Hong Kong awaiting 'enormous' retail hit amid political unrest

HONG KONG (BLOOMBERG) - Hong Kong businesses that have managed to stay afloat through almost six months of sometimes-violent protests are looking to the upcoming Christmas and Chinese New Year period with a mixture of hope and trepidation.

Retail figures to be released later on Monday (Dec 2) are forecast to show sales by value plunging by almost 23 per cent in October, according to economists surveyed by Bloomberg. Such a slump is likely, given that visitor data for the month published last Friday showed that the annual "Golden Week" holiday in mainland China this year failed to translate into a tourist bump for local retailers.

Financial Secretary Paul Chan said on Monday that there would be a "very enormous" decline in sales in October. Arrivals from China plunged 45.9 per cent from a year earlier, the biggest decline on record.

That raises the stakes for the coming months. Many businesses will be forced to make hard choices: whether to continue the fight into next year or give up as leases come up for renewal and employee bonuses must be paid.

Ms Iris Pang, an economist with ING Bank in Hong Kong, sees a 70 per cent chance of a wave of store closures among retailers if spending continues to be weak. The situation is especially dire for catering companies, which typically enjoy brisk business at the holidays and face the prospect of cancellations during periods of unrest.

"Make or break is the correct description for most catering businesses in Hong Kong, as some of them have continued in the business just because their rental agreement has yet to be due," Ms Pang said. "It is very likely that many catering businesses will close their business if their revenue doesn't make a comeback during this holiday."

Hong Kong's large retailers face a similar predicament.

Cosmetics retailer Sa Sa International Holdings may close about 30 stores in the coming year depending on how the market shakes out and "the results of discussions with the owners on rent reduction", the company said in an e-mailed statement. Sa Sa shares have tumbled more than 40 per cent this year.

Chow Tai Fook Jewellery Group will look to cut costs by seeking bigger rent discounts, reducing advertising and reviewing store networks in Hong Kong and Macau, the company said in a webcast after reporting that first-half net income sank 21 per cent. The company has leases on more than 40 stores in Hong Kong and Macau expiring in the next fiscal year.

WATCH OUT

Hong Kong has traditionally been one of the world's largest centres for sales of luxury watches, but it has taken a hammering this year. Swiss watch exports to mainland China surpassed those to Hong Kong for the first time in October.

 
 
 

"If the situation persists, by the end of the year, many watch companies will have to shut down business," said Mr Alain Lam, finance director with Oriental Watch Holdings. "At the end of the year, suppliers will ask for payment and employees will demand a one-month bonus - this may cut off the cash flow of some companies."

Oriental Watch Holdings has managed to negotiate 8 per cent to 10 per cent discounts in rent from some landlords and will attempt to arrange better deals when leases come up, Mr Lam said. But there's no guarantee the company will retain its significant presence in Hong Kong, as it has healthier operations elsewhere.

"If the numbers don't work out, we will close stores," he said. "We are shifting our strategic focus to mainland China, aggressively."