Global brands muscle out local stores

HONG KONG: Home-grown retailers are fighting a costly war with big global brands to maintain a foothold in Hong Kong's upmarket shopping precincts.

The bidding war over rentals with high-margin wealthy international players comes on top of rising operating costs as a result of inflation, and has proved too expensive for many of the city's lower-margin retailers, who have been forced into subprime shopping districts or offshore.

"The Hong Kong retail sector is an increasingly competitive marketplace. Rents rose 12% in 2010, following a 3% increase in all of 2009," said Benedict Ma, associate director of research at property consultant CB Richard Ellis (CBRE).

The acceleration in rentals last year was largely due to a rebound in retail sales that lured big retailers and international players to expand in the market, Ma said.

During the first 11 months of last year, retail sales increased by 18.2% in value or 15.5% in volume over the same period a year earlier. The robust performance was driven by an improvement in domestic consumption, as well as from a surge in mainland tourists arrivals and associated spending.

"International retailers are fighting to get in on the action, and are willing to outbid existing tenants, who in many cases are smaller, local operators, in order to acquire prime shop locations," Ma said. Recent examples included US-based fast fashion retailer FOREVER 21 taking up space formerly occupied by local brand Giordano in Capitol Centre in Causeway Bay, and German luxury goods brand MCM taking over space previously occupied in Entertainment Building by local clothing brand Episode.

Global brand Gap has committed to a 13,000 sq ft shop in Central.

"This means that more local and smaller entrepreneurs will have an increasingly difficult time in trying to identify well-located shops and will therefore be pushed back into secondary or tertiary locations where rents are lower," Ma said.

In some extreme cases, entrepreneurs hoping to set up shop thought they had a better chance of success if they went offshore.

Brenda Lee is an example. After graduating from university in 2003 and working for a few years in hospitals, Lee planned to set up her own chiropodist clinic.

Hong Kong was not her first choice and she and her partner opened a clinic in Macau early in 2009. The monthly rent plus management fee for her ground-floor shop is around HK$10,000 (RM3,924.16), versus about HK$20,000 for a similar-sized location in Hong Kong.

"We did not consider Hong Kong as rents were too high," she said.

Since the business went well, the partners considered setting up shop in Hong Kong, but their hopes were dashed when they found out what rent they would have to pay.

"We tried to look for space in office floors in Sheung Wan but asking rents were more than HK$20 per sq ft," Lee said. This meant she would have to pay about HK$20,000 a month to rent a shop.

Caroline Mak Sui-king, chairwoman of the Hong Kong Retail Management Association, said rising rents had forced fast-food chains like Pizza Hut to move upstairs and there were fewer convenience stores in core shopping districts such as Causeway Bay and Tsim Sha Tsui.

"The situation is getting worse," she said.

CBRE expected the situation for smaller retailers would continue to grow more difficult. Local retailers may have to think of more creative retailing formats, he said, such as "Ginza-type" vertical retailing, sharing shop space between one or more brands or operators, or maybe pursuing an online retailing model.

Rising inflation, a continued growth in retail sales, and a limited supply of shops in prime areas, will see retail rentals of ground-floor units in shopping districts edge up a further 20% over the next 12 months, Colliers forecast. — SCMP
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