Retail Sales Performance

The value of Hong Kong's retail sales has maintained steady growth during 1981-1997, registering an average annual growth of 10.3%. After the outbreak of the Asian Financial Crisis, however, it tumbled. Retail sales value fell by 26.4%, or at an average annual rate of 5%, in 1997-2003. In volume terms, 12.9% decline was recorded during the same period, though a rebound was seen in 2001. Nevertheless, a full and strong recovery can be noted since August 2003.

• In the nine months ending April this year, year-on-year growth in retail sales value was successively recorded. Measured in three-month periods, the year-on-year growth were 1.7%, 5.3% and 14.9% respectively. The 11.6% year-on-year growth during the first four months this year was the highest in the past decade. Though still 4.7% below the figure recorded during the first four months of 1998, this year's retail sales value is expected to beat 1997's record.
  
  
• While negative growth was recorded in all retail outlets during the bad times, broad based recovery has currently been evident. During the first four months this year, year-on-year growth was recorded in all retail outlets, except supermarket.
  
  
• Retail prices also rebounded in the current recovery, as indicated by larger increases in retail sales value than volume since December 2003.

Contributions by Tourists and Residents

The retail sales statistics in Hong Kong are collected from retail outlets in the territory. They cover both spending by domestic residents and tourists. While we cannot directly identify tourists' shopping expenditure from those figures, other statistics and surveys should support the fact that such spending has been a major driver of retail sales recovery since Q3 last year.

• Visitor arrivals have rebounded since July 2003. Boosted by the "Individual Visitor Scheme", growth has been remarkable this year. Visitor arrivals grew by 39.1% during the first four months this year, reaching a record of 6.67 million.
  
  
• Expenditure by non-residents registered 14.3% and 18.7% year-on-year growth respectively during Q4 last year and Q1 this year. These growth rates far exceeded those of domestic consumption expenditure (at current prices), with the latter being only 1.2% and 3% respectively. Though it would also cover non-retail items such as water, electricity, towngas and wholesale, as well as services, the fact that services spending (covering both residents and non-residents) only registered 0.1% and 0.7% year-on-year growth in the two periods suggested that the major momentum should come from commodity sales. This should support the view that tourists' shopping expenditure has been the propeller of retail sales.
  
  
• Larger growth rates were found in items most favoured by visitors. They include wearing apparel, jewellery, watches, cosmetics and photographic equipment. In the first four months, year-on-year growth for apparel, electrical goods and photographic equipment, department stores, jewellery and valuable gifts, medicines and cosmetics were 18.9%, 22.4%, 26.2%, 15.5% and 15.6% respectively, all higher than the overall growth rate of total retail sales at 11.6%. On the contrary, growth in sales of retail outlets mainly targeted by local residents was below average.

In fact, shopping expenditure by visitors can be estimated through visitor arrivals and past spending patterns. Basing on the number of visitors since last year, together with the number of overnight visitors and same-day in-town visitors and the shares of shopping expenditure in their total spending, it is estimated that the total shopping expenditure by visitors in the first four months was $14.35 billion, increased by $4.98 billion or 53.1% over the same period a year ago. This means that out of the 11.6% growth in retail sales value in the same period, 69% or 8 percentage points is attributable to tourist spending.

Spending by local residents also grew. From the above estimates, their spending should be $49.35 billion, increasing by $1.66 billion or 3.5%, slightly higher than the 3% growth of private consumption expenditure of Q1 (at current prices). Though lower than the growth of spending by visitors, performance is still improved when compared with that since 1998.

Improvement in spending by local residents is closely related to the economic rebound started in Q3 last year, which help boost consumer confidence and income. The CEPA provided the legal framework for further integration with the Mainland and expansion of Hong Kong's services hinterland. Its implementation also brought about immediate benefits. Amid economic recovery, job opportunities began to increase, helping to stabilize the median household income. Furthermore, rebound in property prices lowered the number of negative equity households and created positive wealth effect.

With visitor spending growing, the customer profile of Hong Kong's retail sector is actually transforming. Statistics from the Hong Kong Tourism Board indicated that total shopping expenditure by visitors in 2002 amounted to $28.10 billion, being 15.9% of retail sales value. According to the above estimates, the share of shopping expenditure by visitors in total retail sales value has already reached 22.5% in the first four months this year. Based on government forecasts of this year's visitor arrivals and private consumption expenditure, the ratio would reach 25% for the whole year.

Tourist Shopping - A Growth Spot

For an economy that imports nearly all retail commodities like Hong Kong, a booming retail sector with domestic residents as major customers may be a sign of overheating. External trade deficit would certainly expand. Yet, when recovery in the retail market is mainly driven by visitors, implications would be quite different.

• Increased visitor spending, being inflows to the economy, actually represents an increase in domestic exports of goods and services. Though imports will rise, goods will be sold to visitors at a premium above their import prices. Thus, Hong Kong's merchandise trade deficit will soar, but will be more than offset by the simultaneous increase in services trade surplus. The overall impact on the current account would be positive.
  
  
• Though Hong Kong will certainly continue to invest in the construction of tourist infrastructures and create more tourist spots, the lack of natural sceneries and humanity attractions is still a major weakness. Besides, efforts to solicit "Individual Visitor Scheme" by Southeast Asian countries would also pose a threat. Nevertheless, the convenience in shopping should help sustain Hong Kong's attraction to Mainland visitors. Statistics from the Hong Kong Tourism Board indicated that the share of shopping in total spending by Mainland visitors was the highest among all visitors. Hence, if Hong Kong can maintain our attraction in shopping, more and more Mainland visitors would continue to visit Hong Kong.
  
  
• Compared with other industries, the value-added of the retail sector has been lower. In 2002, its share in the sector GDP was only 42.7%, much below the average of 56.4% among all sectors. Yet, the situation is quite different now. Visitors are mostly interested in high end products, which would allow retail outlets to generate higher value-added. This is evident from the huge net profit growth and margin among major high-end product retailers last year, despite the attack from SARS. Employee remuneration in these companies was also relatively higher. All these certainly imply higher value-added. Actually, increase in value-added represents an "economic upgrade", and this is now seen in the retail sector. If more internationally renowned retail brand names seek a presence in Hong Kong, introducing more scientific management and sales techniques, value-added of the sector would certainly be further enhanced.
  
  
• Different sectors in an economy are interrelated. While the retail sector rebounded together with tourism, other sectors also benefited. Specifically, the retail sector is largely connected with wholesale, import/export, transport and storage, while tourism is certainly associated with hotels, restaurants, transport, entertainment and retail. Recovery in various services since Q4 last year is mainly attributable to tourism and tourist spending. Moreover, investments have also been stimulated, both through the expansion of retail network by listed retailers and the arrival of internationally renowned brand names. According to InvestHK, over 20 companies belonging to this category have either established their outlets or expanded operations, under the assistance of the Department. These brand names mainly come from Europe and Japan, selling high-end consumer products. The retail sector has already attracted the largest foreign investment this year. Employment opportunities are also created. In March, the number of persons engaged in the sector was 2.3% higher than a year ago while vacancies even more than doubled. In comparison, total employment and vacancies for all sectors surveyed only grew by 0.6% and 78.7% respectively. Relatively higher growth was also found in sectors more closely related to retailing and tourism.

Consolidating the "Shopping Paradise" Status

Hong Kong has long been hailed as a "shopping paradise". Yet, the slump in the retail sector since the outbreak of the Asian Financial Crisis signified also the waning of the status. In addition to residents increasing consumption in the Mainland, tourist spending also shrank. Shopping expenditure by visitors reached a record high of $40.85 billion in 1996, but stayed substantially below the level in 1997-2002. As visitor arrivals have already exceeded the level achieved in 1996 since 2000, the fall in shopping expenditure was more related to the decline in purchasing power and intensified competition.

Looking ahead, Hong Kong faces good opportunities to strengthen its "shopping paradise" status, mainly due to Mainland China's emergence as a huge tourist source, and recovery in the northeast and southeast Asian economies which are also major sources of visitors. Outward travelling by Mainland Chinese residents already reached 16.6 million in 2002 and has earlier been forecast to grow by 20% each year on average towards 2010 (growth should be much higher after the implementation of "Individual Visitor Scheme"). The World Tourism Board forecasts that China would become the fourth largest source of visitors by 2020. Economic recovery has also boosted personal wealth in the Asian Pacific region. Thus, Hong Kong's tourism has much development potential. Nonetheless, the challenge lies in the intensifying competition that threatens our lead position, specifically from the lowering of tariffs, liberalization of domestic retail markets to foreign firms and promotion of shopping by our neighboring countries.

Certainly, Hong Kong still maintains many advantages, including our status as the freest port that makes available the most diversified supply of commodities and relatively lower import costs, the simple and low tax regime that supports a favorable business environment, its hub location that makes visitors feel convenient, the free flows of information that enable Hong Kong to catch up with the latest fashion. Nevertheless, these should by no means justify complacency. The urgent issue for us now is to strive for further enhancement of our competitiveness, consolidating our status as the "shopping paradise" both to visitors and residents.

Hui Wing Fu, Senior Economist