Luxury companies including Kering SA are demanding lower Hong Kong store rents to reflect the island city’s waning appeal with wealthy Chinese shoppers.
The owner of the Gucci brand may close some of its shops there if those costs don’t come down, Kering Chief Financial Officer Jean-Marc Duplaix said recently.
“Many landlords have not necessarily understood that the markets have changed,” Duplaix said, speaking on a conference call with analysts. In some locations, rent is eating into profitability.
U.K. trenchcoat maker Burberry Group PLC said recently that it also may try to lower its rent bill after sales growth slowed to a two-year low. Luxury spending in Hong Kong, one of the world’s largest hubs for high-priced shopping, has been suffering since China began discouraging extravagant spending by government officials in late 2012.
Hong Kong and Macau accounted for more than 10 percent of Kering’s first-half luxury retail sales, a spokesman said, declining to say how many stores it has in Hong Kong. Burberry, with 17 shops there, gets a similar proportion of revenue from those markets, excluding licenses.
While wealthy Chinese are still spending in Asia, for example in Japan, they’re making fewer trips to Hong Kong. Swiss watch exports to the island city slumped 20 percent in the first half.
Hong Kong’s “halcyon days are gone,” said Exane BNP Paribas analyst Luca Solca. He expects watch and jewelry makers in particular to close sites there, and rents to come down, helping “moderate adverse developments for luxury players.”
Rental costs for luxury companies in Hong Kong could drop 20 percent in the next 18 months, according to John Guy, an analyst at MainFirst Bank AG, who also said luxury consumption has peaked in the island city.
Kering has also started renegotiating rents in Macau and mainland China as part of a wider plan to contain costs, Duplaix said. While the CFO said Kering has no plans to cut the number of stores in China, net closures on the mainland by luxury companies are likely, according to Philip Guarino, a partner at China Luxury Advisors in Paris.
“Luxury brands have over-expanded their presence and are now suffering from bloated and unprofitable retail networks,” Guarino said. With Chinese consumers set to make more than 75 percent of their luxury-goods purchases overseas, brands “will be forced to rethink their geographical footprint.”