THE unthinkable has happened - Hong Kong has shopped itself to a standstill. In the face of a long term downturn in the property market, similar falls in share prices, ever-increasing interest rates and a seemingly perpetual inflation rate of 10 per cent or more, the boom in buying has stopped. Consumers have packed away their credit cards and are only looking for bargains. People are still shopping, but they are being more cautious and discriminating in their purchases. Shopkeepers and owners in Hong Kong are being squeezed by falling sales while costs continue to rise. As a measure of the downturn in the territory's 'feel good' barometers - the property and stock markets - people are still buying clothes and shoes, but not big ticket items like fridges and cars. Retailers have been the first to feel the brunt of the shifting current in economic growth. Department stores, the hardest hit by this downturn in spending, are retrenching and wondering about their future role. Some chain stores, like Giordano, seeing the writing on the wall, began years ago to make inroads into foreign markets like Taiwan, Singapore, South Korea and China and are now reaping the rewards in higher profits and dividends. Now the likes of Joyce and Wing On are heading into foreign territory - the Philippines and China - looking for increased sales and for a boost in earnings. This is partly because retail operations must expand to survive and because the Hong Kong market is finite. 'Shop till you drop' may still be at the heart of the local psyche and of the tourists who flock to the shops along Nathan Road in Tsim Sha Tsui or Central or Causeway Bay, but retailers and analysts agree that the game is tougher and meaner than we have seen in a long time. Ever-increasing retail rents and salary costs are no match for a virtually static population with an ever-shrinking disposable income. Now analysts say that in Hong Kong there are just too many retailers chasing a shrinking economic pie. The results which we are seeing today is retail saturation where profit margins are shrinking at an alarming rate and retailers, unless they are very good and very smart or have a lot of money to spend, are increasingly going to be pushed up against the wall. However, analysts and retailers are not sure whether the current rough patch in the retail market is simply a cyclical phenomenon or a hint of greater changes to come in the economy and the retail industry. According to some analysts, this spending slowdown will evaporate if only the stocks and property markets return to their early 1994 performance levels. Others, however, worry that what is going on now is having a longer term impact on the retail industry. There is a fundamental restructuring going on. Hong Kong's retail sector has been in the doldrums for the better part of a year, recording an overall sales growth of just over five per cent during 1994 as compared to seven per cent growth the previous year. Retail sales for December last year (the latest figures available) grew by 4.4 per cent as opposed to six per cent for the same month the previous year, according to government statistics. Not bad, say some retail analysts - except that this is Hong Kong, renowned as being the shopping capital of the world and the growth has not matched that of costs in many cases. As a result many economists, analysts and retailers have described these results as 'sluggish' and warn that sales figures in 1995 will be equally dismal with a further contraction in consumer spending likely. According to one estimate by the Hong Kong Retail Management Association (HKRMA), dollar sales are expected to keep pace with inflation but volumes will be down in 1995. Further warning flags were hoisted recently when a variety of retailers listed on the local stock exchange began reporting their year end results. Invariably, it was the companies with a 'regional exposure' as opposed to being solely Hong Kong based which reported the best earnings. While consumer confidence is often sited for a downturn in the retail sector, retailers are also feeling the pinch from increased competition. According to a number of analysts, Hong Kong is still viewed as ripe for the picking by an increasing number of American retailers keen on using the territory as a launch pad for their Asian operations. This is particularly true in the clothing sector. But perhaps the single biggest cost which is eating into retailers' pockets are rents and salaries. According to the Hong Kong Retail Management Association, rents today can take at least 20 per cent or more of a company's monthly turnover. In department stores, which usually need a lot of space, rents of more than a $1 million are the norm and they require sustained sales to register any growth. While there is some evidence that retail rents in the smaller shopping precincts are falling, the same cannot be said for the core shopping districts of Hong Kong and Kowloon. According to estate agents, rents in these prime areas continue to rise. And while there is much talk of falling rents in 1995, at the moment it is just that - only talk. Retailers are also unanimous in their complaint that current wages and projected tied-to-inflation increases in the years to come will leave them little or no room to manoeuvre. They talk of ever shrinking margins. Particularly hard hit are the department stores. According to some industry analysts, many of the household names usually associated with department store retailing in Hong Kong could very well disappear unless they adopt innovative retailing concepts, streamline operations and stop trying to be an 'all-things-to-all-people' type of outlet. A recent report indicated that sales volumes and profits recorded by Hong Kong's department stores are a mixed bag. By and large, these retailers are also feeling the pinch from increased competition and reduced consumer spending. A report from the Census and Statistics Bureau described department store retailers as 'cautiously optimistic' about the future. Colin Buchanan, director of retail operations with Marks and Spencer, reports 'significantly increased sales' during 1994 and predicts a fairly rosy picture for 1995. By the same token, he says, sales are down a bit compared to last year. 'We're still making good increases, but they are not as good as six to 10 months ago,' he said. 'At the end of the day there is less money about and people are less willing to spend than they were six months ago.' Mr Buchanan described financial results in the retail sector as 'patchy' with many of the chain stores doing well. However, department stores were suffering. 'Retail sales are cyclical,' said one brokerage analyst. 'We are near the bottom of the downtrend. While the tunnel will be fairly long it is not going to get worse. It depends upon the property market and interest rates.' But while analysts foresee that retail sales may pick up somewhat, they agree that a slow sales growth 'at home' will be the norm from now on. The successful retailers will increasingly look for their profits offshore. They will have to become more focused on their product, streamline operations and be more innovative. With pressure continuing on the dollar, inflation in Hong Kong way above average in developed nations and interest rates only now beginning to peak, the chances are Hong Kong's retail sector will be in the doldrums for some time.