What: In 2014, retail sales in Hong Kong declined for the first time in a decade as protesters took to the streets. Over the following years, tourist numbers dropped to record lows, with a particularly significant 14.2% drop pre-pandemic in 2019. Luxury brands, which have targeted tourist spending through multiple points of sale across the small but affluent Chinese territory, began to review their presence in the market. Then, Covid-19 hit. In 2020, retail sales declined 24.3%, while tourist arrivals plummeted 93.6% below 2019 levels. Many luxury brands closed stores, including Prada, Valentino, Tiffany & Co., Chow Tai Fook, Fendi and Louis Vuitton.

Why its important: With these prospects, domestic consumers (renowned for their spending power) have become the main focus for retailers. As local sentiment improves, boosted by vaccination rates, low Covid-19 cases and an easing of social restriction rules, a new energy is reinvigorating the market. Retail sales have been on an upward trend, year-on-year, since February 2021. Local demand cannot compensate for the loss of tourism spending (pre-pandemic, CBRE attributed one-third of Hong Kong’s total retail sales to Mainland tourists): when the borders reopen, will tourists come back?

Optimist experts are confident that Hong Kong will continue to represent an important luxury destination for Asian and Southeast Asian luxury consumers, who enjoy the tax-free shopping and the high-profile image of the city, complete with a well-rounded ecosystem of luxury. Short term still looks dismal, but six million people per year are expected to come to Hong Kong when borders reopen.

Oliver Tong, head of retail at JLL Hong Kong, sees “pretty good momentum” in the commercial real estate market. According to CBRE data, in Q2 2021 commercial rent prices increased 1.2% quarter over quarter, recording the first gains since Q2 2018, while high-street vacancies fell to the lowest figure since Q2 2020.

Other voices are more cautious. The Chinese government’s push to turn the tropical island of Hainan into a duty-free paradise is likely to divert some Chinese travellers away from Hong Kong.

While the wait continues for a loosening of the regulations for visiting Hong Kong, brands continue to focus on locals. CRM, loyalty programmes and in-store experiences are all high on the priority list for brands as they seek to maximise sales to locals. Lane Crawford highlights the need for highly personalised services and experiences. They include personal styling appointments in VIP suites, beauty concierge services and events around specific products or topics, such as watches or whiskey. During the pandemic, Lane Crawford put together personalised wardrobes and delivered them to customers' homes to try on styles and participate in Zoom styling sessions and livestream trunk shows.

Assortments have also changed to better respond to local taste. Social restrictions and working from home have caused a mini-boom in the home decoration segment. The hypebeast sector is strong: Hong Kong buyers are using Stockx to buy sought-after brands such as Bearbrick, Kaws and the Ikea and Daniel Arsham collaboration. In fashion, understated luxury labels ranging from Officine Generale to Margaret Howell are favourites among Hong Kongers. In footwear, niche sneaker labels such as Common Projects, Veja and Moonstar are popular. The trend is casual luxe.

Investment in cost-effective pop-ups continues. Brands that might have paid up to HKD 2 million (GBP 189,000) a month for a permanent store in Central and Tsim Sha Tsui can now enjoy deals of as little as HKD 300,000 (GBP 28,000) for a short-term pop-up. They have to invest some Capex, but the sales are great. Prada, which declined to renew the lease for its Hong Kong flagship in June 2020, launched a two-month pop-up at IFC Mall in January 2021. Similar moves have been made by Gucci, Burberry and Dior. Landlords have also divided large unoccupied spaces into smaller units, which are easier to fill.

Understanding luxury in Hong Kong