Collateral damage: this military euphemism is a fitting description for the “blow” delivered to the luxury industry by the mass uprising that is rocking Hong Kong. For the past four months, the city has been shaken to its core by increasingly violent demonstrations aimed at loosening China’s grip on this special territory. Protests have unhinged the financial community, driven away tourists, caused cancellations of major international events and kept consumers out of the malls. The figures are there to prove it. The Hong Kong Federation of Restaurants and Related Trades indicates that around 200 establishments were forced to close between June and September. In August tourist arrivals dropped 40% year-on-year – the biggest decline since the SARS outbreak in 2003 – while retail sales slumped 23% in the same month.
Hotel attendance fell by 5% in June compared with the same month one year previous, then 10% in July and 25% in August. Mainland Chinese stayed away during the traditional Golden Week holiday, when occupancy rates hovered around the 60% mark compared with 93% a year earlier. Major tourist events have also suffered. Scheduled for October, the Hong Kong Tennis Open, the Hong Kong Cyclothon and the Hong Kong Wine & Dine Festival have all been cancelled in the face of escalating protests. Financial investors are looking elsewhere, too, with Singapore standing to benefit. As of August, Goldman Sachs estimated an outflow of at least $3 billion in deposits from Hong Kong to Singapore.
It’s been a hard blow to the Hong Kong economy against a backdrop of the ongoing trade war between China and the United States. Ahead of official figures, in all likelihood the decline in GDP that kicked in during the second quarter (-0.4%) will be more marked in the third quarter, signalling recession. In response, the government last week announced a series of measures worth $225 million. Will this be sufficient? For the luxury industry, the stakes are high: analysis by Bernstein Research estimates that Hong Kong accounts for 10% of global luxury revenue.
The threat is very real: 80% of these sales depend on visitors (residents make up the remaining 20%), the vast majority of whom are from mainland China and susceptible to influence from Chinese propaganda as it continues to vilify Hong Kong and its pro-democracy demands. Results published by LVMH, which owns more than 70 brands, indicate the scale of the “problem”. As reported by the group’s Chief Financial Officer, Jean-Jacques Guiony, the multinational posted a 25% drop in overall business in Hong Kong for the third quarter. This reflects “the flattish month in July and around a 40% drop in August and September.”
The Swiss watch industry has been similarly affected. In September, whereas exports to the other main markets posted strong growth – in particular the United States (14.7%), China (26%) and Japan (31.6%) – shipments to Hong Kong lost 4.6% on top of a 12.7% drop in August and 1.3% in July. Over nine months, exports declined 6.2%. While no hard conclusions can be drawn from these figures, which show exports and not sales to end customers, experience gained from the crisis of 2015-2016 suggests that Hong Kong retailers are again carrying excess inventory (also the situation in the United Kingdom) and that shops are running on empty. None of this bodes well given the high cost of ridding networks of surplus stock: “triple-digit millions” for Swatch in the first half-year 2019 after a similarly high figure for Richemont. The fight for democracy demands sacrifices, failing strong support from companies that would rather not antagonise the Chinese dragon at the risk of seeing themselves shut out of the world’s largest luxury market…