Is the F&B trade oversupplied in HK? 20240815

Lately we often hear how bad the retail scene in HK has become, and indeed a stroll down main thoroughfares around town reveals just how many boarded up vacant shops there are, even in formerly very busy precincts. So how bad has the food and beverage (F&B) landscape been? We take a look at how the numbers and make up of licences in the industry to pin down any emerging trends…

What surprises us initially is how the total number of licences have continued to increase in HK despite the severe lockdowns and the current weak economic performance – at end-2023 there were 33,536 outlets in the city, up a substantial 19% against pre-lockdown 2019:

Chart 1: No. of licences over time, and restaurant receipt changes (grey area)

Chart 2: No. of licences – Others sub category

In fact, neither the social unrest nor the lockdowns made any dent in the over army of F&B outlets in HK, whose numbers have basically increased non stop for the past quarter of a century!

Top winners have much to thank harsh lockdown policies

Because of the combined adverse events of the unrest and lockdowns, it is very appropriate to compare numbers against 2019 levels. Amongst the various categories of F&B licences, three strong winners stick out, and they are all beneficiaries of isolation/curfew/lockdown related policies that ruled the ‘covid years’:

a) Cold stores – as lockdowns and work from home (WFH) took grip, more and more people opted to take away and cook at home in the period 2020-22, resulting in a massive 41% spike in outlets that sell refrigerated foodstuffs (red bar, Chart 2);

b) Food factories – along the same vein, food factories swelled by 34% thanks to people buying more ready to serve/cook meals instead of dining in (orange bar, Chart 1);

c) Fresh provision shops – trying to eat healthy and cooking at home (as strict lockdowns prevented dining out) made this type of outlet popular, which as a result rose by 29% in the past 4 years (dark green bar, Chart 1).

Social distancing killed the sweet tooth!

The most unexpected losers in this changed dynamic was how commuters disappeared and with that bakers (presumably people bought their buns en route to work before), which were down 14% (light blue bar, Chart 1), followed by frozen confection entities, may be because there were no birthday parties or office outings, or other celebrations (purple bar, Chart 1).

Viewed in proportional terms, here is a graphic illustration of how each component of the F&B industry fared in the past few years (red arrows = expanded, blue arrows = shrank):

Chart 3: Relative weighting of F&B categories over time

One driver of the rise in food factory category was also due to how consumers have felt poorer in the intervening years, resulting the sudden popularisation of the so called ‘Rice with Two Sides’ outlets, which mushroomed everywhere, and selling each lunchbox set for as low as $25; if you felt like pampering yourself, you might splash out and bought ‘Rice with Three Sides’ for $35!

Retail rent cannot be willed into rising despite the economy

It is easy to blame the landlords for ‘unconscionably’ high rents and coldblooded disregard for retail livelihoods, as is often heard on the media. However, just looking at how restaurant receipts have changed and how sympathetically retail rents have tracked it, one can only say that rents are very much a product of the market – if tenants can’t make money, then so can’t the landlords:

Chart 4:  Retail rent index actually underperformed restaurant receipts in the past 18 years

In fact the total F&B receipt index is up 94% since 2005, but retail rents over the same period was up a more measly 75%...

So, if rents are not the culprit of the current F&B malaise, then what is the real problem? We hypothesise that it may be the combined effect of lack of innovation and moving up the value chain, and the southbound invasion by cheap and competitive mainland brands:

Chart 5: Retail rent index vs Restaurant receipt index

What is clear in the chart above is that despite rising nominal receipts (red line) in the past two decades, the real income has stagnated for most of that period – with no rise at all since about 2008 (green line), then the social unrests and lockdowns became the final straw that broke the camel’s back, taking the real returns for the industry as a whole from 150 to 120 now (ie a 20% decline).

What is more alarming is how the total number of outlets continued to grow despite the savage lockdowns – the licence numbers have basically grown uninterrupted during the whole of the lockdown years (blue line). As a result, the per outlet revenue has fallen a more dramatic 30% from the mid 2018 highs to 818 now. 

Perhaps there are mix issues obscuring the numbers – for example more smaller eateries have surfaced while the industry wide capacity is reduced by larger restaurants going out of business (such as whole-floor Chinese dim sum restaurants), not to mention more licences being out of retail premises and residing in industrial properties in the form of factory kitchens. What is certain is that there is a huge amount of recovery yet to take place in HK’s F&B arena before we are genuinely ‘back in business’.

The author would like to thank Huang Ying Fung from Hong Kong University of Science and Technology majoring in Accounting and Finance for assisting in data collection, analysis, and drafting this article.

Does HK have the right amount of office and retail space?

With the record smashing office land sale last week in Central where both the lump sum and unit price hit all-time highs (HK$23bn and HK$50,000 per square foot respectively), it seems an opportune moment to look into the dynamics of commercial land supply in Hong Kong.

As can be seen in Chart 1 below, both the office stock and retail space have been growing steadily in the past three decades. However, one cannot fail to notice that the speed of growth in office space has been outpacing that of retail consistently – this has led to the office-retail stock ratio rising from 0.62x in 1981 to 1.04x in 2016 – a massive outperformance of 69% over the entire period.

Chart 1: Gross floor area: office has grown persistently faster than retail

Last week’s record high office land sale price tag may be due to a combination of factors, including an ultra-low interest rate environment, increasing demand from China’s burgeoning corporate sector looking to expand overseas (via HK), thereby pushing up rents and prices here.

However, this could be said for retail space also, where ever rising PRC tourists should have done the same to retail property demand, so why has office still raced ahead in its stock build up, leaving retail in the dust?

Shifting consumption pattern: from goods to services

We suspect that the faster growth in office inventory compared to retail space may have something to do with the changing mix of the Hong Kong economy at large, where a greater part of consumption is now undertaken in the form of services rather than goods alone.

By comparing service consumption dollar to retail dollar over the years, it becomes apparent that services have grown significantly faster than retail – from 0.9x of retail back in the 80s to around 2.5x in the noughties (X axis, Chart 2). Throughout this period, there seems to be a matching growth in the ratio of office stock versus retail space (Y axis). Apart from a short period of volatility where the service-retail ratio fell in the past 4-5 years (red oval), likely caused by a disproportionate explosion of mainland visitor numbers, the relationship has held very neatly in a linear fashion.

Chart 2: Stronger growth of office stock driven by increasing share of service consumption

Looking more closely at the total consumption picture, we could see that the amount of services related consumption, which is largely produced, if not also consumed in office premises, has risen from 43% in 1981 to 60% now; over the same period, the more retail space intensive items of Food and Consumer Goods have seen their combined share drop from 58% to 47% (Table).

Table: Components and their weights in private consumption

This rising trend of services consumption can be visually represented in Chart 3 below, in fact, even the basket of household expenditure used to survey inflation has also witnessed a general drop in weighting for goods specific items (food, drinks, clothing and durable goods – see purple line in Chart 4) over the years.

Chart 3: Services weighting in private consumption in rising trend

 

Chart 4: Services weighting of household expenditure basket also rising

From bricks and mortar to clicks and mortar

Another new trend that has emerged in recent years is the exponential growth of online retail (Chart 5), meaning that increasing proportions of retail purchases may now be taking place in offices (eg online sales handling by e-commerce staff) and industrial/warehouse spaces (which supports the logistics of the online retail sales), this will obviously become more important in influencing demand for both office and retail space in future.

Chart 5: Number of HK people employing online purchasing for personal matters (mils)

Why has office rent not outperformed retail then?

Given the faster rising demand for services, one might ask, why then has office rent not done significantly better than retail rent (Chart 6). The simple explanation could be that office stock has grown faster than retail space at the same time, keeping the magnitude of office rent increases in check. 

A more physical reason may be that office space can be stacked over many storeys without affecting its utility, while retail premises require large pedestrian foot traffic, convenient transport linkages, and high location visibility to be of value to retailers. This explains why retail facilities in most multi-storey commercial buildings are restricted to the lowest floors (often not more than three).

Chart 6: Average office rent still a fraction of retail rent (Kowloon, HK$psm/month)

But what of the future? Will office supply continue to outpace retail? Not necessarily, for two reasons: 1) as the increase in PRC tourist arrivals recover and potentially reach new highs, more specialty themed multi-storey shopping malls may be built, or converted from office blocks, provided the logistic issues of large foot traffic flows can be addressed; and 2) the new trends in mobile working and hot desking could reduce the need for office space at a per-worker level (e.g. some organisations expect >10% utilisation improvements in their office space by moving towards a hot-desking/co-location model), not to mention the emerging phenomenon of robo-workers and their threat to white collar professions.

Whatever the future holds, Hong Kong remains a hub of regional activity for both office and retail, and will only benefit from further above-average growths of the Asian economies. In that regard, both subsectors should see trend outperformance compared to other global office/retail hubs in more mature cities.

With special thanks to Miss Rhonda Zixuan Lai (賴子萱) for her contribution to this article.