Tough times may speed up HK retail industry transformation

November 20, 2019 08:00
Customers and staff watch from a shuttered fast-food outlet as a riot police officer walks past inside a shopping mall in Tai Po on Nov. 3. Photo: Reuters

Hong Kong has been suffering from an economic downturn since the start of the US-China trade war. The situation got even worse amid violent protests over the past few months.

Undoubtedly, the severely affected sectors are those doing their business on the streets, including transportation, tourism and especially retail. The impact on the latter is particularly huge as shops are stationary.

While the latest business receipts data covers only up to the second quarter, the business tendency survey shows how leaders perceive the industry outlook up to the current quarter.

Over the past few years, an interesting phenomenon was observed where retail sales outlook tended to be significantly worse than that of the overall industry during downturns. Some say this is the intrinsic nature of street-level businesses, yet data shows this was not always the case. One could blame the unrest, but it couldn’t explain the exceptionally bearish outlook in 2016.

There are two fundamental reasons. The first one is well-known: the high rental costs. Street-level businesses are most exposed to this kind of risk. Soaring property prices, the highest in the world, would naturally raise costs for retail business. This is perfectly fine in a period of expansion but not in a recession.

The second factor is global rather than local. The growing popularity of online shopping, thanks to the high penetration of smartphones, has made street-level selling a sunset business. 

The economic recession, along with the trade war and political turmoil, acted merely as a catalyst that triggered the industry slump. To put this more accurately, the series of events has speeded up the restructuring of industry, maybe from a street-level business to something else.

Except for luxuries, probably 90 percent of the retail sales items are daily necessities. Even with the recession, trade war or civic unrest, people will continue to buy them. Only the brand and pricing matter.

The same logic applies to restaurants. Families who usually eat out will not suddenly cook at home for dinners. They will simply switch to food deliveries, which of course mean business for restaurants. So the demand is still there, although spending may turn cautious.

Every recession is a chance for restructuring. The industry is not dead except for the stubbornly weak firms.

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Chart: Census and Statistics Department

The author is Adjunct Professor in the Department of Economics and Finance, City University of Hong Kong and previously the chief economist of a bank. (, [email protected])