Sustainable Growth in Hong Kongs Retail Trade Industry - Assignment Example

Sustainable growth in Hong Kong’s Retail Trade Industry Contents 3 2.Introduction 3 3.Research Background 4 3 Industry background 4 3.2.Theoretical background 8 4.Methodology 9 4.1.Research question(s) 9 4.2.Research design 10 5.Discussion and Analysis 10 Occupy Central in HK 12 5.1.Major causes of soaring shop rents in Hong Kong 12 5.2.Impacts of soaring shop rents on Hong Kong’s retail trade industry 13 5.3.Strategy to foster the sustainable growth in Hong Kong’s retail trade industry 14 6.Conclusion and Recommendations 15 7.References 18 19 1. Abstract The aim or purpose of the paper is to analyze the causes behind soaring rents of retail shops in Hong Kong. The next part of the paper will focus on the impacts upon the economy as a whole because of the soaring of rent prices. A range of strategies will also be concluded so that such types of situations can be avoided in the future and if arises, what can be the possible measures to nullify any ill effects. A secondary research methodology shall be adopted for this purpose. It was analyzed that interest rates and various initiatives from the government was the leading causes while strategies like promotion of commercial spaces on vested lands and ceiling on rent prices can be the alternative measures. 2. Introduction Retail trade has contributed towards employment and economic growth in Hong Kong. This study will be focused towards identifying various strategies to achieve sustainable growth in retail industry of Hong Kong during soaring shop rent situation. In this particular research paper, different factors will be outlined which has caused turmoil in Hong Kong’s retail sector. The value of retail sales has drastically decreased in recent years, approximately by 6.9% over previous year. It has been observed that sales value of certain products such as jewelry, clocks and valuable gifts, photographic equipment and electrical goods, and consumer durables has decreased by 28.2%, 15.3% and 23.9% respectively. Retail business operators in Hong Kong market are facing major challenges in present scenario in terms of retaining their market share and gaining high revenue margins. This problem has mainly occurred due to decrease in purchasing power of China’s mainland tourists and increased total costs in form of wages and shop rents. It is clearly evident that minimum wage legislation of Hong Kong Government and anti-corruption policies of Chinese government are policy variables. These external factors are not under control of retail operators. However these operators can adopt the best strategy for reducing shop rents so as to achieve sustainable growth in Hong Kong market. 3. Research Background 3.1. Industry background The retail trade sector is a vital component of utilities, transportation and trade supersector. This sector encompasses establishments in terms of engaging into retailing merchandise and rendering services in context of merchandise sale. Retailing process can be stated as final step in merchandise distribution. Retailers are generally organized to sell specific merchandise to general public in small quantities. There are two main categories of retailers such as store and non-store retailers. Store retailers are those who operate in permanent point-of-sale locations and they are capable enough to attract huge array of walk-in customers. Retail trading indicates extensive merchandise display and utilization of mass-media advertising for spreading awareness amongst customers. They sell merchandise to general public for household or personal consumption and even serve institutional and business clients (Madaan, 2009). There are store retailers who are engaged in after-sales service such as installation and repair. On the contrary, non-store retailers serve general public but their retailing methods are completely different. There are different promotional techniques adopted by this subsector which makes it convenient to reach out to large base of customers. Direct response advertising, publishing of electronic and paper catalogs, in-home demonstration, door-to-door solicitation, distribution with the help of vending machines and selling from portable stalls are certain examples of non-store retail operations. The retail trade industry as a whole faces a lot of challenges such as regulatory barriers or restrictions imposed by local governments on real estate purchases. There are even restrictions on foreign investment in this sector and unfavorable taxation structure even affects retail business. Low profits margins is a common issue in retail trade industry as there is high competition in existing market place (Cox, 2006). In 2012 there was a desirable increase in revenue margins of retail trade business in tourist-oriented island and major countries such as Russia, Spain, Brazil and Pakistan. Though in United States this sector has decreased in GDP percentage to 14% of GDP from 19% but there has been an increase in China and India from 7.3% and 8.4% to 11.5% and 18.7% respectively. It can be stated that retail trade industry has a scope for growth in Hong Kong market as economic position of the region is stable. However retailers need to overcome hurdle in terms of rising shop rent prices (Fitzgerald and Rowley, 2013). The purchasing power of tourists has decreased in this region but economic stability has enhanced financial position of residents. In august 2014, the forecasted volume of retail sales was 40 million dollars which showed an increase of 3.4% as compared to that of 2013. However it can also be stated that the first eight months of the same year recorded a decrease of 1.0% as compared to the same time period of the previous year. If the effect of price changes is netted out the increase in total retail sales will be accounted to 2.8% over the previous year. Again the total retail sales percentage dropped by 1.0% from 2013 while the revised forecasted volume of retail sales dropped by 4.5% over the same time period. (Government of Hong Kong, 2014) (Government of Hong Kong, 2014) 3.2. Theoretical background Property rentals in Hong Kong market has been witnessed to increase considerably since 2003. From macro-economic perspective, property market can be considered as a vital component of market economy. It can even be related to state of economy like that of share prices, wages, inflation, trade performance or unemployment rate. Hong Kong in the current economic scenario is the freest economy in the world. It is a service oriented economy and the biggest recipient of foreign direct investment. A real growth was witnessed by the region in 2014 which was about 2.2%. Total exports and investment expenditure had decreased in 2014 in comparison to previous year. There is certain government initiatives taken that is centered towards increasing growth rate of economy by 3%. Though labor market conditions remained unchanged but retails sales value highlighted an overall decrease. Series of effective initiatives are taken by Hong Kong government in order to boost commercialization and R&D activities (Findlay and Sparks, 2002). Four pillar industries and technological start-ups are greatly supported by Hong Kong government. This market is regarded as a highly attractive market as it provides a scope for future growth and success. It eventually attracts foreign direct investment to explore market opportunities. Since 2000, the shop rentals has been increasing in this market segment as more industrial players have set up their business in this location creating a supply shortage. The rise of shop rents can be associated with increasing demand in retail trade industry. High levels of employment and purchasing power of consumers tend to attract more retail operators in Hong Kong market. In macroeconomics, demand and supply can be defined as an economic model for determining price in a market. This theoretical framework will be incorporated in this research study in order to determine the major reasons that led to increase in shop rents. Four basic laws of this framework are increasing demand and unchanged supply lead to higher prices, decreasing demand and unchanged supply lead to lower prices, unchanged demand and increasing supply results into lower prices, and decreasing supply with unchanged demand leads to higher prices (David, 2008). All of these aspects can be related to Hong Kong market as governmental support and stable economic conditions make this market a highly attractive destination for business operations. On the other hand, growth in retail business can be contradicted with rising shop rents stating that retail traders possess financial arm to meet such high prices. 4. Methodology For this particular project, we are adopting Secondary Research Methodology. As the Project is based out of Hong Kong retail market, conducting interviews, surveys or observational experiments that comprises of Primary Research will involve huge cost & time as compared to Secondary Research. So, the best approach is to take Secondary Research i.e. to gather information from existing & authentic sources so that true inference can be drawn effectively, considering the research budget & objectives (Gratton and Jones, 2010). 4.1. Research question(s) Depending upon the research need & objectives, the following questions should be analyzed for understanding the scenario: What are the rationales behind shop rents in Hong Kong to increase sharply? What are the internal & external economic forces influencing such increment in shop rents in Hong Kong? What are the consequences of such increment in shop rents on Hong Kong retail trade industries? What are the strategies HKRMA should adopt in order to promote sustainable growth in Hong Kong’s retail trade industry? How can Hong Kong achieve sustainable growth in retail market in order to maintain their position in global competitive market? (Alvesson & Sandberg, 2010). 4.2. Research design In order to analyze the macro economic variables affecting Hong Kong’s retails trade industries & the socio political factors contributing towards this, accumulation of relevant information from various sources is of utmost importance. Here, we have used various external sources to collect required data such that internet, various journals & periodicals, Government & private reports and statistics on Hong Kong’s retail industries etc. To make the research report more authentic, relevant data, charts & graphs are also used which are derived from various statistical surveys, industry analysis reports and current newspaper report. 5. Discussion and Analysis Retail trade is one of the most important economic sectors in Hong Kong in terms of employment opportunities & contribution towards GDP. Where this industry is responsible for income generation of 9% of Hong Kong’s total population, it caters to 4% contribution to its GDP growth. The industry has witnessed a no. of ups and downs over past few years. It was continuing an uninterrupted expansion until global financial crisis of 2008-2009. The volume of retail sales re accelerated sharply in 2010 & 2011 due to a marked increase in consumer durable goods. In 2012, the volume of retail sales showed a notable growth of 7.2%. The sustained expansion has also brought with it ample employment opportunities. Now, despite of all these facts and figures, Hong Kong is losing its competitiveness rapidly in retail industries due to various reasons. According to provisional estimates from the reports on monthly survey of retails sales published by the Hong Kong Census & Statistics Department, the value of total retail sales in June, 2014 was $37.1 billion, 6.9% lower than the previous year. The main reasons behind this can be attribute as: The problem of increasing total cost due to soaring shop rents & wages. Decrease in Chinese mainland tourists’ purchasing power. High rental costs resulting in price discrepancies even though non imposition of tax on goods & services. Occupy Central in HK Occupy Central is a civil disobedience movement practiced in the country of Hong Kong is September, 2014. The protest calls to block the roads which have direct effects on the financial districts. The protest was formed to pressurize the government to implement collective suffrage for the election of chief executive to be held in 2017 and the legislative council elections scheduled to be held in 2020. The protests are likely to reduce the rent prices since people will think twice to opt for a rented shop in the busy places of Hong Kong now. If sufficient demand is not generated following a supply, the rent prices are likely to go down. 5.1. Major causes of soaring shop rents in Hong Kong After global & financial crisis of 2008-09, Hong Kong is experiencing a steady increase in property prices as much as 30% to 70%. Simultaneous increment in rent has been resulted in a bonafide social problem. One of the main reasons behind sharp increase in commercial rent in Hong Kong retail industry is Government’s initiative to enhance FDI participation in retail market in Hong Kong. Inflow of foreign capital influences macro economic variables like GDP, inflation, unemployment in a positive manner. So, in expectation of a sound economic condition, more employment & retail boom tends businessmen to start new retail business or expand their existing business. Arrival of new market players resulted in fast capturing of business places. More & more capital inflow leads to shortage of spare space, thus resulting in overheating property market. According to US Federal reserve Board, little chances of interest hikes until 2015 is another contributory factor of increasing shop rents. In the current scenario, return on rent tends to be higher than savings deposit rates. This factor is pushing more & more people to buy housing units to collect rents, instead of selling them, the interest on mortgage loans being low as well. And as compared to residential units, past data have shown much bigger hike (as much as doubled in past 2/3 years) in shop rents. So, instead of purchasing property & giving rent in residential places, real investors tend to put shop rents. Boom in tourism sector leads to arrival of a large no. of wealthy tourists. Purchasing power of such wealthy customers attracted not only the local retailers but also foreign brand names. Huge business opportunities resulted in dramatic increase in store spaces, mostly in prime locations. Such condition prompted the real estate investors to raise shop rents. These are the main reasons for soaring shop rents in Hong Kong. To be précised, as long as the strong capital inflow prevails in the economy, high rent in retail business is likely to remain (Fitzgerald and Rowley, 2013). 5.2. Impacts of soaring shop rents on Hong Kong’s retail trade industry The impacts of soaring shop rents are high enduring. During 2011-2012, the rent of street shops in major locations of Hong Kong such as Tsim Sha Tsui rose up to 25.3% and 34.1% respectively. As a result, Hong Kong is continually losing its competitiveness as compared to other Asian countries. According to a retail business owner, for every HK$10 sales, HK$ 6 goes out in terms of rent whereas in Tokyo, rent is the third biggest expenses, after food & salaries. So, in spite of having an advantage of operating in a tax free market, sky high cost of renting shop spaces result in increment of price of goods, though non-imposition of tax on goods & services. This reduces the purchasing power of Chinese mainland tourists. A buyer stated that he bought a pair of branded jeans for HK$900 from Hong Kong. Later, he found that the same were sold for a much less in a business district of Manila, even with a 12% VAT. The problem of soaring rent, though indirectly, has also counted to be the main driving factor towards increment in Consumer Price Index. To incur profit, after paying the huge amount of rent & other expenses, the retailer has to increase price of goods which in turn give the CPI a big boost. Hong Kong’s rent structure became beyond comparison of New York & Paris, the two most expensive cities in the world for retailers respectively. In the first quarter of 2014, the increase in rent is 25% higher than that in New York & almost thrice as compared to rate of rent in Paris (Howard, 2013). 5.3. Strategy to foster the sustainable growth in Hong Kong’s retail trade industry Though according to the stats & figures, it is nearly impossible to cut down the shop rents before 2015, till such strong capital inflow prevails in the economy, strategies should be formulated to foster the sustainable growth in Hong Kong’s retail trade industry. To maintain its status quo like shopper’s paradise, Government is trying to increase the supply of retail space so that more and more local & foreign investor can keep coming into retail industry and the industry can optimize their growth rate, giving the GDP of the country a big boost. FDI should be channelized in such a manner so that retail business hub can be constructed in wastelands for optimum utilization of existing resources. As burning rate of rent is an important factor for price determination, keeping other things constant and large no. of buyers & sellers (both foreign & domestic) are present in the market, perfect competition should prevail in the market so that price can be controlled. Online retail store & online shopping should be encouraged for both buyers’ & sellers’ benefit. In this case, establishment cost is zero for the seller. With strong logistics & inventory management system, retail investors can enjoy huge profit and neglect the rising shop rent burden as well. Government should introduce different kind of subsidies and also encourage domestic retail investors to expand their business in their locality itself. Preferences should also be given to the local investors in terms of rent rates & availability so that powerful foreign currency cannot capture the whole industry & capital inflow in the economy should be maintained (Adjaye and Mahadevan, 2012). 6. Conclusion and Recommendations From the above discussion it can be concluded that free flowing FDI in the retail sector prompted investor to open up new shops in Hong Kong soaring the rent price. The government has taken various initiatives to attract investors in the retail sectors, the prime reason being stimulating the economy. The U.S. Federal Reserve shows no sign to raise the interest rates till 2015 and so people tend to exploit that allowance. But the prime factor the return on rents being higher than the return from savings. People now tend to lease their spaces for shop rents. The initiatives have not gone unnoticed and the economy began to reap the fruits of benefits within a short span of time. The rise in shop rents gave more money on the hands of the people. But it has yet another story. The rising rate of shop rents has an indirect effect on the purchasing power of the consumers. The price of the products being higher is often out of reach and is a pocket pinch. To overcome this situation the government has to come forward. They can opt for a commercial retail space in major parts of the country where the footfalls are large. Accessibility towards customers is important and so selection of a prime location is a strategic choice. They can lease out that space to a large number of shop owners who can present their products from there. A minimum amount of lease money can also be fixed so that it comes as earnings for the economy. But soaring of rent prices can be avoided to some extent. The FDI can be channelized strategically so that the retail stores are set up on wastes lands contributing towards economic development. The concept of price ceiling can be implemented as the recommendation. Since the rent prices are on the upward rising curve a rent ceiling can be imposed from the part of the government. It would not been possible for the space owners to call for higher rent price. In this way it might be possible to keep the soaring rent prices in check. Another recommendation which can be stated is imposition of taxes on accrued rent amounts. The government can impose a tax rate that shall be proportionate to the rent amount to the rent accumulators. The tax rate will increase as the amount accumulated from rent increases. This strategy might evade the possibility to ask for higher rent prices from the shop owners. By following the same strategy as followed in case of motivating the retail sector the government can implement it on some other sectors of the economy. The government can start the initiative to provide loans and buy retail spaces to the people. Such an action will drive more people to apply for loans. It must be stated that the loan amount must be used only for buying and renting spaces for retail spaces. Such an action will increase the availability of retail spaces on the market and following the demand supply theory rent cost can be expected to go down. 7. References Adjaye, J. A. and Mahadevan R., 2012. Managing macroeconomic policies for sustainable growth. Massachuattes: Edward Elgar Publishing. Alvesson, M. and Sandberg, J., 2013. Constructing research questions: Doing interesting research. New York: SAGE Publications Limited. Cox, R., 2006. Retailing: An introduction. New Delhi: Pearson Education India. David, R. H., 2008. Concise encyclopedia of economics. Indianapolis: Library of Economics and Liberty. Findlay, A. M., and Sparks, L., 2002. Retailing: The evolution and development of retailing. Great Britain: Taylor & Francis. Fitzgerald, R., and Rowley, C., 2013. Managed in Hong Kong: Adaptive systems, entrepreneurship and human resources. New York: Routledge. Gratton, C. and Jones, I., 2010. Research methods for sports studies. New York: Taylor & Francis. Howard. E., 2013. The changing face of retailing in the Asia Pasific. Milton Park: Routledge. Fitzgerald R. and Rowley C., 2013. Managed in Hong Kong: adaptive systems, entrepreneurship and human resources. New York: Routledge. Madaan, K. V. S., 2009. Fundamentals of retailing. New Delhi: Tata McGraw-Hill Education. Government of Hong Kong, 2014. Report on Monthly Survey of Retail Sales. [online]. Available at: http://www.statistics.gov.hk/pub/B10800032014MM07B0100.pdf. 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