(Bloomberg Opinion) -- Don’t blame street protests for the luxury bust in Hong Kong. They hurt, but there are bigger issues at play that have been building for a while.
Hong Kong is on alert for signs that demonstrations against the way China’s special territory is being run are damaging the economy. So far, the impact has been small. The confrontations between black-shirted protesters and riot police may have shut down subway lines and defaced public buildings, but private property hasn’t been targeted. Shop windows displaying the likes of Prada handbags and Gucci loafers remain unsmashed even if tear gas outside deters passersby. Contrast that with a class-warfare struggle like, say, the Yellow Vests in Paris.
But Hong Kong is undoubtedly feeling luxury pain. The dominant buyers are mainland Chinese who account for 30% of such purchases worldwide. While turned off by what some of them see as unpatriotic disorder, they were already curbing sprees in Hong Kong well before mass marches against an extradition bill kicked off the unrest. Chinese visitor arrivals have been gradually declining since January, tourism data show. The trade war and its impact on currency have eroded purchasing power. Hong Kong’s peg to the U.S. dollar means that the yuan’s slump this week to an 11-year low will further put off Chinese shoppers. That will eventually ripple through to other luxury destinations.
Recent events will take a toll. The Hong Kong Retail Management Association has predicted double-digit declines in sales for July and August from the same period in 2018. June retail sales fell 6.7% from a year earlier, provisional government data show, dragged down by a whopping 17.1% plunge in jewelry, watches, clocks and "valuable gifts."
That’s bad news for a city that built a reputation on luxury shopping and makes up between 5% and 10% of global purchases, according to analysis from Bernstein Research. But the former British colony has been losing its luster for bling for a while now.
Chinese luxury shoppers still opt for Hong Kong as their No. 1 destination, followed by France, Japan, the U.S. and China, HSBC Holdings Plc said in an April research report. But as Chinese grow wealthier and better-traveled, short shopping trips across the border have a been-there, done-that feel.
Blase but bargain-eyed tourists are quick to tie up a shopping trip with a sightseeing one. Buying that LVMH SA handbag in Paris is less of a big deal than it used to be. Violent protests scared tourists away from Paris for a while, giving Hong Kong a cushion, but they returned to the French capital in the spring, Bernstein Research found.
Then there’s the online challenge. A lot more luxury buying happens at home as brands cater to China’s digitally savvy shoppers. HSBC reckons that there will be 50-50 split between overseas and domestic shopping within two years, from 75-25 a few years ago.
Chinese buyers still face a price gap. Louis Vuitton’s Speedy bag #25 (with strap) sells for 1,020 euros ($1,143) in France, HK$11,800 ($1,505) in Hong Kong and 10,900 yuan ($1,552) in China. Beijing, however, has been cutting value-added and import taxes to encourage consumers to spend more at home. The overall gap with prices in France has narrowed from more than 50%.
Luxury brands are picking ambassadors like pop idols Kris Wu and or Lu Han to fight back. They’re also watching prices. French luxury goods group Kering SA cut prices on its Italian Gucci brand by 3% in China after the latest round of value-added taxes came into effect in April but still boasts strong sales there. In contrast, less trendy Italian fashion house Prada SpA posted a 5.1% drop in greater China first-half sales.
When times are tough and the economy is slowing, Chinese consumers, like those elsewhere, become picky. One area that’s stayed resilient is high-end fashion with a sporty twist, due to its popularity with millennials. They like Balenciaga SA's Triple S sneakers and the gym clothes co-launched by Louis Vuitton and New York-based skate brand Supreme.
At some point as the trade war intensifies, Chinese appetite will further diminish. Other markets won’t be spared. Hong Kong is proving a trip-wire for brands coping with some of the world’s highest rents. But the clouds of tear-gas shouldn’t obscure longer bad times coming for bling.
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Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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