Mass-Market Retailers Head to Hong Kong

BUSINESS

MAY 11, 2011

By JASON CHOW

Mass-market retailers are flocking to Hong Kong, one of the world's top luxury shopping cities, driving up rents for retail space in their effort to market themselves to mainland Chinese consumers.

Abercrombie & Fitch, Gap and Apple are the latest U.S. retailers coming to Hong Kong as they seek to attract Chinese consumers, while Google is objecting to India's plans to regulate Internet content. WSJ's Jake Lee, Jason Chow and Amol Sharma discuss.

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Abercrombie & Fitch Co., Gap Inc., Apple Inc., Forever 21 Inc. and American Eagle Outfitters Inc. are the latest retailers to open outlets or plan openings in Hong Kong. In a sign of the times, Abercrombie is moving into a prime spot in the historic Pedder Building in Hong Kong's Central district, replacing the long-time tenant, Shanghai Tang, a Chinese-styled luxury retailer now owned by Cie. Financiere Richemont SA of Switzerland.

Abercrombie will pay seven million Hong Kong dollars (US$900,000) per month for a 25,000-square-foot store, more than twice what was paid by Shanghai Tang, according to a report by real-estate firm Cushman & Wakefield. Neither Savills, the real-estate firm that worked on the deal, nor Abercrombie would confirm the figures.

In recent years, luxury stores such as Prada, Louis Vuitton and Gucci have been among the big sellers in Hong Kong. But commercial-real-estate insiders say an influx of foreign retailers geared to the mass market is pushing up store rents in the city's most desirable locations. The average annual rent for retail spaces in the Causeway Bay shopping district has risen 34% in the past two years to US$1,849 per square foot, says Michelle Woo, a senior director at Cushman & Wakefield.
While retail sales in North America and Europe have been hit hard by the global economic slowdown, sales in Hong Kong have been growing fast. Retail sales in the city rose 20% in the first quarter of 2011, compared with a year earlier, according to the city's Census and Statistics Department.
A significant factor is the uptick in the number of mainland Chinese tourists visiting Hong Kong. In the first four months of this year, 6.5 million Chinese tourists came to the city, up 17.5% from last year. Many are drawn by Hong Kong's prices, which can be as much as 40% lower than they are over the border because Hong Kong doesn't tax retail sales.

American brands are following in the footsteps of European retailers, according to Nick Bradstreet, head of leasing at Savills.
"The Europeans trailblazed first," he says, pointing to the plethora of luxury brands in the city, as well as Zara and H&M, which came to Hong Kong in 2004 and 2007, respectively. "Europeans are more comfortable crossing borders than Americans are. For a German company going to Spain, it's not a big deal. But in the U.S., the domestic market is so big. They haven't always had to go overseas to grow."
Real-estate agents say Abercrombie fought off tough competition from several parties to secure the lease. Shanghai Tang, which has been in the Pedder Street location since it was founded in 1994 by David Tang, declined to comment.
"We love iconic buildings, which we think we got with the Pedder building," says Eric Cerny, Abercrombie's manager of investor relations. He adds that the company was scouting locations for a new Hong Kong store for three years. The nine-story building was built in 1923 and its neoclassical arches and columns make it stand out in a city dominated by skyscrapers. The building was the headquarters of Hong Kong trading firm Jebsen & Co. from 1926 to 1992.
Kevin Lam, a director at real-estate agent DTZ, says some new entrants to Hong Kong may be willing to pay more for a good spot because it will help them advertise their brand to Chinese shoppers.
"One of the major elements of their flagship stores is huge signage and signage is part of the marketing tool to advertise their brand awareness," Mr. Lam says. "I know some brands would like to allocate their marketing budget with their rental figures. It makes the rent look more reasonable."

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Nick Shearman/The Wall Street Journal

Abercrombie & Fitch will pay more than double the previous rent for a store in Hong Kong's Pedder Building, above.

Abercrombie is following in the footsteps of American Eagle, which opened an 8,500-square-foot space in the busy Tsim Sha Tsui district of Hong Kong in March. The store is the brand's first in Asia, though more openings are planned.
American youth fashion line Forever 21 is slated to open a 50,000-square-foot store, costing HK$11 million per month, in the Causeway Bay district by the beginning of next year, while Gap plans to open its first store in Hong Kong this year. The 20,000-square-foot store will command rent of HK$5 million per month, says Cushman & Wakefield's Ms. Woo, who worked on both deals.
The trend isn't confined to clothing. Apple, whose products have previously been available in Hong Kong through licensed resellers, is also moving into Hong Kong. The company announced in February 2010 that it would open 25 stores in China and Hong Kong over a two-year period. One of the new Apple stores will open later this year in a two-story space in the mall at the International Financial Centre, according to people familiar with the matter.

Write to Jason Chow at jason.chow @wsj.com