Sogo parent Lifestyle International to bet HK$14bn on a revival in Hong Kong retail sector

PUBLISHED : Sunday, 27 November, 2016, 6:39pm
UPDATED : Sunday, 27 November, 2016, 9:24pm

Sogo department store operator Lifestyle International’s decision to splash out HK$7.4 billion for a plot of land in Kowloon on which to build a massive shopping complex comes at a time when the city’s beleaguered retail landscape see initial signs of stabilisation.

The iconic mall owner agreed to pay the highest price for a government commercial site in history, even after it reported in August a 49.9 per cent interim profit plunge to HK$587 million amid dwindling tourist arrivals and lukewarm domestic demand.

“Besides Sogo department store, we will also bring in other commercial, entertainment and dining facilities in the proposed development,” said Terry Poon Fuk-chuen, chief financial officer of Lifestyle, without disclosing the total investment cost.

But experts estimated that together with construction costs and interest expenses, the development could end up costing up to HK$14 billion.

“Lifestyle had been understood to be searching for a site in Kowloon for a while, but that they were happy to pay such a huge sum did catch us by surprise,” said Mariana Kou, head of Hong Kong consumer research with CLSA. “It will be interesting to see how it is going to settle financing costs with rising debt levels.”

The East Kowloon site is designated for an iconic twin-tower project in what the city government hopes will become the second central business district, featuring high rises office blocks as well as residential quarters.

Lifestyle runs two Sogo stores in Hong Kong’s Causeway Bay and Tsim Sha Tsui shopping districts, but chief executive Thomas Lau Luen-hung had suggested in August that it planned a much bigger property in Kowloon, as Sogo’s Tsim Sha Tsui outlet was too small to even house its signature supermarket.

Apart from being a magnet for mainland Chinese tourists, the 31-year-old mid-to-upscale department store boasts a traditional appeal to the city’s middle class.

CLSA’s Kou said the new Sogo mall may include facilities such as cinemas and ice-skating rink that typically drive local foot traffic, as well as dining venues that encourage customers to spend more time on the premises.

With mainland visitors declining, the city’s shopping mall operators such as Langham Place in Mong Kok are shifting their focus to local consumers, and residential properties to be developed around Kai Tak in the years to come could offer a customer base for Sogo.

“By picking a site there, they may also want to be closer to the border with Shenzhen, so as to be more approachable to mainland buyers,” said Kou.

However, other analysts believe the move was Lifestyle betting that Hong Kong’s retail sector would be out of troubled waters by the time the new shopping complex welcomed its first visitors, probably in three or more years.

But for now, they say a substantial rebound is not on the horizon although the market has been hovering at rock bottom following dozens of months in the doldrums.

“The worst may be over, but it is still too early to say if the sector is bottoming out,” said Eugene Mak, analyst with China Merchant Securities.

Last week, jewellery chain Chow Tai Fook and cosmetics giant Sa Sa International both reported interim results that pointed to a narrower profit fall from a year earlier, after grappling with a multi-year tourism downturn that has triggered a slew of store closures in the city.

Chief executives of the two firms are now sounding an upbeat sentiment, noting they could benefit from lower expenses as landlords are under pressure to slash retail rents by as much as 60 per cent in some of Hong Kong’s busiest shopping streets to lure back tenants.

“Unless something really bad happens, the retail sector has gone through its hardest of times,” Chow Tai Fook’s billionaire chairman Henry Cheng Kar-shun said on Wednesday, noting a potential return to earnings growth for the second half.

The 87-year-old company now sees signs of being able to regain its footing after its interim profit drop narrowed from last year’s 42 per cent plunge to a 21.5 per cent fall.

Unless something really bad happens, the retail sector has gone through its hardest of times
Henry Cheng Kar-shun, Chow Tai Fook

Sa Sa posted a 2.3 per cent growth in total sales transactions for the six months ended September 30, after six consecutive quarters of decreasing transaction volume.

The latest two quarters have seen the slide in mainland visitor numbers losing its momentum, which senior management of the cosmetics chain said had bolstered sales over the last few months.

The city’s September retail sales logged a 4.1 per cent year-on-year decline, the smallest drop in almost a year, according to official figures.

However, analysts say the “good old days” when retailers just collected cash pouring in from bigger spending mainlanders are not likely to return, with the yuan depreciating and wealthy Chinese venturing farther afield to Europe for luxury shopping.

“There isn’t a catalyst for growth, unless hotel room rates continue to drop,” Mak noted.

He argued that retailers like Chow Tai Fook and Sa Sa were still adopting “survival strategies” by cutting store count, while the long term outlook remains too bleak for them to beef up revenue figures considerably.

“There are political uncertainties, and more infrastructure is needed to make Hong Kong appealing other than for shopping,” he said.

From the perspective of retailers, there is more to be done to lure back the increasingly discerning Chinese consumers.

“Retailers, particularly luxury retailers here, have to make the Chinese buyers feel they are wanted. It is more than speaking the same language,” said Mary English, Hong Kong-based general manager with global loyalty company ICLP.

To bring in more customers from across the border, she suggested luxury brands could partner with local five-star hotels to invite some mainland shoppers to Hong Kong with special transportation and accommodation offers.