tenant mix. These changes will lead to a more balanced, and increasingly vibrant retail market.”