Rent negotiations

Turn the corner: this building cost over $1 million a month to rent

To establish their longevity and promote their prestige it’s common for luxury goods firms to flaunt their date of founding. However, in the case of US bag maker Coach the year of its establishment will strike anyone with a knowledge of history as an especially unpropitious one. The firm began making men’s wallets in Manhattan in 1941. By December of that ill-fated year the US had entered the Second World War.

These might not strike you as ideal business conditions for a consumer goods start-up. However, the firm managed to make it through four years of war and today Coach sells its products in more than 1,000 locations.

But this month Coach delivered some unpropitious news of its own – at least insofar as Hong Kong property tycoons were concerned. It shuttered its store in one of the territory’s most visible and high-profile locations on Queen’s Road Central. This flagship store opened five years ago to promote the brand to visiting mainland Chinese consumers and featured expensive external cladding that doubled as a billboard for Coach’s logo and its China ambitions.

Its closure indicates that Hong Kong’s high-priced property market may be finally feeling the effect of a decline in mainland tourist numbers. This has resulted in a drop in retail spending, particularly in the all-important luxury segment. The Wall Street Journal points out that in July the number of mainlanders visiting Hong Kong fell by 10% versus the previous July; while CBN cites broker research that predicts Hong Kong’s retail sales will see their biggest annual decline this year since 2000, with jewellery, watches and luxury goods hardest hit with a 12% fall.

In some respects Hongkongers have got what they wished for, and are now reaping the whirlwind in the form of fewer mainlanders storming through their malls. As WiC has reported before (see issue 271), the city’s residents have been aggravated by the number of mainland Chinese arrivals, calling the tourists ‘locusts’ for emptying shelves of goods (such as infant formula), and straining local transport infrastructure with their numbers. This has led to fractious debates in local media, on the internet and even heated clashes between the Chinese and Hong Kong football teams (see this week’s And Finally for the latest example). To address the problem there were even calls from the general public to limit cross-border Chinese arrivals.

In response, affluent Chinese consumers and tourists have shunned Hong Kong and gone shopping elsewhere, particularly Japan, South Korea and Taiwan (see WiC272). Adding to the misery of Hong Kong’s retailers has been President Xi Jinping’s anti-graft campaign, which has led to a cut back in luxury goods purchases.

This has not just impacted Coach. Last month LVMH also took the decision to close a high-priced retail location on Russell Street in Causeway Bay, where it had a flagship Tag Heuer watch boutique (at its peak Russell Street commanded the highest shop rents globally, surpassing even New York’s Fifth Avenue, comments the South China Morning Post). Kering’s CFO Jean-Marc Duplaix added to the pressure on landlords, when he announced the company’s latest quarterly results. Duplaix told analysts that Kering was renegotiating the rent for its flagship Gucci store and would consider quitting the location if the landlord “does not provide better conditions”.

While Coach has never publicly disclosed the rent paid on its erstwhile flagship in Central, Hong Kong media has confidently declared that the three floors and outer cladding was costing the US retailer $1.1 million per month. You’ve got to sell a lot of bags to cover that, and evidently waning Chinese tourist numbers have started to make the equation look ugly. What speaks volumes: Coach closed the store two years ahead of its lease expiring, a phenomenon that Hong Kong’s retail sector hasn’t seen since the SARS epidemic in 2003.

Chow Tai Fook, a large jewellery chain, is also rethinking its expansion plan in Hong Kong and may close some stores in the territory’s prime shopping areas, the company’s chairman Henry Cheng told reporters last month.

This means more bargaining power for tenants, and landlords are finally beginning to budge. This week Emperor, another jewellery chain, took advantage of a break in its lease to negotiate the rent down by 70% on its premier Russell Street location, reports the Hong Kong Economic Times. The paper also pointed out that there are vacant units in the street, a further telling sign.

Cushman and Wakefield research shows that retail rents in the Central district fell 12% in the second quarter, but the decline only looks likely to increase in the coming quarters as brands start to question the commercial logic of these prestigious locations and play hardball with major landlords such as Hongkong Land, Swire, Sun Hung Kai and Wharf.

(Softening in Hong Kong’s luxury residential property market looks to be underway too, with the local press recently reporting on a penthouse that had been on the market for HK$66 million. After being unsold for 3 months it was purchased for HK$45 million, or $5.8 million, i.e. 30% lower than the asking price.)

Meanwhile Coach has been in damage limitation mode, stating that its new Hong Kong flagship store has just opened in Harbour City in Tsim Tsa Tsui, and that it better embodies its new retailing concept and product mix. It told CBN that it now has 171 stores in Hong Kong, Macau and mainland China, a net increase of 18 stores versus 2014.

Its CEO Victor Luis said last month on a conference call: “Although the macro-environment appears to show a slowdown in growth, we believe that Greater China maintains the driving force for long-term growth, which makes us remain optimistic about the prospects of this region.”

Last Friday Coach also reopened its store on Tmall in a renewed effort to target China’s online shoppers. It first opened on the Alibaba site in 2011 but closed its Tmall online store after just a month.

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