Bloomberg has recently mentioned how retailers like Forever 21 and Gap have rushed to Hong Kong to reach the 28 million Chinese tourists passing through every year. How bad they want to reach these customers? Just look at rentals, which rose 32% last year… perhaps companies are overpaying?
“… Forever 21, which opened its first Hong Kong store in January, said it is paying $1.4 million a month — its highest rent in the world, both in total terms and per square foot. It pays less in New York’s Times Square.
… Rents of $1,943 per square foot in Hong Kong’s Causeway Bay make it the second most expensive shopping street in the world.”
We’ve heard it in Dubai circa 2006…
Burberry Group Plc, the U.K.’s largest luxury-goods maker, is planning to pay HK$6.5 million ($840,000), or 250 percent more than the last tenant, for a 5,200-square-foot space in Causeway Bay.
“The rent in Hong Kong leads that of London or New York,” said Nick Bradstreet, head of leasing at Savills, a property agency. “The higher the sales, the higher the rent.”
Some are rational… and sell to idiots
The high rent is pushing out some local and global retailers. Well-known brand Shanghai Tang, which is owned by Cie. Financiere Richemont SA and sells Chinese-style outfits, in October left the Hong Kong premise that housed its flagship store for 17 years after the monthly rent “went totally out of control” from the HK$3 million it had been paying. The old space of Shanghai Tang was picked up by New Albany, Ohio-based Abercrombie & Fitch.
“Brands like Abercrombie consider it essential to be visible in Hong Kong because of the awareness and the traffic of mainlanders,” said Erwan Rambourg, head of consumer & retail research at HSBC. “It’s important for them to make a statement. Profitability is not the main target. It’s essentially a PR advertising approach rather than a profitability approach.”
They face some challenges. Hong Kong retail growth is likely to slow to 15 percent this year from 25 percent in 2011, according to Caroline Mak, chairwoman of the Hong Kong Retail Management Association.
This year “is going to be a crucial moment to test the foreign retailers’ stamina and their commitment in China markets,” said Eddie Lau, head of regional consumer research at Citigroup Inc. “Unless they are very bullish on long-term growth and are prepared to invest heavily, we might see them pulling out. Sales growth is likely to slow while operating expenses remain incredibly high in the near term.”