Overview

• Market-wise, satisfactory sales results were recorded for the US, the UK, France and Japan. Performance of the mainland was encouraging, but Germany and Italy fared less well.
• Product-wise, consumer electronics, particularly digital music players, were a big hit. Video games were another hot seller, while clothing did well amid the cold weather.
• In 2006, consumption in the US will slow a tad, and spending in the EU will remain moderate. Consumption in Japan will rise modestly. Yet solid growth should take hold on the mainland.

Reports from TDC's branch offices indicated mixed results for Christmas sales in Hong Kong's major overseas markets. In the US, sales were below the good gains made at the start of the festive season, but retailers still managed to post a modest increase, helped by a last-minute flurry. Likewise in the UK, sales were bolstered by a late rush, despite higher unemployment and weaker housing prices. In general, consumers in other major European markets were more cautious, although France's performance was more encouraging. Japan's continued economic revival, on the other hand, touched off a moderate expansion in year-end sales. On the Chinese mainland, where the consumption atmosphere has remained favourable, year-end sales were heartening, aided by the rising popularity of Christmas there.

In terms of products, different categories again experienced mixed fortunes. As in past years, consumer electronics, especially digital music players, as well as DVD players and flat-panel TVs, were this year's holiday standout across-the-board. Video game consoles, as well as other electronic toys and educational toys, were other popular buys this Christmas, although traditional toys performed less well. For clothing, the recent chilly weather helped bring some welcome winter trade in virtually all major markets. As for jewellery and watches, holiday sales were facilitated by the sustained demand for upscale merchandise in a number of overseas markets. Year-end sales of jewellery and timepieces were also satisfactory on the Chinese mainland.

By and large, the retail outlook for overseas markets in 2006 will likely follow the pattern of year-end sales in 2005. In the US, economic growth will shift to a lower gear. Rising interest rates will eventually affect consumption, but the potential impact on higher-income consumers is unlikely to be substantial. In the EU, economic recovery will remain hesitant, and high unemployment will continue to hinder spending. In the case of Japan, consumer demand should pick up moderately, as there are indications that the economy is achieving a steady and sustainable recovery. Regarding the mainland, consumer demand should further expand on the back of sustained economic vigour and government polices to encourage spending.

I. 2005 Christmas Sales in Major Overseas Markets

(i) US - Modest Increase amid Last-minute Flurry

While sales results for the entire holiday season will not be available until retailers announce their official December sales figures in January, preliminary indications suggest that Christmas sales in the US were below the good gains made at the start of the festive season. Sales started off strongly after Thanksgiving, but then slowed down as holiday shoppers adopted a wait-and-see approach to buying. Still, US retailers, helped by a last-minute shopping spree, managed to record a moderate sales increase of around 3.5%. Despite rising interest rates, fundamentals for consumer spending were propped up by the robust employment landscape and higher disposable incomes. A slightly longer Thanksgiving-to-Christmas period, which lasted for 30 days against 29 days last year, was another positive factor. Higher energy costs, on the other hand, were the major irritating factor. Crude oil prices, albeit slackening from their highs caused by Hurricanes Katrina and Rita, remained relatively lofty, and served as a drag on holiday sales.

Apparently, lower-income consumers were the most affected by high energy prices. While loosening their purse strings, they tended to keep spending tight, and were largely selective about their purchases. For these cost conscious shoppers, holiday buying procrastination has become a usual practice, in the hope of doing better on prices. Retailers, for their part, have conditioned holiday shoppers to anticipate more bargains in the closer run-up to Christmas. In addition, several other factors also played a part in holding off shopping until the very last moment this Christmas. These included a Saturday Christmas Eve, a late Hanukkah, the lack of must-have items (with the major exceptions of video games and digital music players), as well as the three-day transit strike in New York. To attract procrastinating shoppers as Christmas drew near, retailers embarked on a series of deep discounts and promotions, alongside extended business hours and supplies of new merchandise, to an extent seemingly more aggressive than those of last year.

As caution was generally the watchword, shoppers once again favoured discounters and mass merchandisers over department stores, which were also getting caught by higher-end stores selling upscale merchandise. This good showing of luxury stores was a testament to sustained demand from higher-income shoppers, who have been less affected by higher energy prices. In the meantime, e-tailers also did well, with holiday sales estimated to have leapt by more than 20%. More holiday shoppers appeared to be taking advantage of on-line purchases, lured by lower prices and free delivery, which have become more important amid rising energy costs. In another development, the continued popularity of gift certificates has further encouraged the trend of procrastination, serving to depress sales results as revenue is not counted until the certificates have been redeemed. On a brighter note, gift certificate holders often buy merchandise worth more than the certificate value. It is estimated that sales of gift certificates would expand by over 6% this Christmas.

Product-wise, consumer electronics continued to be the star performer. Topping the shopping list of US consumers were handheld digital audio players, while flat-panel TVs, DVD players, digital cameras, mobile phones and notebook computers were popular too. Another hot seller was video game systems. Other electronic toys, like robotic pets, radio-controlled cars, and children's cell phones, MP3 players and video cameras also sold well, as did educational toys and certain dolls, action figures and licensed toys, such as products related to Harry Potter. Other than electronics and toys, warm clothes and related accessories received a timely boost from the recent cold weather, especially in the Northeast and Midwest. For jewellery, sales were facilitated by the sustained demand for up-scale merchandise. For the same reason, performance of high-end timepieces was stable, although casual and sport watches remained favoured gift items.

(ii) Europe - Cautious Festive Spending

Compared with their US counterparts, European consumers generally seemed to be more conservative during this festive season, as concerns over job prospects, still-high oil prices and lukewarm consumer confidence held back spending. To compound the problem, a series of political and social events have worsened economic woes. In the wake of the rejection of the EU constitution treaty in France and the Netherlands in the middle of the year, the aftermath of the German general election in September and social riots in France in November have exerted a further short-term impact on consumer sentiment across Europe. Not unexpectedly, most EU retailers relied heavily on discounts and promotions to lure Christmas shoppers, although luxury stores enjoyed better sales in certain markets, notably the UK. Cashing in on the focus on price and convenience, along with the rising popularity of high-speed Internet connections, EU's e-tailers enjoyed remarkable sales. A case in point was the UK, where on-line sales surged by some 50% from last Christmas.

Germany

In Germany, Christmas was not encouraging for retailers, with holiday sales roughly matching last year's worst showing since 1996. Evidently, high joblessness remained the main deterrent to consumption, as the export-led growth of the German economy has yet to feed through into the domestic sector. To some extent, however, hosting of the 2006 World Cup and the unusually cold weather enlivened year-end sales. Once again, sales of consumer electronics, such as digital cameras, digital music players and DVD players, were especially strong. Sales of flat-screen TVs received another boost from the news that Germany's pay TV channels would broadcast the World Cup matches in HDTV format. Meanwhile, licensed World Cup T-shirts and sportswear were sought after, while low temperatures whetted an appetite for winter clothes. A slew of games also took their cue from the 2006 World Cup, whereas video games, remote-controlled toys and educational toys remained favoured gifts. Sales of watches and jewellery, for their part, were satisfactory during this festive season.

France and Italy

Christmas sales results were more encouraging in France but disappointing in Italy. In France, where domestic demand has been stronger, year-end sales were revved up by a last-minute flurry, despite the recent social riots. Notwithstanding stronger exports, however, a spate of banking scandals in Italy tended to hurt consumer sentiment. In view of sliding confidence, which has been aggravated by lingering concerns over job security and a decline in disposable incomes, Italian consumers were in no mood to spend during this holiday season. But despite the difference in overall performance, the product demand pattern in both markets was quite similar. For instance, consumer electronics remained this year's holiday standout, exemplified by the solid performance of a few electronics gadgets such as digital cameras, portable digital audio players and DVD players. Regarding toys, video games were well received. The other more sellable item was winter garments, especially in the case of France, thanks again to the unseasonably cold weather.

UK

Thanks to a last-minute flurry, Christmas sales in the UK were above earlier expectations, with festive spending expected to have increased by around 2.5%. Despite higher unemployment and weaker housing prices, plus the spectre of terrorist attacks in the wake of the July bombings in London, consumer spending was stoked by the rekindled popularity of electronic gadgets and the cold weather. In particular, the onset of cold winter weather seemed to have released pent-up demand for winter clothing, footwear and related accessories. Likewise, the launch of and subsequent sell-out of a trendy video game console appeared to have triggered a demand for many high-tech electronic gadgets, ranging from set-top TV boxes to the latest mobile phones and digital music players. But other than electronic games, sales of other toy items were less satisfactory. Jewellery and watches, on the other hand, showed robust sales on residual feel-good seasonal sentiment.

(iii) Japan - Better Year-end Sales

In line with the continued resurgence of the Japanese economy, year-end sales in Japan are expected to have increased modestly. Sentiment among Japanese corporations has improved, while rising corporate profits provided a boost to job creation and personal incomes. Victory of the ruling party in the parliamentary elections last September has further lifted business and consumer confidence. Given a rise in winter bonuses and better job prospects, consumers were more willing to spend money during Christmas, with higher-income customers having a penchant for luxury items. Like the US and Europe, consumer electronics were a big hit. In particular, flat-panel TVs, DVD players/recorders and portable digital audio players were key drivers of sales. The recent cold spell, alongside the government environmental "warm-biz" campaign to encourage office workers to be warmly dressed, also shored up the demand for winter clothes. For toys, video games were a popular buy. As for jewellery and watches, better performance was registered for original and unique jewellery, jewellery watches, functional watches, as well as radio-wave and solar timepieces.

(iv) Chinese Mainland - Inspiring Retail Performance

On the Chinese mainland, year-end sales were brisk. Despite the macro-economic tightening measures, economic fundamentals have remained sound. To some extent, the 2.1% appreciation of the RMB against the US dollar, while jacking up mainland export prices, has whet an appetite for imports. Amid the favourable consumption atmosphere, retail sales expanded by 12% in November, and are projected to grow at a similar pace in December. While Christmas was not traditionally celebrated across the mainland, it has begun to catch on in the more sophisticated urban cities. More and more retailers have put up Yuletide decorations, and undertaken related promotional activities. Feedback from the TDC's network on the mainland showed that Christmas sales promotions have somewhat encouraged consumption, although that might relate as well to the Lunar New Year one month away. Most consumer products, including consumer electronics, toys, garments, watches and jewellery, were among favoured gift items. A growing number of consumers also thronged Hong Kong for holiday shopping spree here.

II. Outlook for 2006

(i) US - Easing to a Lower Gear

The US economy will ease back into a lower gear in 2006. While interest rates have remained at a historically low level, successive rate hikes, along with a less stimulatory fiscal policy and firm energy prices, will increasingly affect consumer confidence. High interest rates may further put a damper on the buoyant housing market, and in turn weigh on consumption. As a result, US consumers will likely become more timid spenders. Consumer cautiousness, in tandem with continued retail consolidation and the sustained popularity of mass merchandisers and discounters, is squeezing prices and profit margins of Hong Kong exports, although without denting growth in the luxury segment, as higher-income consumers will likely sustain their spending binge. On the back of the still-strong US economy, they are inclined to clamour for value-for-money luxury items at department stores and specialty stores. These items are not always expensive but, instead, small indulgences. As such, Hong Kong exporters should opt for product strategies with a balanced mix of price and quality.

(ii) Europe - Still in the Slow Lane

In the EU, economic growth will remain hesitant in 2006. In the main, persistently high unemployment will continue to rein in consumer confidence and demand. Even in the UK, joblessness is edging upward amid a cooling housing market, although a gradual relaxation of the monetary stance expected for 2006 may help. In the near term, a series of political and social events will further weigh on consumer sentiment across the EU. In Germany, for instance, sentiment will be affected by the uncertain stance of the grand coalition government, particularly over the planned VAT hike. Sluggishness of the EU economy, alongside interest rate differentials in favour of the US, have continued to put pressure on the euro, although the impact has eased somewhat amid the likelihood of further interest rate rises in the euro zone. While a favourable currency factor serves to facilitate EU exports, this will amplify the adverse impact of high oil prices.

As no major turnaround in economic recovery is in sight, prospects for Hong Kong exports to the EU are unlikely to be overly promising. With sustained weakness in the job market, European consumers are generally not in the mood for lavish spending, notwithstanding that luxury items, mainly confined to prestige European brands, are still sought after by higher-income earners. Furthermore, the weakness of the euro will erode the price competitiveness of Hong Kong products in the EU market. But competitively-priced Hong Kong exports are poised to benefit from the sustained popularity of value-for-money in the EU, as well as European buyers' continued efforts to look for sources that can offer quality products at competitive prices.

(iii) Japan - A Sustainable Revival

In Japan, there are signs that the economy is achieving a steady and sustainable recovery. While a hearty appetite in the mainland along with a weaker yen will continue to bolster exports, stronger business investment and a modest pickup in consumption are expected to stay firm. A steady and sustainable revival of the Japanese economy will certainly bode well for Hong Kong exports. Improving consumer sentiment, on the back of improving job prospects and personal incomes, should whet an appetite for consumer products. Be that as it may, the prevailing recovery will provide a tonic for higher-end products, probably dominated by European and American brands. Amid the economic hardships over the past 10 years or so, however, Japanese buyers tend to stick to higher value-added products with competitive prices. As such, competitively-priced Hong Kong exports are expected to further benefit from the continued adherence to value-for-money, although sales growth will be constrained by the recent depreciation of the yen.

(iv) Chinese Mainland - Strong Growth Taking Hold

In 2006, the mainland economy will remain in good shape. Consumer demand, spurred partly by government polices to encourage spending such as the increased threshold for personal income tax and an expected rise in salaries for civil servants, is expected to remain strong. Meanwhile, as the mainland proceeds to reform its financial system, the RMB will likely appreciate further in the medium to long term. A stronger RMB will not only affect the price competitiveness of mainland products, but also Hong Kong exports originating from the mainland. Conversely, enhanced price competitiveness will enable products produced in Hong Kong, as well as other countries, to be sold to the mainland more easily.

For Hong Kong companies interested in exploring this lucrative market, keeping abreast of the latest developments is of vital importance. On the regulatory front, Hong Kong's domestic exports to the mainland will be further facilitated by CEPA III, under which all products of Hong Kong origin will become tariff free from January 2006. A case in point is watches, for which the rules of origin will be relaxed. On the market horizon, rapid urbanisation, estimated at a level of almost 42%, as well as growth of a prosperous middle class, consisting of some 420 million inhabitants, continues apace, creating enormous demand for a wide range of sophisticated consumer goods. In reaching out to their potential customers across the border, Hong Kong suppliers should 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. Alternatively, these suppliers could serve their mainland customers in Hong Kong, which is increasingly becoming a shopping centre and display showcase for high-income mainlanders.

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