Adidas is exiting Hong Kong’s Central prime business district. The German sportswear giant signed a HK$4.34 million a month, or HK$52.1 million a year, lease for the 13,000 sq ft shop at 36 Queen’s Road in 2015. Removal staff were seen dismantling shelves and putting away stock on Wednesday.
“After a thorough review we have decided to close the Adidas Brand Center on Queen’s Road,” the company said on Wednesday. “We continue to have a strong presence in Hong Kong, with more than 20 Adidas stores and multiple franchise stores.”
Adidas is potentially following in the footsteps of Gap, Topshop and Esprit, brands that have either shut shop in Central or exited Hong Kong altogether. International brands that rely heavily on mainland Chinese and other tourists for sales in Hong Kong have found themselves unable to sustain business operations after the city essentially closed its borders early last year to combat and contain its coronavirus outbreak. Visitor arrivals dropped by about 94 per cent last year to 3.57 million. Retail sales too fell, by 24.3 per cent to HK$326.5 billion.
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“It is not surprising to see major retailers closing down, especially their prime flagship shops,” said Hannah Jeong, head of valuation and advisory services at Colliers International in Hong Kong. “Despite a 25 per cent drop in overall retail shop rents, and some prime street shops facing up to a 50 per cent reduction in rents, operations costs including rental expenses are still not yet sustainable, given the large cuts in revenue.”
Rents on Russell Street in Hong Kong’s prime shopping district Causeway Bay stood at US$2,671 per square foot in 2018. By the second quarter of 2019, it was the world’s most expensive shopping avenue, with rents at US$2,745 per square foot a year on average, according to commercial real estate services firm Cushman & Wakefield. The city’s exorbitant rents coupled with plunging retail sales have made business operations unviable for many retailers.
Adidas’s lease for the space expired last year and it opted for a short-term deal, which suggests “the brand might leave at any time”, said Thomas Chan, research analyst at property agency Midland IC&I. “According to market news, a local bank may lease the premises for over HK$2 million a month, down almost 54 per cent compared with the last lease, if the deal is sealed,” he said.
The city will see more reasonable shop operations, given the softening of the retail market, said Colliers’ Jeong. “Flagship shops will find it difficult to make a profit. Therefore, we will see more brands looking for smaller shops to maximise the dollar spend per square foot. This does not necessarily mean that retail brands are closing down, or withdrawing from the Hong Kong market. It is rather that shop requirements of retailers are changing.”
Indeed, Adidas itself rented the shop at 36 Queen’s Road at a rate that was 22.5 per cent cheaper than that paid by its previous tenant, US luxury brand Coach, according to the Land Registry.
A number of foreign brands have expanded in Central of late. Casual clothes brand American Eagle has taken up a 7,000 sq ft space vacated by Gap in LHT Tower just a few steps away from the vacated Adidas shop. In October last year, mid-priced French sporting goods retailer Decathlon rented a 9,300 sq ft shop previously rented by luxury leather goods retailer MCM in Entertainment Building in Central.
“It is quite common to see retailers come and go across different retail districts in Hong Kong, as they adjust their retail strategies. As retail rents have dropped significantly, by as much as 60 per cent from their peak in the third quarter of 2014, international retailers are in fact looking for prime spaces to take advantage of the cheaper rents,” said Lawrence Wan, senior director, advisory and transaction services – retail, at CBRE.
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