Unrest scares Chinese shoppers, rattles luxury CEOs

For Anna Lee, shopping in Hong Kong isn’t the carefree experience it used to be.

The 21-year-old student from the southern Chinese city of Shenzhen used to travel over the border every fortnight to buy everything from cosmetics to branded clothing. This summer, she’s only gone once “because my classmate begged me to.” She was afraid of encountering the protests that have convulsed Hong Kong for more than a month.

Lee’s anxiety is a worrying sign for the consumer brands and luxury retailers that have come to depend on Hong Kong as a top destination for millions of shoppers from the Chinese mainland every year.

What began as a protest over a contentious law has become a movement against China’s grip over the former British colony. Demonstrations have spread throughout Hong Kong, with key shopping areas blocked by barricades at times. Retail sales fell more than expected in June and storekeepers say tourist numbers dropped as much as 50% last month. Global brands from Levi Strauss & Co. to Ralph Lauren Corp. and Prada SpA are flagging slipping sales as the protests – which show no sign of letting up – force some stores to shut.

“Hong Kong has been challenging,” Andre Hoffmann, vice chairman at L’Occitane International SA, said on a call with analysts last week. “We lost several trading days in the quarter due to the protests. Chinese tourists spending in our shops has declined – all these are a bad cocktail for our business.”

The cosmetics retailer, which counts Hong Kong as its fourth-biggest global market, saw sales in the city down 19% in the second quarter. Prada had a similar story Thursday when the Italian fashion house reported first-half earnings, saying the political unrest in Hong Kong dragged on sales, even as mainland China showed gains.

It’s a theme that may become more significant, with a number of the world’s leading luxury and consumer names only reporting results through June, before clashes between police and protesters really intensified. The Hong Kong Retail Management Association predicts double-digit sales drops in July and August, and said some retailers see job cuts as inevitable if the situation worsens.

Hong Kong retailers have shown resilience in the past, bouncing back quickly from the 2014 protests known as the Occupy Movement, which lasted almost three months but was less confrontational. The situation this time is worse as the protests are taking place over a wider area, according to Annie Tse, chairwoman of the Hong Kong retail association.

“Even if the issue is resolved, the industry needs time to recover and tourists need to regain confidence in Hong Kong,” she said.

Perched on a peninsula a short train ride away from Guangdong, Hong Kong has long been both a gateway to China, and a popular getaway for its rising consumer class. L’Occitane and Prada – iconic European brands – are listed in the city. Hong Kong is the top export market for Swiss watches, and both Richemont, the owner of Cartier, and the Swatch Group AG have said the unrest there has weighed on sales due to store closures and lower tourist arrivals.

While China’s heavily controlled media has been selective in reporting on the demonstrations, there was a flood of anti-protest coverage after the country’s liaison office in Hong Kong was vandalized. The city is a key transport hub and stopover location for the Asian region, but mainland China is by far its biggest source of visitors.

Levi’s experienced the protest chaos first hand after the jeans maker scheduled a board meeting in China and Hong Kong in June.

“We were a day away from pulling the plug on the board meeting,” Chief Executive Officer Chip Bergh told Bloomberg. “We decided to go through with it because we were staying in Kowloon, which was on the other side of the bay.”

Initially around the area known as Central, the protests have since spread, with demonstrators storming the city legislature and holding sit-ins at the airport. Levi’s hasn’t been able to open some stores as normal, and tourism, in particular from China, is “way down,” Bergh said.

Hugo Boss AG has already closed a store at the airport and another in one of Hong Kong’s malls.

“The protests are not helpful,” Chief Financial Officer Yves Mueller said on a call Thursday, after Hugo Boss reported earnings. “Overall, our business in Hong Kong at this time is not contributing as positively as mainland China does.”

Ralph Lauren has three shops in close proximity to the main protest areas, and CEO Patrice Louvet said they were affecting the preppy fashion brand’s business in Hong Kong. Even Macau, the gambling enclave a short ferry-ride away, is seeing an impact, with analysts pinning an unexpected drop in casinos’ July gaming revenue partially on the protests.

With demonstrators showing few signs of backing down, some travelers are re-routing their travel to avoid a stopover in Hong Kong. Not all tourists, however, are ready to abandon the city.

Chan, a 36-year-old from Zhongshan, in nearby Guangdong province, was in Hong Kong this week for a day trip. He was unfazed by the protests.

“I’m not afraid, we’re all Chinese people,” said Chan, who only provided his surname. “What is there to be afraid of?”

Others from the mainland arrive knowing little about the ongoing unrest, underscoring the control that Beijing exerts over China’s media and public discourse.

Lin Canyu, a 27-year-old teacher who came from Hunan in southern China to shop for food and cosmetics, learned of the demonstrations only after arriving: “What protests? I’ve never heard of any protests.”

There could be an upside for retailers if the unrest deters some shoppers from Hong Kong. China itself is emerging as the most significant consumer market for a number of big global brands.

“The only good news there is that if there are less Chinese tourists in Hong Kong, they buy more in the local market,” Jean-Paul Agon, CEO of cosmetic firm L’Oreal SA, said on a call Wednesday, after reporting earnings. “I think it will be more a tailwind than a headwind.”

Fewer visitors in Hong Kong can also mean deeper discounts. Anna Lee found bargains in Mong Kok, a major shopping area in Kowloon.

“Bossini was in clearance sales,” she said, referring to a Hong Kong apparel retailer. And she bought a pair of shorts for cheaper than they sell on Chinese e-commerce portal Taobao. Bloomberg