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2020 was, against the odds, a good year for Hong Kong businessman and retail tycoon Adrian Cheng.
During a devastating year for Hong Kong retail, with sales down 25.3 per cent in the first 11 months of 2020, a fourth wave of Covid-19 infections, lower tourist flows and a new national security law adding to the unstable sociopolitical climate, Cheng’s K11 retail malls recorded sales growth of 56 per cent in the second half of 2020.
“I was a bit surprised,” admits Cheng in an interview with Vogue Business. The head of property conglomerate New World Development and jewellery brand Chow Tai Fook, who founded the high-end mall brand K11 Group in 2008, said its newly opened K11 Musea mall reported a 60 per cent sales increase in November and 21 per cent in December, while average monthly footfall was 1.4 million. To be sure, the growth compares to the beginning of pro-democracy protests in November and December 2019. But even the more established K11 Art Mall, which opened in Hong Kong in 2009, reported relatively flat sales in December compared to the year previous. In Mainland China, sales at the five K11 properties rose 34 per cent, in step with a broader rebound of the luxury sector.
K11’s outperformance in Hong Kong is attributable to three key points of differentiation, says Veronica Wang, partner at strategy consultant OC&C: the malls’ status as cultural destinations, more advanced offline-to-online practices compared to competitors and successful membership schemes that promote loyalty and repeat purchases. Underlying all three is Cheng’s focus on local consumers, which has helped shield his malls from the drop in international tourists travelling to Hong Kong since 2019. Others have struggled including Cheng's other business, Chow Tai Fook, where he is an executive director, permanently closing 4 jewellery stores in Hong Kong and Macau in the first half of 2020. Tiffany, Prada and Valentino have also closed stores and luxury distributor Bluebell, which operates in Hong Kong, Macau and Taiwan, said a study of 50 brands, both Bluebell and non-Bluebell operated brands, shows declines of 50 per cent in Hong Kong malls in December 2020, according to managing director Samy Redjeb.
Cheng was early to experience-led malls, since launching K11 Group in 2008. The art exhibitions and cultural events make it an outlier among malls in Hong Kong, which “are focused on transactions and designed [to] cater to tourists” and prioritise convenience over experience or entertainment, says Wang. After a difficult 2020 for Hong Kong retail, Cheng’s approach could provide a blueprint for more businesses to follow.
“We are not really a shopping mall,” Cheng says. K11 Musea, a 1.2 million square-foot development located in Hong Kong’s art and design district and opened in 2019, houses a sustainability-themed education park and an interactive game zone among other exhibits, 250 retailers and 70 restaurants. For now, many attractions have been moved online. “It’s a curated, immersive, cultural journey and you can still convert because [shopping] becomes part of the experience.”
Digitalisation, rewards and exclusive partnerships
While K11’s malls in Hong Kong were never made to fully close last year, like many retailers in the West and in parts of Mainland China, a quick pivot to digital was necessary to maintain sales. Cheng credits the nimbleness of his young management team for the groups’ quick response in March, after Covid-19 first disrupted daily life in Mainland China and Hong Kong. K11 Go, a functionality part of the group’s WeChat mini program, launched soon after to allow customers to shop selected products, engage in live-stream events and experience virtual art tours across China. The group’s e-commerce sales grew 50 per cent as a result. “We changed our strategy very quickly by doing live streaming, virtual exhibitions and a lot of community pushing, which worked really well,” he says.
K11’s loyalty programme has also been successful in retaining customers and encouraging spending, says Cheng, particularly K Dollar, the digital currency exclusive to upper-tier members. Each time they make a purchase from K11, members earn points that can then be converted into dollars (1 K Dollar is worth 1 HKD). K dollars can be spent in the K11 ecosystem, including with participating brands Alexander McQueen, Burberry, Gucci and Saint Laurent, but have an expiry date. “This kind of loyalty programme actually incentivises consumers to shift more consumption on that specific shopping mall instead of others,” says Wang.
Differentiating in Mainland China, where there is an oversupply of shopping malls, is harder. K11 is relying on brand exclusivity. Take K11’s most recent Art Mall in Wuhan in December, with more than 30 brands not seen before in the city, including Nars and Armani Boutique.
Looking towards the future
Cheng, who plans to open 38 K11 projects in 10 cities across Greater China by 2025, is convinced that Chinese consumers won’t return to pre-pandemic travelling habits at least for the next three years. He sees repatriation of spending continuing to be a central issue for luxury going forward, with local consumption possibly boosted by further reductions in VAT taxes. “[China] is the only place where you can grow, and I’m not talking about single digit, I’m talking about double digit,” he says.
In the meantime, brands need to more clearly differentiate their approach to lower-tier cities and upper-tier city customers, whose level of sophistication is “much different”, and be aware of consumers’ new needs, which include a new attention to companies’ social mission and environmental footprint.
More pressingly, however, Cheng thinks brands operating in China will have to “crack” their digital strategy and omnichannel offering, which he says is still lacking. “You see people talking about it at conferences, but it’s still very challenging. The cycle is not fully completed yet.”
Correction: Corrects reference to declines in Hong Kong malls by luxury distributor Bluebell. The 50 percent decline refers to 50 market brands, both Bluebell and non-Bluebell brands, in Hong Kong. (13 January 2021).
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