Concrete Analysis

Hong Kong’s restaurant sector still on a high despite gloom in the retail segment

Food and beverage segment in city needs to be more innovative with menus and promotions to sustain long-term customer interest

PUBLISHED : Tuesday, 09 August, 2016, 3:00pm
UPDATED : Tuesday, 09 August, 2016, 7:51pm

The Hong Kong government released its retail sales and restaurant receipts statistics last week on August 5. The results are indicative of consumer sentiment in the local retail sector. Interestingly, while retail sales have plunged 10.5 per cent in the first half of 2016, restaurant receipts, in contrast, have increased by 2.5 per cent. The two indexes have grown in opposite directions since March 2015 as the food & beverage (F&B) category has continued to shine as a clear outlier from other retail segments.

The restaurant segment not only grew more than any other core retail category, but also experienced the most consistent acceleration. According to CBRE Research, in 2015, there were 73 new international entrants to the Hong Kong retail market, of which 37 were F&B brands. In the first half of this year, the pace of F&B expansion grew even faster, with 26 out of 35 new entrants from the F&B sector.

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Among all restaurant types, the value of receipts from ‘other eating and drinking places’, which includes coffee shops, dessert shops, ice cream houses, herbal tea stores and fruit juice shops, witnessed substantial growth in the first two quarters of this year, up by 5.2 per cent.

The growth in restaurant sales has more to do with fundamental lifestyle changes than purely cyclical factors. One of the factors that has influenced the growth of the F&B sector has been declining tourist spending – Hong Kong’s retail landscape is shifting from a visitor-reliant market to a more local-focused one. To address local citizens’ concerns about the overwhelming number of inaccessible luxury shops dominating Hong Kong streets, retail landlords are becoming more inclined to open F&B outlets, which are enthusiastically welcomed by local consumers.

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Many developers are thus investing massively to expand their F&B portfolios and redevelop their retail assets to accommodate more F&B options. Shopping mall landlords have also realised that restaurants offer a solution to counterbalance declining overall sales and combat the impact of the booming e-commerce industry. Dining and drinking establishments add diversity for visitors, and most importantly, can effectively boost the amount of time and money spent at the mall. Successful F&B establishments can also attract more regular, loyal consumers.

Landlords seeking to meet consumer demand for new and unique dining concepts should be prepared for a certain degree of risk. Converting a retail space for restaurant use involves a considerable investment. This often requires physical and/or structural changes to the space, including kitchen build-outs and utility and ventilation systems.

With strong demand for F&B space in prime shopping locations, landlords are given the luxury of a wide list of potential tenants to choose from. As a diverse tenant mix has superseded rental as a priority for tenant selection, F&B operators need to ensure that they offer an element that makes them stand out from the crowd and appeal to local consumers long-term.

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With goods so readily available through online channels, consumers visiting brick-and-mortar shops are now placing a greater importance on unique retail experiences. This is especially true for dining.

Hongkongers crave new trends, therefore the introduction of different culinary brands is key to maintaining a steady flow of visitors. Most notably, adding popular overseas brands has become an attractive way to drive an increase in foot traffic. New York’s Lady M and Japan’s Calbee Plus both generated long queues at their Hong Kong openings, and have continued to attract crowds of curious food lovers.

F&B outlets offering novelty factors and uniquely-presented food are also an easy and cost effective way to increase foot traffic. Food that is plated and decorated in a photogenic way, or is served in a remarkable setting help increase the likelihood of it being shared across social media networks, raising brand awareness.

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We also advise restaurant operators to refresh their menus with seasonal promotions to keep customers interested. New menus can act as a catalyst for increasing marketing activity.

Nonetheless, while novelty factors and unique dining experiences may attract consumers in the short-term, landlords and retailers still need to place a greater emphasis on doing their research and due diligence to mitigate potential risks of failure.

The lack of understanding about consumer behaviour and Hong Kong’s restaurant landscape is painfully noticeable in the local F&B market, evidenced by the limited number of successful concepts surviving past the typical three plus year lease. While it may be easy for landlords to rush into a lease agreement in order to hastily boost retail sales, F&B tenants and landlords are often forgetting to consult real estate professionals, who have a greater insight into the wider retail market.

Nicola Tang is associate director, advisory & transaction services for retail at CBRE Hong Kong