Overview

Continuing with the current upturn, the world economy will expand further next year, but the pace of growth is expected to moderate. Within this context, it is hoped that information contained in this report will be of use to Hong Kong exporters in planning their business for the coming year. Readers are also advised to refer to "Hong Kong's Export Outlook for 2005: A Year of Consolidation", another publication by the Council's Research Department, which gives a more comprehensive analysis and more specific forecasts on Hong Kong's export prospects.

Feedback from TDC branch offices showed mixed results for Christmas sales in Hong Kong's major markets. In the US, sales were below the good gains made at the start of the festive season, although retailers still managed to post a modest increase, helped by subsequent heavy discounts and promotions. Likewise in the UK, sales were bolstered by a late rush amid aggressive promotional efforts. Generally speaking, consumers in other major European markets were more conservative, due mainly to the high level of unemployment in the euro zone. Uncertain job prospects also affected sentiment in Japan, even though consumers were more willing to spend in tandem with the prevailing economic revival. In the Chinese mainland, year-end sales were encouraging, despite implementation of macro-tightening measures.

In terms of products, different categories also faced mixed fortunes. As in the last few years, consumer electronics, such as digital cameras, MP3 players and DVD players, topped the holiday shopping list of consumers in most major markets. For clothing, sales fared better in the US, as well as the UK and the mainland. As for toys, demand was generally constrained by a lack of must-have items. Regarding jewellery and watches, demand in the US was skewed slightly towards higher-end items, given the current preference for up-scale merchandise. To some extent, upper-end jewellery and timepieces also sold well in other markets like Germany and France. Meanwhile for convenience sake, more and more Christmas shoppers opted for gift cards instead of conventional gift items, particularly in the US.

Broadly speaking, the retail sales outlook for overseas markets in 2005 is expected to follow the pattern of Christmas sales in 2004. In the US, economic recovery will moderate. Rising interest rates are poised to cool consumer spending, but the potential impact on higher-income consumers is unlikely to be substantial. In the meantime, continued economic revival in the EU, though staying in the slow lane, should lead to steady consumption, whereas slower growth of the Japanese economy will likely translate into a moderation of consumer demand. Compared with their counterparts in the US, therefore, European and Japanese consumers will largely remain prudent. In the mainland, retail sales will continue to expand healthily, as the government will rely on consumption, along with exports, to buffer the impact of macro-tightening measures.

I. 2004 Christmas Sales in Major Overseas Markets

(i) US

Preliminary indications revealed that holiday sales in the US were below the good gains made at the start of the festive season. Sales got off on a high note after Thanksgiving, but then moderated partly because of the modest discounts initially offered by retailers. More importantly, economic fundamentals have become less strong recently. Increasing interest rates, slow income growth and high fuel costs were major factors which affected sales performance during the US holiday shopping season. Sales were further hampered by a lack of must-have items. Still, US retailers, helped by subsequent heavy discounts and promotions, managed to post modest performance. To a certain extent, cold weather in much of the Northeast and Midwest, while affecting traffic in certain areas, also facilitated Christmas sales, whereas a slightly longer Thanksgiving-to-Christmas period, which lasted for 29 days against 27 days last year, was another positive factor. Within this setting, holiday sales are estimated to have expanded by around 3% from 2003, compared with an increase of more than 5% last year.

Evidently, lower-income consumers were the most hurt by high gasoline prices and a lower economic outlook. While loosening their purse strings, they tended to keep spending tight, and were largely selective about their purchases. They generally took a wait-and-see approach to buying, in the hope of doing better on prices. For these cost-conscious shoppers, procrastinated holiday buying has indeed evolved into a usual practice. Retailers, for their part, were in a defensive mood at the start of the shopping season. Hoping that shoppers would pay better prices, retailers initially offered less aggressive discounts than a year ago as the festive season commenced. However, as Christmas drew near, retailers resorted to a series of deep discounts and promotions, as shoppers waited to get the best offers. In most cases, retailers appeared to refrain from cutting prices across-the-board, although other tactics were used to boost sales, including free gift certificates to increase store traffic and selective discounting to boost sales of other regular items.

Not unexpectedly, the cautiousness of lower-income consumers served to drag the holiday sales of discounters and mass merchandisers. Higher-end stores, on the other hand, fared better due to the sustained demand for up-scale merchandise, driven by upper middle- to high-income consumers, who had additional incomes from dividends and stock earnings. While the majority of Christmas shoppers visited retail stores for their purchases, many turned to readily convenient online shops. Spurred by improved site usability, wider product assortment, better services, and competitive prices, online holiday sales are expected to have surged by almost 30%, although Internet transactions have accounted for less than 5% of all retail sales. Continuing the upward trend in recent years, the increasing popularity of gift certificates was another prominent development. The use of gift certificates, while offering convenience to gift givers and flexibility to gift receivers, effectively suppressed Christmas sales results, as revenues would not be counted until the certificates have been redeemed. During this festive season, it is estimated that about 10% of holiday budgets were spent on gift certificates.

Product-wise, home-related merchandise and consumer electronics continued to be the hot sellers. In particular, digital cameras, digital camcorders and high-definition TVs topped the shopping list of US consumers, while MP3 players, DVD players, cell phones, wireless phones, desktop computers and notebooks were popular too. Sparked by the strong demand for trendy fashions, clothing was another favoured Christmas gift. While knits, sweaters and pants for women were in demand, men's items also sold well. Warm clothes further received a timely boost from the recent cold weather, especially in the Northeast and Midwest. In line with the prevailing preference for up-scale merchandise, demand for jewellery was skewed slightly towards upper-end items, and the appetite for higher-priced timepieces was good. Meanwhile, demand for toys was hindered by a lack of must-have items, although the broad mix of items and wide range of prices that were available helped facilitate sales. It appeared that Barbie and video games were the most popular toys for girls and boys, respectively. Other sellable items included Bratz, Cabbage Patch Dolls, American Girl, Batman, Spiderman, Mr. Incredible, Yu-Gi-Oh, Robosapien, as well as educational toys.

(ii) Europe

Compared with their US counterparts, European consumers were generally more timid spenders during this Christmas, as high unemployment, soaring energy costs and low consumer confidence kept year-end spending in check. Even in the UK, the star performer among major EU markets in the past few holiday seasons, consumer sentiment was affected by rising interest rates and slackening house prices. While the prevailing moderate economic upturn, alongside an influx of inbound tourists, has somewhat stimulated the appetite for luxury goods, European consumers remained largely cautious about holiday spending. Against this backdrop, EU retailers placed heavy emphasis on low prices and store promotions to attract Christmas shoppers. Capitalising on the focus on price and convenience, EU's online holiday sales are estimated to have expanded by about 40%, although Internet shopping still constituted a small proportion of overall holiday sales. In another development, gift certificates became increasingly popular across many EU markets this festive season, mimicking the current trend in the US.

Germany

In Germany, Christmas sales were lacklustre. The country's mediocre economic showing and its endemic unemployment have continued to take a toll on consumer spending. That said, year-end sales were none too uninspiring for German retailers, who offered earlier and deeper discounts to shore up year-end business. In contrast to the decline in the last couple of years, Christmas sales this season are expected to have edged up by 1%, with online sales posting particularly good growth. Once again, sales of consumer electronics were especially strong. These included digital cameras, MP3 players, DVD players, plasma TVs, laptop computers and mobile phones. Likewise, electronic games and educational toys were sought after, while board games, dressing dolls, wooden toys, construction kits and car racing games remained traditional Christmas gifts. Though to a lesser extent, jewellery and watches were among other favoured gifts, despite the country's current economic hardships that have dampened demand for higher-priced items. Garments, for their part, performed less well than other products during this season.

France and Italy

Likewise in France, year-end sales were not particularly encouraging, although its stronger economy has whetted an appetite for up-scale merchandise. Jewellery and watches, such as gold jewellery and fashion watches, therefore showed stronger sales this season. Consumer electronics, however, remained the best seller, exemplified by the solid performance of most electronic gadgets like digital cameras, MP3 players, DVD players and multi-function mobile phones. Video games also sold well, as did certain licensed and wooden products. On the other hand, clothing sales were sluggish in general. In the case of Italy, Christmas sales this year, which are expected to have contracted moderately, were even less encouraging. Evidently, consumers were in no mood to spend during the festive season. Consumer electronics and household electrical appliances were the only major products which fared better. In general, other major products, such as clothing, toys, housewares, watches and clocks, as well as jewellery, all showed declines of varying degrees.

UK

Thanks to a last-minute flurry, Christmas sales in the UK were above earlier expectations, with festive spending expected to have increased by some 3%. As credit worries and weaker housing prices impacted negatively on consumer sentiment, retailers employed widespread discounts and extensive promotions to stimulate sales demand. But the satisfactory performance was not equally spread across the retail sector. Reportedly, many of the big-name store chains did not perform well, while retailers with substantial online operations recorded remarkable results. Product-wise, electronic gadgets, such as digital cameras, MP3 players and mobile phones, seemed to fare well. Year-end sales for toys moderated, however; Bratz, Cabbage Patch Kids, Dancing Dora, Robosapien, Power Rangers and Leapster were among the more sellable items. On the other hand, clothing sales, led by top-priced brands and fashions, managed to post quite good growth this season, and sales of jewellery and watches also held up relatively well.

(iii) Japan

In tandem with the recovery of the Japanese economy, year-end sales in Japan are projected to have expanded moderately. Given a rise in winter bonuses, consumers were more willing to spend money during Christmas, a major year-end occasion for gift exchange in the country. However, uncertain job prospects, aggravated by the recent slowdown of the economic recovery and the recent agreement by the ruling parties to gradually abolish the temporary tax cuts (introduced in 1999 as a part of the policy to stimulate the slow economy), remained a cause for concern. As a result, Japanese consumers have been largely conservative, although demand for extravagant items appeared to strengthen a tad. Like the US and Europe, consumer electronics were a big hit. In particular, flat-panel TVs and DVD players/recorders were key drivers of sales. Sales of toys, with the exception of new game devices, were uninspiring amid an absence of popular items, while the demand for timepieces was weak. The performance of jewellery was also not encouraging, despite the strong appetite for certain high-end items. Sales of clothing were further dragged by a warm winter.

(iv) Chinese Mainland

In the Chinese mainland, year-end sales were encouraging. Despite the macro- tightening measures taken to slow down an economy fuelled especially by some over-heated sectors, the mainland's economic fundamentals have largely remained sound. The recent interest rate hike was only modest, and its impact on retail sales, which are expected to surge by 13% for the whole of 2004, has not been significant. While not many Chinese consumers have traditionally celebrated Christmas, gift exchanges have begun to catch on in the major Chinese cities. Apparently, more and more retailers have put up Yuletide decorations and undertaken related promotional activities, and an increasing number of more sophisticated dwellers in the major cities celebrate this festive season. Indeed, feedback from the TDC's network on the mainland indicated that Christmas sales promotions have to some extent encouraged year-end purchases. Most consumer products, including consumer electronics, garments, houseware, toys, garments, timepieces and jewellery, were among the favoured gift items.

II. Outlook for 2005

(i) US

The US economy will ease back into a lower gear, as forces are at work to foster a smooth transition to a more sustainable rate of growth. Interest rate hikes are set to cool consumer spending. Rising interest rates will not only increase the financial burdens of consumers, whose debts are high relative to incomes, but also put a damper on the buoyant housing market, leading to a slowdown of mortgage refinancing activities. Not surprisingly, American consumers are expected to become more prudent spenders. Consumer cautiousness, alongside continued retail consolidation and the sustained popularity of mass merchandisers and discounters, will mean further price pressures on Hong Kong exporters. But higher-income consumers will likely continue their spending spree. Spurred by the economic rebound, they tend to look for higher-end but value-for-money items at department stores and specialty stores. In this context, Hong Kong exporters should adjust their product strategies, and pursue a balanced mix of price and quality.

(ii) Europe

Sustained US growth, though expected to slow somewhat, will continue to help fuel the modest economic recovery of the EU. However, EU exports will be hampered by the strong European currencies, and the stubbornly high level of joblessness, with the major exception of the UK, will continue to put a drag on consumer spending. Overall, the continued recovery in the EU should lead to steady consumption and sustained demand for imports. To some extent, the gradual economic rebound will likely whet an appetite for higher-end products. Amid the economic hardships over the past few years, however, European buyers tend to look for sources that can offer higher value-added products at competitive prices. As value-for-money continues to be the catchphrase, the prospects for quality but competitively-priced Hong Kong products should remain steady, especially with the strength of the euro, which serves to maintain the price competitiveness of Hong Kong exports, although the currency is unlikely to rise against the US dollar at the fast pace of 2004.

Within the euro zone, growth in Germany, which is battered by its export dependency and structural weaknesses, is again likely to be weaker. Given its high budget deficit, Germany has little room in which to manoeuvre fiscally, and consequently the expansion of domestic demand is unlikely to be anything more than a convalescence. In all likelihood, retail sales in Italy will even be more disappointing, although domestic spending in France is expected to be stronger. Outside the euro zone, economic activity will be relatively robust in the UK. But with successive interest rate rises, the spending boom should moderate. There are signs that both retail sales and the housing market are cooling off, notwithstanding the continued low rate of unemployment. In the meantime, economic performance of the new EU members will likely remain solid. This favourable development, coupled with their adoption of the EU's trade policy and measures, will create additional opportunities for Hong Kong exports, despite the small size of their markets.

(iii) Japan

While Japan posts a pace of economic recovery unmatched since the 1990s, growth should decelerate next year, as exports will likely be dragged by softer demand from China, aggravated by the appreciating yen and weaker appetite in the US. A weaker external sector will inevitably have a spillover effect on the domestic front, slowing both business investment and consumer spending. Coupled with the recent agreement by the ruling parties to gradually abolish temporary tax cuts, the retail sales outlook for the country is unlikely to be promising. Yet the prospects of Hong Kong exports to the Japanese market are not all that gloomy, either. Facilitated by the strength of the yen, though unlikely to match the pace of 2004, competitively-priced Hong Kong exports are poised to further benefit from the continued adherence to value-for-money, and the ensuing popularity of overseas sourcing resulting from prevailing consumer preferences in Japan.

(iv) Chinese Mainland

Though pursuing adjustment measures to cool down the economy and mitigate over-investment, the Chinese mainland will count on domestic consumption, in tandem with exports, to achieve a soft landing. Amid an easing of inflationary pressures, it is likely that any further interest rate rises will only proceed at a slow pace, and hence the retail sector, propped up by the rise of the middle class and continued lowering of import tariffs, should remain in good shape. Interestingly, Hong Kong's domestic exports may also benefit from the further expansion of CEPA from January 2005, under which another 713 Hong Kong-origin products will be granted zero tariff access to the mainland. Although most Hong Kong manufacturers will continue to use the mainland as their production base, some might consider expanding or setting up their production facilities here to take advantage of CEPA, especially for fashion, lifestyle and health products.

For Hong Kong companies interested in exploring this lucrative market, keeping abreast of the latest developments is of vital important. On the regulatory front, the recent removal of restrictions limiting overseas retailers to joint ventures in a few cities means that competition in the Chinese market is bound to intensify. On the market horizon, new trends are emerging in the consumption pattern of urban residents. In leading large and medium cities, consumption hot spots have gradually shifted from basic consumer durables to housing, automobiles, higher-end better-featured products, as well as services such as tourism, entertainment, insurance and health care. Meanwhile, the emerging middle class on the mainland represents a growing social trend that is unleashing new opportunities for Hong Kong companies. It is estimated that there are about 200 million mainland citizens who belong to the middle class. Evidently, these high-income earners are potential customers for Hong Kong suppliers, who should however note that the mainland is a diverse market, making it necessary to take into account the unique consumption patterns and preferences of different regions when formulating marketing strategies.

For the Press Release, please go to TDC News & Speeches.