Greedy landlords taking the Mickey
If it looks like retailers can't sell their wares fast enough these days, it may be because they really can't.
Despite the throngs of mainland tourists arriving each weekend and the expectation of surging arrivals when Disneyland opens on September 12, an increasing number of retailers in Hong Kong's shopping hubs are getting squeezed.
At Causeway Bay's ground zero, across from Sogo, is the Giordano store on Jardine's Crescent. Yesterday afternoon, customers just inside the entrance gathered around the main attraction: a large display of colourful Disney-themed T-shirts. The $80 price seemed high. The coloured T-shirts at the back of the store (sans Mickey, Minnie or Goofy) are four for $100. But the Mouse blesses the mark-up. The merchandise moves.
But things are far from magic in Hong Kong's retail kingdom. Giordano this week announced that despite double-digit growth in worldwide interim profits and a 7.3 per cent increase on Hong Kong turnover, the company might be forced to close four of its 97 stores in the territory this year.
'Even in prime locations, you can see a few vacant shops now because no retailers can afford to pay the rocketing rental fees,' said chairman Peter Lau Kwok-kuen, voicing an increasingly common complaint. 'We will not renew those leases if the landlords ask for exceptionally high rents.'
The rises are a speeding bullet that not even Superman Li Ka-shing has managed to dodge. Market sources yesterday said that Watsons, Mr Li's health and beauty chain, is being forced to move out of a prime spot in Central's Entertainment Building after landlord Hysan Development lured in fashion retailer Joyce Boutique Holdings and doubled the rent.
Joyce plans to put two shops in the Watsons space, fashion brand names Jil Sander and Balenciaga, according to managing director Adrienne Ma.
Despite being one of Hong Kong's biggest real estate developers and seeing first-half profit from property sales nearly quadruple to $2.32 billion, Mr Li announced on Thursday a 40 per cent drop in earnings from his retail and manufacturing interests.
'Some landlords greedily increase rents substantially,' Mr Li said at the results announcement. 'We have leased properties from other developers ... and we are also a victim in this respect.'
Retailers, it would seem, are becoming victims of their own success. Retail sales have grown each month for the past 23 months, their longest positive streak in a decade.
It is no coincidence that the boom run began in August 2003, the first full month that mainlanders from select cities were permitted to travel independently to the territory. But a recent dip in mainland tourists' per capita spending has brought retail sales growth down from their double-digit highs of last year.
Shopkeepers are hoping that Disneyland's opening will reverse the trend. 'Landlords are overly optimistic on the Disneyland effect. The theme park hasn't opened yet and no one knows how our business will benefit from it but landlords are already using it as an excuse to raise our rent,' said jeweller Luk Fook Holding's director Paul Law Tim-fuk.
Some of Luk Fook's stores have faced recent rent rises of 50 per cent to as much as 200 per cent, according to Mr Law, although they managed to bargain the latter down to a mere 100 per cent jump. 'It is true our business has registered growth but not 200 per cent,' Mr Law said. 'It would have been impossible to make money at that store if we had accepted the increase.'
Convenience store chain Circle K, which operates 218 shops in Hong Kong, plans to slow expansion. 'Basically, rent increases are reaching irrational levels in the second half of the year,' chief executive Richard Yeung Lap-bun said.
A Disney boost was irrelevant, Mr Yeung said, because 99 per cent of Circle K's business came from local consumers. Earnings are flat, but costs are up 30 per cent, mostly due to rent rises.
'Hong Kong has a unique landlord culture. When sentiment changes they all move in the same direction and it becomes self-fulfilling,' Morgan Stanley economist Andy Xie said. 'Landlords say prices are up so rents should be up. That's not economics but it works because everybody thinks that way.'
Core inflation is on the rise. Baseline CPI was up 1.3 per cent last month after a 1.2 per cent leap in June. Rents have spiked but price rises on retail goods have remained relatively modest and durable goods have declined.
'Retail price increases have actually been quite soft,' JP Morgan economist Ben Simpfendorfer said. 'They are rising but nothing dramatic and are certainly well below rental price increases.'
Landlords reject claims they are pushing irrational rent rises.
'Some of our tenants in fashion or food and beverage have seen eight-year highs in turnover this year,' said Jimmy Wong, an executive director of Sun Hung Kai Real Estate Agency, the leasing arm of Hong Kong's largest private shopping centre owner. 'People say landlords are greedy but our rents have not gone back to eight-year highs.'
And as for the Mouse effect, Hysan says Disney's opening will be good for the economy. 'But our rent rate also takes into consideration the performance of the economy and the demand for retails shops,' said a spokesperson. 'Lots of our tenants have leased space from us for many years. By now they are like partners to us.'
But there will be fewer partners around if rents keep climbing, says Circle K's Mr Yeung, who is hard-pressed to squeeze better margins out of things like a can of Pepsi. 'We are going to see a wave of small operators going out of business.'