This slight uptick prompted the industry body, the Retail Management Association, to revise its full-year growth forecast upwards by one percentage point, to 3 per cent.

The wholesale and retail trades contribute only 4 per cent to Hong Kong’s gross domestic product, but they have always been closely watched for their impact on other parts of the economy.

The sector absorbs more workers than all banks in Hong Kong combined – with 102,700 employees last year.

Also, the surfeit of shops, eating houses and entertainment, mostly open till late and through major holidays, fuels the buzz that gives Hong Kong its reputation as a “shopping paradise”, ensuring that tourism remains one of the four pillars of the local economy. The other three pillar industries are finance, trade and professional services.

Explainer: how did Hong Kong become a retail hub and how have our consumer habits changed?

Last year, just over 56 million tourists thronged the city that is home to 7.35 million people, lured by the array of fashion, electronics and food on offer, and zero sales tax. About three in four were from the mainland.

But analysts say that the latest figures do not mean the tide has completely turned for the sector, which still has to contend with existing challenges, such as high rentals and competition from e-commerce.

Retailers, they add, should be assessing what they need to do to sustain the sector’s recovery.

Diversifying the tourist mix

The retail sector’s dependence on tourism was most apparent when overall sales jumped 24.9 per cent in 2011 to hit HK$406 billion, in tandem with a 16.4 per cent increase in visitors. More than half of that figure – HK$263 billion – was attributed to the 42 million visitors.

Many were big-spenders, with the sale of jewellery and watches rising by 46.6 per cent that year, and that of medicines and cosmetics by 21.5 per cent. They mostly descended on the city during the two mainland holidays – the three-day Labour Day break in May and the eight-day “Golden Week” break in October.

Hong Kong tourist numbers see biggest increase in seven months thanks to Golden Week holiday

But tourism expenditure peaked at HK$359 billion (US$46.2 billion) in 2014, and then plunged by 18.5 per cent in 2015 and last year.

An ongoing anti-corruption drive on the mainland cut short the stream of free-spending shoppers while an unfavourable exchange rate between the yuan and the Hong Kong dollar, and demonstrations of anti-mainland and pro-independence sentiment in the city, contributed to the drop in tourist numbers to varying degrees.

The transport links, property consultancy Knight Frank’s head of retail services Helen Mak said, would definitely help Hong Kong businesses expand their customer base.

But Hong Kong retailers are no longer putting all their eggs in one basket, as they realise mainlanders have grown wealthier and more inclined to travel further afield.

Not your typical Hong Kong tourists: Estonian farm stay brings cultural exchange and broader perspectives

To diversify the portfolio of inbound visitors, the Tourism Board was allocated HK$80 million by the government last year to draw holidaymakers from Southeast Asia through promotional campaigns.

Multi-day itineraries have also been designed to encourage visitors passing through the city to stay longer and spend more.

Cheung on Sunday pledged to continue developing tourism by, among other things, wooing more international tourists to use the city as a stopover for their onward travel to the rest of Asia.

Going local

Businesses are now turning their attention back to local consumers.

Several malls owners have jazzed up their tenant mix and improved the shopping experience by offering more lifestyle activities, also in a bid to draw in younger crowds.

Hong Kong malls test experiential concepts to sustain traffic in battle against e-commerce

Pacific Place, which is in Admiralty, earlier this month said it had increased its food and drinks space to account for a fifth of the mall, while adding a yoga centre and hosting workshops and arts and crafts events to cater to changing customer preferences.

Joyce this year showcased Parisian luxury accessories house Fauré Le Page at some of its stores.

There was indeed been a slight pickup this year in local consumption of luxury items, with the wealth of Hongkongers boosted by the rising value of stocks and property, even though sales were nowhere near their heyday in 2013. This development was also driven by lower prices of several established brands – part of their international price alignment strategy.

Personal shopper for Hong Kong multibillionaires on their taste in watches and fashion and his jet-setting life based out of London

Retailers who cater to mass consumers, like snack giant 759 Store, said it had never targeted the tourist market, and would continue to try to serve local shoppers.

“Look at our [store] locations – how many of those are in tourist districts? Instead we’re always looking to expand into public housing estates,” Lam Wai-chun, chairman of CEC International Holdings, which owns 759 Store, said.

The chain, which started off as a Japanese snacks specialist, now sells frozen foods and rice as well. Its biggest draw is that its prices are 30 to 50 per cent lower than supermarkets.

Hongkongers’ shopping habits among unhealthiest in the world, survey reveals

Lam said that while he was optimistic about sales next year, the business had also calibrated its expansion. After opening 271 stores in seven years, it ordered the closure of 50 outlets, most of which had underperformed.

An analysis of the shops’ performance yielded useful insights, that instead of having megastores – where rent for 20 of these stores came up to HK$100 million a year – it made more sense for shops to be between 800 and 1,200 sq ft but packed with a diverse range of offerings.

Challenges remain

As tourist footfall dwindled in the last few years, landlords of street level shops in prime locations, dominated by high-end and chain stores, slashed rents significantly.

This introduced smaller shops into the retail mix, and was a “healthy correction” of rental rates, though the downward adjustment is expected to end soon, real estate consultancy firm Cushman and Wakefield’s Hong Kong head of retail services Kevin Lam said.

Mall rentals continued to remain robust.

In November, American jeweller Tiffany and Co. secured a 3,600 sq ft shop in Tsim Sha Tsui, another tourism hotspot, for a reported monthly HK$6.48 million (US$0.8 million) from September 2018.

The new lease – 8 per cent more than what current tenant Cartier is paying – was regarded as a vote of confidence for the city’s retail market in the medium-term.

But Mak of Knight Frank said that as shop spaces with high ceilings and large facades were in limited supply, luxury brands would always be willing to splurge on them. This did not mean a rise in rentals would sit easy with all shop owners.

Hong Kong consumers warm to online shopping, with a little help from Alibaba’s Singles’ Day

To sustain the improving retail numbers, analysts said more retailers should explore using mobile payments and e-commerce to attract and retain customers.

Take-up for mobile payments in particular, has been slow, even though the Hong Kong Monetary Authority granted around a dozen licences in 2016 to allow electronic payment platforms to set up shop in the city.

Less luxury, more affordability in Hong Kong airport duty free shake-up

Current options, besides dominant smart card operator Octopus, are WeChat Pay by Tencent and AlipayHK by Alibaba financial affiliate Ant Financial. Alibaba Group owns the South China Morning Post.

With mobile payments, retailers can offer users special offers, e-coupons and rewards for spending to build loyalty.

While it is convenient for customers to nip into the many shops dotting Hong Kong’s urban landscape, having an online presence could help retailers improve sales without a corresponding increase in manpower or rental costs, with physical stores serving as showrooms for products.

Shoppers like Pinky Leung Wai-man, who splashed out on skincare, clothes and shoes to the tune of HK$7,000 this Christmas, suggested retailers continue with holiday discounts to tempt customers to return.

Leung said her budget was unlikely to increase next year, as she expected only a small pay raise. But she would continue to shop “when things are on sale, especially during Black Friday and Christmas to make my money go further.”

Additional reporting by Danny Lee