Retailers play the survival game

PUBLISHED : Wednesday, 19 July, 2006, 12:00am
UPDATED : Wednesday, 19 July, 2006, 12:00am

Amid rising rents, operators adopt strategies such as moving back-offices, buying shop space or just closing expensive sites

Squeezed between soaring retail rents and a highly competitive market, big and small tenants are scratching their heads trying to find out the rule of survival in the city.

While big retail chains minimise the space they need by moving back-offices north of the border, some small retailers and banks choose to buy their own shop space to avoid the ups and downs of rents.

For property agents, the number of shops they keep serves as the market barometer as they have a flexible policy of opening and closing shops overnight in response to their business revenues.

Fast-food chain operator Fairwood Holdings says rising retail rents have not stopped its expansion in the city, where the economy is on the recovery track.

It plans to add eight stores this year and aims to have 100 stores in the city by 2010. It now has 72 fast-food outlets and cafes.

How does it manage to expand despite rising rents? By keeping only its head office and central kitchen in Hong Kong.

Fairwood chairman Dennis Lo Hoi-yeung said the company had moved most of its back-offices to Shenzhen where rents were cheaper and outsourced the logistics side to limit its expenses.

And Mr Lo adds: 'Our new outlets avoid prime locations.'

He said the chain preferred to move into shopping centres, where rents were more reasonable than street-level shops.

'We do not go for ground-level retail premises held by speculators who charge higher rents to attract buyers,' he said.

Besides, shopping centre operators charge base rent or turnover rent, whichever is higher.

'We normally pay 10 per cent to 12 per cent of our sales as turnover rents,' Mr Lo said, adding that the chain only leased retail space that charged about $50 per square foot per month, unlike cosmetic retailers and jewellers that can afford to pay up to $300 per square foot.

Underpinned by strong consumer spending, Hong Kong's retail leasing market continues to record steady growth. For example, two street-level units at 67 and 69 Argyle Street were pre-leased recently to a local apparel store at more than $900,000 per month.

Based on the floor area of about 1,550 square feet, the average rent is more than $580 per square foot a month, says Colliers International.

Mr Lo said although Fairwood had bought retail premises to offset the soaring rents of the 1990s, most of those properties had been sold. 'Buying our own shops is not economically viable for us,' he said.

For instance, for the cost of a retail property, the company can invest that on opening 10 to 20 new stores, Mr Lo said.

Just such a strategy is being adopted by Yu Kee, which sells food and vegetables at discounted prices. The firm prefers to buy properties for its retail chain to offset thinning margins from escalating rents. The chain bought 10 shops for its own operations in 2000.

'It is one way to maximise our margins even when retail rents are on an upswing,' a spokeswoman at Yu Kee said, adding that the company leased 60 shops as well.

Landlords have sought rent increases of up to 50 per cent as some of its leases come up for renewal, she said.

Yu Kee's rental expenses make up 5 per cent of its turnover, lower than the market's 10 per cent to 20 per cent.

CB Richard Ellis expects overall rental levels for retail properties to exhibit double-digit growth this year.

Ricacorp Properties managing director Ivan Ho Shiu-cheong said property agency branches that did not generate enough business to cover the rent were closed when the lease came up for renewal.

'Those leases that require 100 per cent higher rent than the previous agreement will also be reconsidered. Business determines the affordability of our rents,' he said.

Ricacorp operated 140 branches and would not renew 10 to 20 leases. he said.