Watsons criticises landlords' 'unrealistic' rent increases

Asia's largest health and beauty chain, Watsons, has criticised aggressive retail rent increases as 'unrealistic' at a time when low prices are still squeezing retail margins and the weakness of the United States dollar is increasing the cost of goods.

The chain, which operates more than 750 stores in the region, said it would not actively seek shops in high-rent locations because most of its customers were locals rather than tourists.

Watsons is planning to open 14 new stores in Hong Kong this year, taking the local total to 164.

David Boynton, who was appointed as Watsons Hong Kong managing director in September, said landlords had recently raised asking rents by 20 per cent to 30 per cent at key locations.

'We've seen landlords change their views from very bearish in November to bullish over the past two months,' he said.

He questioned whether landlords' moves to increase rents were realistic, considering retailers' bottom lines were still under pressure.

Watsons saw sales rise 30 per cent in 25 of its stores in areas with heavy tourist traffic over the Lunar New Year holiday but Mr Boynton said he expected only 'low single digit' growth in sales this year. That forecast matches the Hong Kong Retail Management Association's prediction for the whole retail sector.

'Only a small fraction of our stores are benefiting from the mainland's relaxation of travel restrictions,' he said.

Watsons decided to upgrade existing stores in prime locations such as Cameron Road, Tsim Sha Tsui, rather than open new stores in high-rent locations, he said.

'Fortunately, we did a lot of lease renewals at prime locations over the past two years and were able to renew for six-year terms,' he said. Watsons ultimate parent, Cheung Kong (Holdings), is a major shopping mall landlord but its 10 properties are in areas less popular with tourists.

Mr Boynton said Watsons intended to increase sales volume to offset lower margins. 'I think our area will see 4 to 5 per cent price deflation this year,' he said.