Thoughts on the Hong Kong Retail Scene – Lessons to be Learnt

I was fortunate to find myself in Hong Kong recently just before the start of the Chinese New Year celebrations. Hong Kong has always been a city that I have loved and enjoyed spending time in – I find the atmosphere stimulating, heady and energizing. The mood and general environment suits my character: fast paced, multi-cultural and goal driven. There is a general air of ‘let’s do this’ which while undeniably exhausting, works for some people, and I am one of them. Whilst London is my home, in a funny way I feel I am at my best when I am in Hong Kong. The people, whether local or expat are driven and dynamic, the food and hospitality culture is amazing (although very pricey if one frequents the swankier parts of town) and the city is beautiful in its juxtaposition of the very new with the very old. I go to Hong Kong for work, but I feel a week there does me more good than a week lying on my back in some boring resort.

Since the early 19th century and the first opium war, Hong Kong has been Europe’s gateway to China – its location on the Pearl River estuary with a land border with Shenzhen on the Chinese mainland to the North enabled direct passage to the continent, whilst its hilly peaks and deep waters provided shelter to European ships. A critical trading post throughout history, most recently for the British and Scottish during the 19th and 20th century, its metaphorical bridging between East and West has been immortalised in popular culture and I highly recommend James Clavell’s novels Tai Pan and Noble House (depicting a fictionalised account of the history of the Hong Kong trading house Jardine Matheson) as well as Ghetto at the Centre of the World, by Gordon Mathews, which examines Hong Kong’s contribution to the newly globalised economy through the lens of a single building.

Due to its geographical proximity to China and the transfer of its sovereignty from the United Kingdom to the People’s Republic of China, along with its general internationalisation and retail focused culture, Hong Kong has often been seen as a barometer for the wider retail scene in China. With Japan still struggling through its so called ‘Lost Decades’ since its financial crisis in the 1990’s, Hong Kong has been seen as the clearest and most legible marker of retail trend and performance in Asia. China and more significantly Chinese consumers have, along with the near unstoppable onslaught of Amazon.com, been the biggest story in retail over the last five to ten years. We read on a near daily basis how the success or failure of a retail brand, or indeed entire economies, appears to be inextricably linked to the spending power of the Chinese: brands are judged on their ability to ‘get China right’, offering a product and retail experience that will appeal to the tastes of Chinese tourists abroad whilst also understanding the machinations of the Chinese economy and infrastructure to ensure they can successful serve them domestically.

It came as somewhat of a surprise to me then to learn that Ralph Lauren had closed its flagship store in Hong Kong, closing overnight its ‘Mansion’ style store in Causeway Bay, with a representative of the brand saying the closure was ‘part of our strategic and financial plan’.

The closure was part of the strategy proposed by Stefan Larsson, who replaced Lauren as CEO in late 2015, before subsequently announcing his forthcoming departure from the company by May 2017. The restructuring was outlined in Larsson’s ‘Way Forward’ plan which according to reports, proposed a cut of more than 50 stores and 1,000 jobs worldwide in order to save the publicly traded company around US$200 million a year. Larsson, who built his name first in technology before spending 15 years in senior management roles at H&M and leading a well-regarded turn around at Old Navy had been brought on as only the second CEO in Ralph Lauren’s history (the first being Mr. Lauren himself) with the mandate to reverse the fortunes of the legendary brand which had suffered from a falling share price and loss of customer share to fast fashion retailers, whilst being generally late to get onto the multi-channel bandwagon.

The reason given for Mr. Larsson’s departure was a difference of strategic view with the namesake founder and board of the troubled American fashion company over how to restore it to its former glory. Ralph Lauren shares dropped more than 10 percent after the news.

“Stefan and I share a love and respect for the DNA of this great brand, and we both recognize the need to evolve. However, we have found that we have different views on how to evolve the creative and consumer-facing parts of the business. After many conversations with one another, and our Board of Directors, we have agreed to part ways. I am grateful for what Stefan has contributed during his time with us, setting us in the right direction with the Way Forward Plan,” Mr. Lauren announced in a press statement.

The recent issues facing Ralph Lauren in Hong Kong are paralleled by the internal issues at the company. China was supposed to be a huge growth market for the brand. In 2012, the company announced its commitment to transform its presence in China, a region management believe would ‘become an important driver of growth for us over the long term’, subsequently announcing plans to open 60 stores in greater China by 2015. A year after the announcement, the label launched its first men’s flagship store in Asia, in the Landmark building in Hong Kong’s Central district, and in October 2014 opened a ‘Mansion’ store at the Lee Gardens complex, offering accessories, watches and jewellery as well as men’s and women’s fashions.

Despite the ramifications for the brand of the sudden departure of its CEO and the further impact it has had on the company’s stock price, the brand’s decision to downsize its Hong Kong retail footprint are not merely illustrative of a company in crisis, but have been argued by some analysts to reveal wider issues in the Hong Kong retail scene. Ralph Lauren’s sudden closure of its flagship store is only one of numerous high profiles closures in 2016. American fast-fashion label Forever 21 has announced it will have closed its flagship store in Causeway Bay by Summer 2017 (with its site being picked up by Victoria’s Secret) whilst Paul Smith has already moved out of its flagship. Perhaps most notably, Abercrombie & Fitch is set to leave its prime location in the heart of Hong Kong’s premium shopping district. Italian luxury clothing and accessories label Tonino Lamborghini also shut more than 10 stores and in-store counters in the city recently.

Whilst the political turmoil and protests of 2014 no doubt had a lingering effect on the wider Hong Kong tourism industry, the main pressure on the Hong Kong retail scene would appear to be a combination of changing consumer tastes, shopping habits, rent increases and competition for high-spending Chinese consumers from destinations such as Japan, South Korea, Milan and London. The city’s retail sales dropped 10.5 per cent in the first half of 2016, its worst performance since 1999. The city experienced a net 5% drop in apparel sales value over 2016 and the 17.2% drop in sales of jewellery and watches.

However, despite the negative outlook, some retailers seem to be bucking the trend, or at least appear willing to brave it. Hong Kong’s Central business district area still has a draw for international brands looking to enter the Hong Kong market, even with its ever-increasing rents and generally challenging landscape as evidenced by the recent arrival of SuitSupply, the Dutch menswear tailoring business, which has opened its first Hong Kong store in Central, taking a large space on Ice House Street, which has some of the highest rents anywhere in the city. The move would appear to be a statement of confidence in Hong Kong retailing, or at least in its positioning as a ‘shop window’ for the wider Asian market.

SuitSupply has enjoyed rapid international growth as a result of its innovative combination of a mass-accessible price point with quality, sartorially driven service and product. Having brought something new to the European market, it has been lauded by industry pundits and has built a loyal consumer base who are drawn to its Italianate styling and accessible pricing. Its international success is arguably down to its unique positioning and key differentials. Compared to the ‘confused’ product offering and muddled retail formats presented by Ralph Lauren, SuitSupply feels fresh, rational and tight. It also marks a move away from the tendency to over-brand clothes, which has been cited as a vulnerability of the apparel industry in light of changing consumer tastes (especially in China).

SuitSupply’s success in Hong Kong remains to be seen of course, but it is tempting to make comparisons with other ‘discreet’ arrivals on the Hong Kong retail scene, such as the newly launched Attire House. The latest destination to cater to the well-healed sartorially inclined Hong Kong residents, Attire House presents a multi-brand format of traditional menswear and accessories sourced internationally along with offering a base of operations for traveling tailors and artisans keen to service the city’s elite. The business’s founders estimate that more than 80 per cent of the brands they stock (or represent) are new to the Greater China region and their range includes Savile Row tailoring, Neapolitan shirt making and Japanese shoemaking. Attire House is building on the success of other traditionally focused menswear businesses which cater to the evolving tastes of both the expat and local community, such as The Armoury, which is world renowned for its international range of high-craft products and its engaging approach to digital marketing.

Whilst the artisanal nature of Attire House and the modern, accessibly sartorial positioning of SuitSupply appears to resonate with the local market (judging by the large amount of footfall, and crucially shopping bags, I noticed in both shops on several occasions) it is also interesting to note that some of the major players are still banking on Hong Kong despite the warning signs from Ralph Lauren and Abercrombie. Despite 2016 being a significantly ‘down year’ for the sales of jewellery, watches and clocks, luxury powerhouse group LVMH announced its commitment to the city.

‘In Hong Kong, [there] is no question of closing the few shops that we have,’ according to Bernard Arnault, LVMH’s Chairman and CEO. ‘Instead, the Louis Vuitton brand will start renovations in its flagship store in Landmark, Central. Hong Kong is a cyclical city as you know, you have ups and downs there. Right now, Hong Kong is going through a trough,” Arnault said.

Mr. Arnault has shown his commitment to the city, pointing out how at the time when Hong Kong was returned to China, the city was ‘full of Japanese’ but after they left, ‘the Chinese came instead”, he said. In press statements and investor reports LVMH has highlighted its plans to increase revenues through extending the footfall within its retail footprint through store refurbishment and multi-channel service development and a greater focus on ‘consumer experience’. Mr. Arnault sees innovation and development as key to the success of his brands internationally, especially in challenging retail markets.

In this light, what would seem to unite the brands that are demonstrating a commitment to Hong Kong (such as SuitSupply and the LVMH portfolio) would appear to be a willingness to adapt and meet changing consumers tastes. The ‘losers’, specifically the brands which have shut up shop in 2016 or are due to, would appear to be brands that are uniformly experiencing wider structural issues in all their markets, such as Abercrombie and Ralph Lauren, both of which are going through uncertain and ill-managed transformations.

There also seems to an interest from the wider Chinese market in alternatives to the established logo-driven brands towards something with a greater degree of perceived authenticity: travel has always been a driver for luxury consumption, with travellers accounting for at least 45 per cent of sales in the industry, but with 2016 demonstrating a spike in travel safety scares as a result of terrorist attacks such as those in France along with the decline in the Euro and issues with the Shengen visa issuing process, Chinese consumers have started spending more domestically. Perhaps the brands which will perform well will be the ones that appeal to this gap between changing consumer tastes and the restrictions of international travel and spending. Moreover, tighter government restrictions on ‘daigou’ – buying on behalf of a third-party for a fee – and overseas purchases since 2016 have also made it more difficult for Chinese residents to bring in luxury products purchased abroad.

After years of spending their money internationally in key shopping cities in Europe and America, Chinese consumers appear to be shopping more at home, due to their sensitivity to currency fluctuations and shifting interests. High-end names such as Richemont, Burberry Group and LVMH are experiencing a surge in sales in mainland China as the government taxes overseas purchases and some luxury brands lower prices in China to bring them closer to those elsewhere. Moreover, the shift to mobile and the world leading sophistication of Chinese digital platforms is leading to an increased awareness among Chinese consumers of brand differentiation and authenticity.

Returning to the Hong Kong retail scene, my current feelings on the market is that the brands which are ‘backing-out’ of the region are the ones which are experiencing wider structural issues, and therefor are not able to weather Hong Kong’s cyclical retailing conditions, which are currently going through one of their unfavorable or challenging phases. In light of structural issues around travel and currency fluctuations, as well as changing customer spending habits and tastes, it is perhaps unsurprising that the brands and formats which are showing greater confidence in the region are the ones which can demonstrate a unique customer value proposition, whilst at the same time being willing to set-up as a loss leader on the Island with a view to establish a shop window and test case for the wider Chinese market.

I will be following the shifting sands of the Hong Kong retail scene closely and will provide further thoughts when I get back from my next exciting trip to this fabulous city.

In the meantime, I advise anyone with an interest in Hong Kong to check out the below:

The ghetto at the center of the world – a fantastic book on globalisation through the lens of a single building in Hong Kong

Food in Hong Kong – something to wet the appetite

Chunking Express – my favourite film set in Hong Kong