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Protests pile pressure on Hong Kong luxury retail sales

Luxury sales in Hong Kong fell 17.1% year over year in June, the clearest indicator to date that increasingly volatile anti-government protests are adding to the numerous challenges facing the city's high-end retailers.

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A protester throws back a tear gas canister during a confrontation with police in Hong Kong on Aug. 3
Source: Associated Press

Provisional figures from the Hong Kong government released Aug. 1 show that sales of jewelry, watches, clocks and valuable gifts at retail outlets in Hong Kong reached HK$5.75 billion, down from HK$6.94 billion in June 2018. Total retail sales in June are estimated at $35.2 billion, 6.7% below the prior-year period.

Hong Kong protesters began rallying June 9 to demand the withdrawal of an extradition bill that would allow suspects to be sent to mainland China. Demonstrations have since increased in frequency and severity, with the latest citywide strike causing traffic gridlocks and hundreds of canceled flights.

"Such extensive disruptions in the name of certain demands or uncooperative movements have seriously undermined Hong Kong's law and order and are pushing our city, the city we all love and many of us helped to build, to the verge of a very dangerous situation," Hong Kong Chief Executive Carrie Lam said Aug. 5.

A number of luxury groups, including Kering SA, Compagnie Financière Richemont SA and Prada SpA sounded the alarm on the unrest in their most recent earnings reports. Kering CFO Jean-Marc Duplaix on a July 26 earnings call attributed its underperformance in Hong Kong and Macao to "a combination of high comps," including repatriation of demand in China and "some disruption in Hong Kong."

However, the protests do not fully explain the decline in luxury sales, according to Iris Pang, Greater China economist at ING, who notes that demonstrations were largely peaceful in June. A multitude of factors, including waning demand and international trade tensions, are likely to have played a role in the drop.

According to a Panjiva report, Hong Kong's exports fell 2.1% year on year in the three months to May 31, while shipments to the U.S. dropped by 35.4% during the same period. Furthermore, Hong Kong on July 31 reported 0.3% contraction in GDP for the second quarter of 2019 from the first quarter.

"Even without the full impact of the protests, the domestic purchasing power is very weak, the [retail] report means that the trade war has damaged the Hong Kong economy," said Pang.

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The protests also come at a time when Hong Kong's position as Asia's luxury retail hub is coming under increasing pressure, particularly from mainland China.

China has cracked down on the practice known as "daigou" whereby Chinese tourists buy luxury goods in bulk abroad to resell on the mainland. It cut value-added tax rates in April, which led to luxury group reducing their prices, Reuters reported. Moreover, fewer Chinese tourists are visiting Hong Kong. Mainland arrivals have been gradually declining since January, long before the protest began, according to data from the Hong Kong Tourism Board.

There are also signs that the slowdown in the Chinese economy is causing some consumers to adjust their buying patterns, according to Michael Cheng, PwC's Asia Pacific and Hong Kong/China consumer markets leader.

"You can see the 'wealth impact' of the Chinese people has been diminishing a little bit. Their spending power is slightly different. Previously they have been spending more on luxury, now they are spending more on daily necessities such as beauty and cosmetics," said Cheng.

This view was echoed by L'Oréal SA Chairman and CEO Jean-Paul Agon on a July 31 earnings call. The beauty products company reported 25.5% year-over-year revenue growth in Asia Pacific in the second quarter. Agon said the Chinese beauty segment grew in the second quarter and suggested that L'Oreal had in fact benefited from the reduced tourism into Hong Kong.

"If there are less Chinese tourists coming to Hong Kong and if they stay in China and do their purchase in China, I think it will be more a tailwind than a headwind," Agon said.

Bleak forecast

As the protests becoming increasingly violent, the specter of protracted civil unrest is a real threat to Hong Kong's retail industry in the long term.

Annie Yau Tse, board chairperson of the Hong Kong Retail Management Association, said during a call with reporters on Aug. 1 that its members have reported 30% to 50% declines in sales from mainland tourists as a result of the protests. "Since the protest is so widespread this time, occurring in different parts of the city every weekend, its repercussions on the retail sector are expected to be more serious, unlike the 2014 Occupy Central protest which was concentrated only in the financial district," said Tse.

Tse warned that the worsening situation could lead to a devastating ripple effect as retailers may be forced to reduce their operations and workforces. "Since the wages of retail workers are closely tied to the performance of the businesses, employees of some of our members are taking home 30% less pay," said Tse. The association has revised its forecast for 2019 retail sales value from single-digit growth to a double-digit drop.

ING's Pang concurred, saying that unemployment and lower wages as a result of the protests could lead to a far more devastating impact on the economy. "This will hurt domestic demand in the second wave after the trade war, and that will actually have a heavier impact on Hong Kong retail," said Pang.

PwC's Cheng, however, emphasized that for now, it is hard to make a longer-term forecast of the situation.

"No one can guarantee whether this is going to be temporary, permanent or even lasting," said Cheng. "It is not an easy moment for everyone in Hong Kong, we have seen almost every week there is some kind of riot. I am sure everyone would think this is going to continue for a while, but I just hope it might end after the summer holidays when the students return back to school. It's more politics rather than economics."

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.