Hong Kong's status as a mecca for luxury brands is being eroded, as it grapples with a continued slowdown in overall retail sales.

High-end retailers from Cie Financiere Richemont SA to Burberry Group Plc and Chow Tai Fook Jewellery Group Ltd reported weaker Hong Kong sales in the last quarter of 2014, even as mainland tourist arrivals climbed.

"Some luxury brands, I believe, will reduce their business in Hong Kong, or at least will not expand operations," said Tang Xiaotang, founder of Nofashion.cn, a mainland-based fashion news website.

Tang said relatively cheaper price tags were a key factor in making Hong Kong a winner in luxury product sales, but rates of discount have fallen.

"The discount on luxury product prices in Hong Kong usually works out to 30 to 40 percent compared to the mainland," said Tang.

"But the discount has narrowed to 15 percent, which is not very attractive for mainland visitors, when more and more free trade zones are being established."

Tang forecast that luxury brands will cut their business in Hong Kong when the price advantage disappears. At the same time, an anti-corruption campaign and slowing growth are cutting mainland demand for luxury goods, while the stronger Hong Kong dollar and lack of new attractions is also deterring some cross-border tourists.

Moreover, while sales of luxury products are slowing, rents for luxury retail space in Hong Kong are skyrocketing.

Hong Kong retail sales in January fell 14.6 percent to HK$46.6 billion from a year ago, while the sales value of jewelry, watches and valuable gifts during the same period fell 21.4 percent.

"Many luxury brands will feel pinched at paying high rents and wage bills in Hong Kong," Tang warned.

However, not all luxury brands share a gloomy business forecast. "Entry-level luxuries are blooming and traditional luxury brands are introducing new designers," Tang noted.

"With the slowdown in tourism during the fourth quarter of 2014, Hong Kong retail sales are seriously hit," said Bob Partridge, managing partner for Greater China Transaction Advisory Services at Ernst & Young.

Luckily, some luxury business professionals are still taking a positive stand on Hong Kong retaining its status as a mecca for luxury brands.

"We are looking for a good position in Hong Kong to open our new store there, but we must queue up," said He Bin, the Beijing-based Greater China managing director of Italian luxury leatherwear maker Tardini.

"Most Asian consumers are willing to go shopping in Hong Kong because it is a duty-free destination."

Mavis Hui, a research director at DBS Vickers (Hong Kong) Ltd, made a more moderate forecast for luxury brands in Hong Kong. "In Hong Kong, unit rents have always been high while major luxury groups have mostly opened an adequate number of stores in the city," said Hui.

"With sales efficiency per store at Hong Kong operations potentially weakening further, (global) luxury brands should not rush into new store openings in the city, at least in the near term.

"Selected local names may actually consolidate their store network if they operate a big retail chain here."

Hui believes various luxury groups could have different strategies for Greater China depending on their existing operating scale and number of stores in the region.

"Overall, we do see rising cautiousness regarding store openings these days, especially on picking the right location, given the rapid increase in the availability of luxury malls and department stores across the mainland," said Hui.

But Partridge believes there is no need to change strategies in Hong Kong.

"Stay focused on giving the consumers (including tourists visiting Hong Kong) top quality brands and goods," Partridge stressed. "This was a temporary setback, but the outlook for this sector continues to be strong."

Hong Kong, as a traditional cluster of luxuries, has seen local companies also try to purchase some overseas luxury brands and operate those on their own, but they lack the know-how to run traditional luxury brands.

"Hong Kong companies have never lacked cash, but are weak in operating luxury brands," said He Bin.

"Trinity Ltd, the subsidiary company of Li & Fung Ltd, purchased a series of European brands and opened many stores on the mainland," said He.

"But the company is too eager for quick success and instant benefits without enough investment into studying brands culture and new products development."

celia@chinadailyhk.com

(HK Edition 03/20/2015 page12)