Understanding luxury in Hong Kong

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business and bi-monthly Market Insights Reports and webinars, sign up for Advanced Membership here. The last seven years have been challenging for luxury in Hong Kong. Political change, social unrest and Covid-19 pandemic restrictions have unsettled what was once considered Asia’s primary luxury hub, although signs of stabilisation are now emerging as luxury retailers adapt to new paradigms. In 2014, retail sales in Hong Kong declined for the first time in a decade as protesters took to the streets. Over the following years, tourist numbers dropped to record lows, with a particularly significant 14.2 per cent drop pre-pandemic in 2019. Luxury brands, which have targeted tourist spending through multiple points of sale across the small but affluent Chinese territory, began to review their presence in the market. Then, Covid-19 hit. In 2020, retail sales declined 24.3 per cent to HKD 326,451 million (£30.8 million), while tourist arrivals plummeted 93.6 per cent below 2019 levels. Many luxury brands closed stores, including Prada, Valentino, Tiffany & Co., Chow Tai Fook, Fendi and Louis Vuitton. How the future will pan out remains unclear, but there are signs of stabilisation. “At the beginning of the pandemic we thought we could adapt, consolidate and then welcome tourists again, but now we have really no idea of when this will happen,” says Arnault Castel, founder of Hong Kong multi-brand boutique Kapok. Travel restrictions in the city remain among the strictest in the world. Many international, vaccinated arrivals still face hotel quarantine of up to 21 days and a minimum of four tests after. On 15 September, quarantine for non-Hong Kong residents from Mainland China was scrapped, but only for a set quota of 2,000 arrivals per day, who still face hotel quarantine on their return home. From the perspective of luxury retailers, the impact of these restrictions has been heavy. “No one is coming,” says Castel. The consensus among retailers, he says, is that restrictions with Mainland China will not be further relaxed until March 2022, after the Beijing Winter Olympics. International restrictions are unlikely to be lifted any earlier. With these prospects, domestic consumers have, of necessity, become the main focus for brands and retailers. As local sentiment improves, boosted by vaccination rates, low Covid-19 cases and an easing of social restriction rules, a new energy is reinvigorating the market. Retail sales have been on an upward trend, year-on-year, since February 2021, including sales of jewellery, watches and clothes all up 28 per cent in August 2021 over the same month in 2020. “Our business has been trending up since March,” says Blondie Tsang, president of multi-brand retailer Lane Crawford. “We see the uplift in traffic, the positivity of mood and willingness to spend as soon as the Covid-19 case numbers go down and the social distancing restrictions begin to ease.” The local market has stabilised, according to Veronica Wang, partner at OC&C. Also sounding optimistic is Albert Lin, chief strategy officer of Hong Kong-based luxury brand Sauvereign, which sells handbags for up to HKD 370,000 (£35,000). He says sales are up at least two healthy digits over last year. “We are not back to our pre-pandemic, pre-social movement high yet, but it's coming back,” he observes. Oliver Tong, head of retail at JLL Hong Kong, sees “pretty good momentum” in the commercial real estate market. According to CBRE data, in Q2 2021 commercial rent prices increased 1.2 per cent quarter over quarter, recording the first gains since Q2 2018, while high-street vacancies fell to the lowest figure since Q2 2020. Hong Kong residents are renowned for their spending power. Despite a population of only 7.5 million, the city has more ultra-high-net-worth individuals than countries such as the UK, Switzerland and India. In 2020, with tourist visitors touching record lows, the city still accounted for 10 per cent of global Swiss watch exports, slightly behind after the US (11.7 per cent) and Mainland China (14.1 per cent). “Hong Kong’s buying power is ridiculous,” enthuses Austen Chu, founder and CEO of Wristcheck, a Hong Kong-based platform selling pre-owned luxury watches, which opened an offline location in the city in September. A luxury hub in flux Local demand cannot, however, entirely compensate for the loss of tourism spending. Pre-pandemic, CBRE attributed one-third of Hong Kong’s total retail sales to Mainland tourists. In 2020, according to a Ruder Finn China luxury forecast report, Mainland luxury shoppers spent over 50 per cent more than Hong Kongers on luxury products. When the borders reopen, will tourists come back? Austen Chu is confident that Hong Kong will continue to represent an important luxury destination for Asian and Southeast Asian luxury consumers, who enjoy the tax-free shopping and the high-profile image of the city, complete with a well-rounded ecosystem of luxury. Consider the bigger picture, say the optimists. “Hong Kong has a legacy of being the fashion capital of Asia, the place to buy things, the place to be seen, the place where everyone knows what you are wearing,” says Sauvereign’s Lin. “Short term it looks dismal, but long term we know that as soon as the border reopens there will be six million people going through Hong Kong every year.” Those numbers include Mainland Chinese shoppers. According to Ruder Finn’s China Luxury Forecast 2021, 68 per cent of Mainland China respondents still regard Hong Kong as a luxury hub in Asia. The city figures as the second most preferred international leisure destination for the next 12 months — ahead of Japan, Macau and Singapore. Other voices are more cautious. The Chinese government’s push to turn the tropical island of Hainan into a duty-free paradise is likely to divert some Chinese travellers away from Hong Kong. Loke-Khoon Tan, senior partner at Baker & McKenzie Hong Kong, also notes anti-Mainland Chinese sentiment brewing in the city, which diminishes the appeal of a visit to Hong Kong in the eyes of Mainland Chinese tourists. “[Hong Kongers] need the tourist dollars, but they don't exactly welcome them with open arms,” he says. That said, for some time at least, Hong Kong is likely to represent the most easily accessible destination for Mainland Chinese. As shown by the timid step taken by the Come2HK travel scheme, a travel bubble between Hong Kong and Mainland China is likely to materialise earlier than any other international opening for citizens of the People’s Republic. Hong Kong needs to seize the opportunity, suggests Tan. “Hong Kong has the potential to recover its grandeur as a luxury destination because travel will be limited, but more needs to be done by the tourism industry to win tourists back,” he says. What the locals want While the wait continues for a loosening of the regulations for visiting Hong Kong, brands continue to focus on locals. CRM, loyalty programmes and in-store experiences are all high on the priority list for brands as they seek to maximise sales to locals, says OC&C’s Wang. Lane Crawford’s Tsang highlights the need for highly personalised services and experiences. They include personal styling appointments in VIP suites, beauty concierge services and events around specific products or topics, such as watches or whiskey. During the pandemic, Lane Crawford put together personalised wardrobes and delivered them to customers' homes to try on styles and participate in Zoom styling sessions and livestream trunk shows. In April 2020, one customer alone bought 46 pieces for a total spend of HKD 700,000 (£66,277), according to the company. At Kapok, Arnault Castel has noted strong sales through Whatsapp, a service he launched during the pandemic. Assortments have also changed to better respond to local taste. Social restrictions and working from home have caused a mini-boom in the home decoration segment at Kapok and Lane Crawford Flatware, glassware, bedding, furniture and in-house entertainment — from retro pinball machines to digital consoles — are all selling well. The hypebeast sector is strong: Hong Kong buyers are using Stockx to buy sought-after brands such as Bearbrick, Kaws and the Ikea and Daniel Arsham collaboration. In fashion, understated luxury labels ranging from Officine Generale to Margaret Howell are favourites among Hong Kongers. In footwear, niche sneaker labels such as Common Projects, Veja and Moonstar are popular. The trend is casual luxe. “In both womenswear and menswear, we are seeing a dressed-down approach to luxury,” says Tsang. A new retail environment Bargain rental deals are not enough to entice many luxury brands. Despite inching up in the second quarter of 2021, high-street retail rents are still around 61 per cent lower than back during the peak of 2016. JLL’s Oliver Tong notes that luxury brands are cautious, although F&B brands are keen to expand, taking advantage of the lower rents to secure premium locations at advantageous prices. On a positive note, compared to six months ago, fewer luxury companies are considering closing shops. The emphasis has shifted to renegotiating rents with landlords. “They want to get a better deal and potentially stay for a little while longer, because the border will eventually be open,” says Tong. Investment in cost-effective pop-ups continues. According to Tong, brands that might have paid up to HKD 2 million (£189,000) a month for a permanent store in Central and Tsim Sha Tsui can now enjoy deals of as little as HKD 300,000 (£28,000) for a short-term pop-up. “They have to invest some Capex, but then the sales are great,” he says. Prada, which declined to renew the lease for its Hong Kong flagship in June 2020, launched a two-month pop-up at IFC Mall in January 2021. Similar moves have been made by Gucci, Burberry and Dior. For their part, landlords are fully aware of the importance of retaining luxury brand tenants in shopping malls. Tong says that some negotiations between landlords and tenants have been successfully resolved with landlords accepting lower deals. “They are open to discuss and are willing to be our partners,” says Lin of Sauvereign, which has two boutiques in Hong Kong and has approached landlords for rent reviews. “Before, their approach was much more commercial, but now they have a more long-term view of the market and of their own product offering,” he says. Landlords have also divided large unoccupied spaces into smaller units, which are easier to fill. For example, a 20,000 square foot space previously occupied by Prada at Plaza 2000 on Russell Street has been split into four. The international brand's perspective Jesse Einhorn, senior economist at Stockx Stockx opened its first APAC authentication centre in Hong Kong in November 2020. For that quarter, sell-side transactions were up 1,000 per cent year-on-year in Hong Kong, according to the company On growth and collectibles During the pandemic, far from slowing down we have actually seen accelerating growth. A lot of that has been driven by our international expansion, with Hong Kong and APAC at the core of it. Hong Kong is a leading place for Stockx for collectibles, with buyers purchasing them at a far higher frequency than in other regions compared to the population and market size. For example, in Hong Kong, Kaws and Bearbrick collectibles are purchased at 5 and 10 times the global average respectively. On Hong Kong streetwear clout A lot of the most popular brands globally on our platform are brands with roots in Hong Kong, like Clot, Jackson Wang and Michael Lau. These are all extremely influential brands in the global streetwear space. One of the reasons why we have such success and growth in Hong Kong is that the artists and brands that are from Hong Kong are really important at a global level. On the next gen consumer investor In Hong Kong we are seeing the collectible brands being fuelled by this new paradigm of alternative class investing. If you look at Bearbricks, they often tend to appreciate in resale value very quickly. The Bearbrick x Bape x Levi's 100 per cent & 400 per cent set, which is more popular in Hong Kong than globally, has doubled in value in the last six months. Demand from Hong Kong buyers has helped keep prices high, with the resale value of this Bearbrick rising from $530 in April to $1,020 in September. At 100 per cent price appreciation in six months, this product far outperforms traditional asset classes such as the S&P 500. You also see this in Kaws, with Kaws figures appreciating 65 per cent in value since the start of 2020. These products have a dual character of being something that you collect and consume, but also something that you can invest in and they all appeal to this next gen consumer investor. The insider's perspective Austen Chu, founder and CEO of Wristcheck Wristcheck is a Hong Kong-based pre-owned watch platform. CEO Austen Chu opened an offline location in Hong Kong’s Landmark mall in September. On the Hong Kong watch market Hong Kong is still objectively the commercial capital for the world for watches. I would rather be in Hong Kong than anywhere else in the watch business and I think it's only going to get stronger, especially when the borders with the Mainland open up. The watch brands that are leaving Hong Kong or making their spaces smaller are the brands that are not doing great globally. People in China would still rather buy watches outside of China. They just didn't have that choice [during the pandemic]. I guarantee you, as soon as borders reopen, they are going to buy them in Hong Kong because it’s cheaper and because it’s still a cultural thing — it's more of a flex. On opening a physical store I wanted to create a store that looked like an art gallery or an exhibition space, which is why it’s called the Wristcheck Experience. It's hard to drop a lot of money for the first time virtually, but with a physical space in the centre of the watch capital of the world consumers can come to our space and become our customers for life. Initially it wasn't supposed to be a store; it was supposed to be a dropbox centre. We started to speak to the landlord, Hong Kong Land, around October 2020. Vaccines weren't out yet and the [economic] trajectory looked terrible, so we negotiated at a good time. On young watch collectors One of our top clients is a 19-year-old who spent over $1 million with us. [These clients] grew up in a culture where they are used to lining up overnight to buy Air Jordan 1s or the latest pair of Yeezys, knowing that if they can get it they can sell it for three times their retail prices. Entering the watch space is a natural progression from that sneaker culture. Twenty years ago watch collectors were people in their late fifties, smoking cigars. Now these people are wearing Air Jordans and Off-White, are in their twenties and some of them are making money from crypto. In places like Hong Kong, London, Shanghai, Singapore and New York, it is very hard for young people to ever see themselves owning property, so they end up buying watches. Key takeaway: After some challenging years, Hong Kong is seeing some positive signs of stabilisation in its retail and real estate markets. However, the role of the city as a luxury hub is still in flux. A lack of international tourists, which is expected to continue at least until mid 2022, continues to weigh on the city’s luxury businesses. Even when borders reopen, it is unclear how attractive a destination Hong Kong will represent for Mainland Chinese tourists, who now enjoy access to more luxury purchasing options at home (including duty-free shopping on the island of Hainan). Locals cannot make up entirely for the missing tourism spending, but brands can still tap into the high purchasing power of affluent locals by investing in sought-after categories and developing exciting in-store experiences. To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com.