Evolutions in the physical world of Hong Kong retail

Despite the intense pressure of high rents and the encroaching expansion of eCommerce, physical retail stores are still blossoming in Hong Kong. Yet, over the past decade, the role of the physical store has evolved. It is still the main distribution channel for brands and retailers, but the focus has shifted to it providing unique customer experiences, solidifying a brand’s image and raising its awareness. Sharon Kwok examines how retailers are leveraging branding and marketing impact to enhance their business.

Creating space for the ‘experience’

Due to the city’s high population density, brick and mortar remains crucial for Hong Kong retailers, and as reflected from data, the vacancy rates of retail stores remain low. According to Daniel Wong, CEO of Hong Kong commercial real estate agency Midland IC&I, the keys that are driving industries are cosmetics merchants, drug stores and F&B outlets.

Despite competition for space, international brands are also actively expanding their footprints into Hong Kong.

French sporting goods retailer Decathlon entered the Hong Kong market in August 2017 with two stores located at Causeway Bay and Mong Kok. However, it’s its third branch – due to open in June – that has drawn greater attention. Located in Tseung Kwan O, the massive 72,000 square foot premises is set to be Hong Kong’s largest sports store.

With more than 1,500 stores across 49 countries, Decathlon is known for its warehouse-like retail venues. Marc Zielinski, CEO of Decathlon Hong Kong, says the size of the Tseung Kwan O store – though humongous by Hong Kong standards – is the average size of Decathlon stores worldwide.

He adds that brick and mortar is a key strategy for Decathlon globally. But how it is executed depends on each local market. Hong Kong has become one of the exceptional examples for Decathlon to open a store within the core districts of a city.

“At a global level, we used to open big stores – mainly situated outside of cities – where people need to drive for a distance to visit us. But this concept would not work here in Hong Kong. So we needed to adapt locally and find the best solution.”

Brands are able to engage customers to a greater extent in physical stores, championing their unique experiences with customers. Zielinski says the store’s enormous size is justified in order to allow for interactive retail experiences.

“We strongly believe [the physical] store itself has a future. Not only for Hong Kong, but globally. That’s why we recently also opened a new store in Japan.”

The Tseung Kwan O venue has an equal 36,000 square foot split between a traditional indoor shop floor and an outdoor practice terrace. Visitors will be able to have a hands-on experience with sports products across 70 disciplines such as hiking, basketball, running, tennis, badminton, camping, ski, yoga, crosstraining – you name it. Cyclists can also utilise a free bicycle workshop space to test, upgrade or repair their bikes DIY style.

Sports fans will also find community areas across the store to engage with sports specialists about training regimens, physical goals or general sporting tips. In addition, Decathlon will organise regular sports learning classes, product testing sessions and sports talks.

“Good retail according to me is based on humans and relationships. We believe that those areas which serve for interaction, and allow customers to speak about their passion, will be meaningful,” he says.

The same views on the importance of in-store personal interaction are shared by Herbert Chow, CEO of Hong Kong-based children apparel retailer Chickeeduck. He emphasises that personal services provided at retail stores cannot be replaced by online platforms.

Chow explains: “For Chickeeduck, the retail shop aims to serve young mothers and teach them how to outfit their children. Our in-store staff are trained to offer advice for parents on how to mix and match outfits for their kids, and make suggestions for gifting.”

The cost of selling

“The rent in Hong Kong is very high. It is a problem definitely. But we find it is possible to offer good prices with quality products,” Zielinski says.

According to the latest Hong Kong Property Market Research Report Q1 2019 by Colliers International, high-street rents remained stable overall, edging down by 0.3% Q-O-Q, compared to the decline of 0.1% Q-O-Q in Q4 2018. Colliers expects the performing sectors, including the non-traditional sectors of luxury accessories, sports and lifestyle, F&B and cosmetics, will continue to take hold of opportunities to expand.

The report also forecasts an uptick of 1.0% YOY for core retail districts in 2019, and a steady growth of 2.5% between 2020 and 2023.

Countering the issue of rent, Decathlon keeps its product pricing lower than the competition by selling everything under its own brands. As a vertically integrated retailer, it controls every stage of operations, from design, pricing, logistics to distribution. This helps the retailer keep its costs and price tags low, but with higher operating margins.

Zielinski (pictured above) agrees the role of physical stores has changed over the past decade. The retail space has incorporated branding and marketing strategies to enhance business. In addition to remaining as the main distribution channel for brands and retailers, physical stores are also being used to build brand image and raise brand awareness.

Decathlon combines retail and branding strategies in the face of the challenge of raising its brand awareness in Hong Kong.

“We may be known in Mong Kok and Causeway Bay. If you ask people in Tseung Kwan O, I am not sure if we are known there. We need to gradually develop our brand awareness, and what’s behind the name, what we do, what’s our belief. I don’t want us to be known for cheap-priced products.”

Decathlon aims to reach consumers who see value-for-money. It appeals to consumers who participate in sporting and outdoor activities and are looking for practical gear.

“At Decathlon, we strongly believe that sports can improve life. The purpose of our company is to make sure sport is accessible to as many people as possible through high-quality products at affordable prices. It means that we don’t target a specific segment. We want to open the possibility for many people to try sports.”

Retailers also need to master how to leverage the physical store’s location and decoration to enhance the brand image. The Apple store and Starbucks are typical examples of utilising the space and vibe of a store to draw customers in.

Chickeeduck has launched a new face for its retail stores.

“We did make some efforts on the decoration of the stores. Because of the fast fashion brands’ penetration, now we go for a high-end style boutique to differentiate ourselves from those fast-fashion brands. It also echoes with our high-quality apparel,” Chow says.

“Ten years ago, the decoration was more kid-friendly. We set up a little table with LEGO and toys for kids to play at the store. Nowadays, we arrange more seats for guests, especially for the gentlemen who accompany their wives to go shopping for their kids.”

Chickeeduck has a 5,000 square foot store in Kwun Tong, the industrial area which clusters some brands’ outlets. Its front shop is an outlet, the back is an office. Chow says while this outlet is well-received, it can also take advantage of the convenience of this setting for staff training.

Chickeeduck plans to open several stores this year. Chow points out that malls without kids zones are not favourable to brands such as Chickeeduck.

“Kids zones help attract our potential customers to visit the store. I would be worried if the landlord offers us an exclusive area. We need a cluster of kids brands in the area in order to prosper.”

He also says rents not surprisingly take up the largest portion of business costs, with an average of 10% to 15% growth year-onyear. However, he foresees there will be a rent freezing period, and that rent will drop for some districts soon.

Colliers International’s report sees retailers being more cautious in their expansions this year, while landlords are already becoming more flexible during rental negotiations. Tenants with higher budgets should take this opportunity to upgrade to locations with better footfall.

An omni-channel balance is key

Physical stores are still crucial, as they incorporate sales and shopping experiences that cannot be found online. However, eCommerce is a trend that can’t be ignored. Brands and retailers have to strike a balance of omnichannel solutions to win, Zielinski says.

“We have been developing an omnicommerce business model. We need to be where the customers are. They do not only go shopping in-store or online, they do both, very often depending on the time they have, the price of the product, and the convenience.”

Users will be able to make purchases through the Decathlon mobile app for a fast and seamless shopping experience and can arrange to pick up their online purchase in-store in one hour through the Click and Collect 1 Hour service.

Zielinski says: “Developing online infrastructure has cost as well. Launching an eCommerce platform has a cost. Not everything is free because it is online. We want to balance offline and online, and follow the trend.”

This article was produced for the May issue of Marketing Magazine. For more features, and other magazine-exclusive content from this and upcoming issues, you can subscribe to receive your print copy here or can read our digital version of this issue in its entirety here.

Read More News