Hong Kong Luxury Sales Explode on Mainland Tourism

HONG KONG (TheStreet) -- Canton Road sounds like the name of a commercial hub in old southern China before it was renamed Guangdong and the roads began turning into flyovers. You could imagine people crowding around for steaming pork buns, squawking chickens and chilling chats with fortunetellers.

Canton Road is in Hong Kong, a reservoir of Cantonese culture with an overlay of British laws and city planning. But most of the people who shop there come from mainland China. They throng the outlets of Burberry (BRBY.L), Christian Dior (CDI.PA), Gucci (GUCG) and Louis Vuitton (MC.PA). It's not just window-shopping.

As a result, fast-rising rents in Hong Kong's Causeway Bay shopping magnet have surpassed those of former top-ranked Fifth Avenue in New York, per findings released this month by property consultancy Cushman & Wakefield.

Who but the world's leading brands could afford to sustain there?

Tourism is all but synonymous with shopping when it comes to mainland Chinese in Hong Kong. With China on a campaign to double people's incomes from an average of $4,940 by 2020, the city that already sits comfortably as an Asian financial center is just going to grab even more money from its bigger-than-big brother to the north.

Put simply, the brands sold on Canton Road will rake in more from Chinese tourists. The Nielsen Co. says those shoppers tend to have above-average incomes and ration out their spending with an average trip bill of $1,548. Of that, 59% goes to shopping that's so intense that the last purchase may be an extra suitcase.

I spent part of an evening on Canton Road earlier this month to see how this works -- and why, given that you can get the same stuff all over mainland China.

Mandarin Chinese was the only language I heard along the festively lit street near the harbor of Kong Kong's vast Kowloon district. Groups of 20-some friends and families with infant children lined up 10 to 20 apiece, and in high spirits, at Hermes and Prada, which apparently don't want their fashion shops to get overcrowded.

I also met a storybook family patriarch who leaned against a post outside the shops with a flotilla of shopping bags. The women in my family are all inside, he said, smiling with pride that they could afford it all (consider China's legacy of poverty).

The foreign brands are also sold in mainland China, but shoppers there fear buying look-alike knockoffs instead of the real thing as counterfeiting is rampant. Currency exchange rates tend to favor purchases in Hong Kong, local merchants say, and the city doesn't tax the sales of stuff that mainlanders usually buy.

Since 2003, as Hong Kong tried to grow business that had taken a hit from the SARS respiratory disease outbreak that year, the city has made it easier for once-restricted mainland tourists to drop down for non-group travel.

Nielsen breaks down the actual purchases this way: cosmetics at 33%, electronics including cameras at 22%, clothing at 22% and jewelry (including watches) at 17%. (Canton Road also attracts jewelers led by Hong Kong's own ubiquitous Chow Tai Fook (1929.HK) chain. Unlisted Chanel woos women with its globally branded cosmetics.)

Again put simply, higher mainland Chinese incomes will generate more Hong Kong shopping, which will add to the sales revenue of international brands, which can confidently answer to investors concerned about performance.

The walk down Canton Road reveals the likely gainers. In addition to the global fashion stars, consider also the popular Emperor Watch & Jewelry ( EPRJF) and Marks & Spencer (MKS.L), a British clothier without the cachet of Dior or Gucci but with outlets around Hong Kong and a steady following of mainland shoppers.

Just 18% of the average mainland shopper's bill goes to lodging, Nielsen estimates. So keen are some to save money for shopping that they make daytrips or stay for cheap in rooms in private apartments, rented by the owners. Sorry Hilton (HLT) and Mandarin Oriental (MOIL.SI) hotels.

Hong Kong people grumble about being surpassed by their once poorer ethnic Chinese kin in the mainland, while merchants selling normal stuff to normal locals have been turfed out of the top shopping areas by rising rents. But the business community looks forward to a further opening of Hong Kong's floodgate to the north, with one local chamber of commerce pushing the city government for an aggressive branding campaign aimed at mainland China.

That group, the Hong Kong General Chamber of Small and Medium Business, says most of its 1,500 members are benefiting from Chinese shoppers. It expects retailing to the mainland Chinese to secure a top spot in Hong Kong's economy.

Hong Kong already logged 28.1 million mainland arrivals last year, up fourfold over 2002 before solo-travel visas got easier.

"In Hong Kong we don't have any industry," chamber President David Ting told me this week. "We have the financial sector, but that depends on the Western world also and their economy is not so good."

At the time of publication, the author had no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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