The speed of change in the retailing business is asking questions of Hong Kong

A transaction at the beginning of this year provided an interesting reminder of the somewhat quaint nature of Hong Kong’s retail sector, highlighting how it operates and why it may no longer be able to operate in this way.

Marks & Spencer, the British-based retailer, sold its Hong Kong and Macau operation to Dubai-based Al-Futtaim, a long-standing franchise partner. Al-Futtaim will continue to operate under the British retailer’s name, sell its products and follow its format; in other words the usual type of arrangement for a franchise store. This transaction raised little interest in Hong Kong because retail brands tend to be better known than their owners.

Franchising of foreign retail operations is widespread in Hong Kong despite the enormous retailing expertise that exists here. But this expertise has had little success creating brands that have gone global.

There are exceptions: Dairy Farm has managed to establish a couple of its brands in nearby overseas markets, as has the clothing retailer Giordano, founded by Jimmy Lai. Shanghai Tang, the rather more upmarket Hong Kong clothing brand founded by another flamboyant Hongkonger, David Tang, only really went international once it was sold to the Swiss-based Richemont group, which last year sold it on to the Italian fashion entrepreneur Alessandro Bastagli.

Marks and Spencer ends mainland China online operations

Meanwhile in Hong Kong practically all the big name fashion retailers are either foreign owned or franchised by overseas companies to local owners. The biggest of these franchise operations are in the food sector.

The Maxim’s group, for example, operates Starbucks as a franchise but keeps its ownership low profile. Probably the largest Hong Kong franchise operation however is the McDonald’s fast food business, which has passed through various hands. A year ago the bulk of this operation in Hong Kong and China was sold to a joint venture of China’s Citic conglomerate and the US private equity firm Carlyle Group.

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Another contender for the biggest local franchise arrangement is Dairy Farm’s ubiquitous 7-Eleven convenience store chain, which is also a US franchise operation. Dairy Farm in turn runs a sub-franchise operation for smaller operators. Its rival, Circle K stores, is also a US franchise, operated in Hong Kong by CR Asia, part of the Fung Group.

It is something of a mystery why Hong Kong retailing expertise has not managed to even produce a similarly flourishing chain of convenience stores and has to had to rely on franchising.

Franchising is a pretty good way to get into a business where the know-how is provided by a well-established franchiser that will typically supply franchisees with copious guidelines on how to operate the business, alongside backup support to ensure that these guidelines are fulfilled. From the franchiser’s point of view this is a massive opportunity to expand their business without spending a cent and carries the prospect of more or less guaranteed revenues because franchisees typically pay a flat fee in addition to handing over a share of the profits.

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What’s changing, and changing fast, is that much of bricks-and-mortar retail business is being overwhelmed by cyberretailing, something that matters in the franchise world because franchising is focused on the high street in ways that make it less relevant in cyberspace. Franchise arrangements flourish in circumstances where a physical presence is required.

In mainland China much of the transition to cyberspace retailing has already taken place and the degree to which it has not in Hong Kong is rather remarkable.

This transition has been revolutionary in slashing the price of entry into the retail market and creates all sorts of opportunities for experimentation.

The mainland Chinese retail business has created internet shopping behemoths such as Taobao, part of the Alibaba Group, which owns this newspaper. They are essentially marketing and distribution networks, allowing literally hundreds of thousands of retail suppliers to trade their goods without heavy investment in premises or flashy shop fronts or anything of the kind. These platforms take a cut of every piece of business transacted, in some respects echoing the franchise model but with greater ease.

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In mainland China even food outlets have found the need to join internet-based food delivery services to keep ahead in the struggle for survival. They, however, still need to retain a quite substantial physical presence in prime areas.

How long will it be before Hong Kong catches up? And what then happens to the rapacious landlords, who have been the biggest winners in the local retail sector? Come to think of it, what does this mean for the outlook for Hong Kong’s main thoroughfares; surely the current mass of retail operations will shrink and, more excitingly it may produce opportunities for plucky independents, who currently cannot get a look in. For once the future for retailing looks pretty exciting.

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster

This article has been corrected to show that CR Asia is part of the Fung Group, not the Li & Fung Group