bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

helpersCheckIsPostiesArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

moreOnThisArticles

urlAlias

commentCount

authorLocations

authors

paywallTypes

corrections

sponsorType

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

socialHeadline

headline

flag

firstTopic

glossary

flattenTypeIds

publishedDate

additionalInfoBoxes

images

image

relatedLinks

relatedNewsletters

__typename

createdDate

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

SCMP Reporter

A recent frenzied price war among Hong Kong retailers - stung by an unprecedented slump in spending - appears to have only deepened their problems.

 With deflation worsening and consumer spending remaining soft, economists and retailers now believe there is unlikely to be any improvement for the retail sector in Hong Kong until well into next year.

 Retailers have been facing a catalogue of misfortunes over the past 21 months.

 More than a year after the onset of the financial downturn, consumer confidence remains weak and there has been a reverse 'wealth effect' caused by a sharp drop in asset values and a record rise in unemployment.

 Real interest rates remain high, many companies still face a credit squeeze and lacklustre tourist arrivals have made retailers' lives more difficult.

 Retailers are also confronted with a growing problem - deflation - which plagued the economy for the 10th straight month in August.

 Part of the reason for this unfortunate outcome is the retailers' own fault.

 Having embarked upon a course of lay-offs, wage cuts and pressure for rent reduction, retailers have tried to entice shoppers by slashing prices and launching cut-throat promotions.

 These moves have resulted in widespread and heavy discounting in department stores, fashion and footwear chains, cosmetics vendors and supermarkets.

 However, while sales have picked up, profits have remained under more pressure than ever.

 Office-wear retailer G2000 and casual-wear chain U2, both controlled by Michael Tien Puk-sun, are a prime example.

 The group slashed prices while sacking 140 staff - or 15 per cent of its workforce - and cutting wages for 600 others.

 During its spring sales, some items were offered with discounts of up to 90 per cent.

 Upscale retailers such as Lane Crawford International, now privatised, suffered more in a more competitive market.

 Lane Crawford, which is wholly owned by conglomerate Wheelock & Co, plunged to a net loss of $66.6 million for the year to March 31, from a profit of $1.4 million for the same period last year.

 Joyce Boutique Holdings suffered a net loss of $87.85 million in the 12 months to March, compared with a net loss of $207.23 million in the previous year.

 In June, price-cutting intensified almost across the board, triggered by the launch of Jimmy Lai Chee-ying's direct-marketing venture adMart, which takes Internet or telephone orders for groceries, computers and handsets.

 The supermarket chains hit back swiftly with retaliatory promotions.

 Hutchison Whampoa's ParknShop offered 1,500 items at steep discounts, gave away two limousines to shoppers in competitions and offered millions of dollars worth of prizes in a lucky draw.

 Dairy Farm International Holdings' Wellcome supermarket chain joined the fray and offered daily discounts for more than 1,000 items.

 General-merchandise store operator Jusco (Hong Kong) also was forced to offer discounts for home electrical appliances and products in supermarkets in order to stay competitive.

 These falling prices have made Hong Kong more competitive, but at a cost to retailer profits.

 The Hong Kong Retail Management Association (HKRMA), which counts almost all of Hong Kong's 50,000 retailers as members, foresaw the possible damage which could arise from a punishing price war early in the year.

 HKRMA chairman Philip Ma King-huen warned of the possible outcome of the discount frenzy as early as March.

 'We never encourage any steep discounts. This will not only squeeze profit margins but also fuel unhealthy competition,' he said. 'We retailers have to sell more T-shirts to maintain a profit.'  Evidence of the effect of falling prices is shown in sets of retail sales figures since January.

 Retail sales in volume terms grew a year-on-year 1 per cent in July, the first increase in 22 months.

 By value, however, they dropped 8 per cent to $15.8 billion for the month, having already dropped 6.1 per cent in June.

 The composite Consumer Price Index tumbled 6.1 per cent in August, the biggest fall on record and marked the 10th straight month of deflation.

 Over the first seven months of the year, retail sales declined a year-on-year 10 per cent in value and 5 per cent in volume.

 The doom and gloom was best described by Rodney Miles, honorary adviser to the HKRMA.

 'A 5 per cent drop in retail sales anywhere in the world is regarded as a depression.

 'As Hong Kong's retail sales dropped an astonishing 28 per cent in value to June from November 1997, it is even worse than a depression,' he said.

 Dwindling prices for property, especially in the commercial rental sector, have exacerbated the deflation problem.

 In an outcry against stratospheric rental prices, retailers have been pressing landlords to share their pain by lowering rents.

 According to real estate agents, commercial rentals have come down between 30 per cent and 40 per cent from peak levels in mid-1997.

 From the retailers' point of view, rental charges were extremely expensive, accounting for 35 per cent of their total operating costs in 1997.

 Terry Ng Sze-yuen, executive director of fashion retailer Giordano International, said the reasonable ratio should be below 20 per cent, or 'income is in turn used to feed landlords, which defeats the purpose of running a business'.

 Despite the fact that lower prices will draw customers, upmarket retailers such as Dickson Concepts (International) and Joyce believe price-cutting is not a viable long-term solution to the squeeze on spending and have both sought alternatives.

 Dickson Concepts chairman Dickson Poon described the price-cutting as 'a tug-of-war between retailers and consumers'.

 'When retailers slash prices too aggressively, consumers will hold off on their spending,' he said.

 'However, if retailers believe consumer spending will pick up and demonstrate their determination to hold prices steady, consumers will start spending again,' he said.

 To improve cash flow and offload obsolete stock, Dickson Concepts opened two 'factory outlets' selling out-of-season clothes, handbags, shoes and accessories at substantial discounts in metropolitan centres such as Sha Tin and Taikoo Shing.

 By contrast, loss-making Joyce chose to expand its market segment.

 Attempting to tap the youth market, the company launched a smart-casual line for men and women called Ad Hoc in Hong Kong and Taiwan.

 The Ad Hoc venture, which has cost the company about $10 million, involves the opening of two or three stores each in Hong Kong and Taiwan by the end of next year.

 'The purpose is to add more dimension to the group's diversity,' Joyce managing director Adrienne Marie Ma said.

 The venture would allow Joyce more flexibility in managing cash flow and inventory levels, she said.



Retailers shop for solutions