Hong Kong Food & Drink

Hong Kong's highly mature modern grocery retail industry continues to grow this quarter, with food and drink retail sales up and with moderate expansion among the sector's leading players still on-going. However, as BMI discusses in its newly published Hong Kong Food & Drink Report for Q306, growth of this nature - despite it being moderate when compared to broader regional trends - is unlikely to continue much beyond 2010.

BMI forecasts that sales through modern retail outlets in Hong Kong will increase by 26.1% to 2010, making our forecast bolder than many more conservative analyst estimates, which have hinged on the market's already crowded nature and the geographical limitations of its land mass. However, BMI's view is supported by trends that have emerged this quarter, namely figures released by the Census & Statistics Department and the expansion plans of Japanese major AEON. Retail sales for the month of June grew by over 6%, while food, drink and tobacco sales grew by 4%, in spite of the preference for discounting being witnessed in the market. The rise was attributed to improvements in Hong Kong's job market, which have boosted consumer confidence and domestic demand. In order to capitalise on this period of high domestic demand, AEON confirmed that it was to open a third JUSCO-branded supermarket, which would focus on sought after fresh and premium foods, just months after introducing the concept to Hong Kong.

However, while the economy and the on-going investments of retailers are aiding growth currently there is a chance that the distraction of neighbouring China will gradually draw capital expenditure away from Hong Kong. Leading operators, such as Convenience Retail Asia have already expressed their desire for greater mainland expansion, while an operator like AEON, which has clear multinational ambitions, will also view growth in China as vital. Over the course of the next few years, BMI expects domestic players to continue investing in Hong Kong, with the profits achieved here then being re-invested in China. This approach makes sense due to the lack of profitability associated with attempting to expand rapidly in China at present.

Ultimately, Hong Kong's retail industry, like its entire economy, is vulnerable to competition from low-cost and high-opportunity China to some degree. BMI's Q306 Retail Business Environment Rankings emphasise this point, with Hong Kong in 11^th place - its broader investment potential offset by retail industry specific disadvantages - and China in sixth place - its broader investment potential aided by a high-growth and high entry potential retail market. Beyond 2010, Hong Kong's retail industry will remain profitable, with consumers remaining high per-capita spenders. However, growth will continue to slow.