Three reasons why mainland tourists shop in Hong Kong

Mainland tourists have been flocking to Hong Kong to satisfy their shopping needs. The number of tourists has reached record levels this year and 1H 2011 posted 21% growth y-o-y. Tourist arrivals to Hong Kong typically are higher in the second half of the year, due to the summer holidays, and we would expect the momentum to continue in 2011.

In particular, mainland tourists have come for Hong Kong’s shopping paradise. The bulk of spending per capita for an overnight mainland Chinese visitor to Hong Kong is on shopping (73%), far higher than for any other spending category.

We think there are three primary reasons for mainland tourists to shop in Hong Kong:

1.Lower prices

One major reason tourists love coming to Hong Kong is for its tax-free prices. Should a consumer choose to buy a watch/jewellery item in China versus Hong Kong, the price will be marked up by

three layers of taxes:

Import taxes: 20-35% for jewellery and 11% for watches

Consumption tax: 5% for gold, silver, platinum and diamond jewellery, 10% on gem-sets and 20% for watches

Value-added tax: 17.5%

We outline an example below of how taxes can impact the price differential between HK and mainland China. For instance, Hengdeli partly offsets the tax impact by retailing watches 30% higher in mainland China than in Hong Kong as described in our China Luxury Tax report.

Although there has been speculation of a cut in the import tax later this year, we think an immediate cut is unlikely and even if it does occur, we do not see Hong Kong’s position as a destination for luxury goods diminishing.

2. Quality assurance

Another reason mainland tourists come to HK is for the assurance they are buying genuine products of high quality. With the recent food scandals and the market of counterfeit goods in the PRC, we believe consumers in Hong Kong can be more assured that such products are what they claim to be.

For jewellery in particular, measures can be taken to provide quality assurance to customers. In addition to certifications made by stores, the Hong Kong Tourism Board also has a Quality Tourism Services Scheme that provides additional assurance to shoppers. QTS-accredited establishments must provide clearly displayed prices and information and ensure flawless customer service, and they undergo stringent annual assessments to provide ongoing assurance that they meet high standards of product quality and service.

All of the local major jewellery and watch retailers, like Chow Tai Fook, Chow Sang Sang, Emperor Watch & Jewellery, Luk Fook, Oriental Watch, Elegant Watch & Jewellery under Hengdeli, have been QTS-accredited for more than 10 years.

There is also a “No Fakes Pledge” scheme by the Hong Kong Intellectual Property Department established in 1998. Companies under the scheme pledge not to sell or distribute counterfeit and pirated goods and the licence is renewed annually under the relevant issuing body, for e.g. the Hong Kong Jewellers’ & Goldsmiths’ Association or the Kowloon Pearls, Precious Stones, Jade, Gold and Silver Ornament Merchants Association.

3. Wider/more exclusive range of products being offered with better service Mainland China’s exposure to luxury is still relatively low and consumer tastes may not be as discerning as they are in Hong Kong. In addition, it may not make economic sense to sell certain products in China due to their higher price points limiting consumer demand. Thus, retailers may choose to offer more exclusive products in their Hong Kong stores which consumers are not able to purchase in China.

Hengdeli for instance only has its Elegant store chains in Hong Kong, which offer the highest end of the watch market as shown below. In addition, they offer watches from select independent watch makers, like Girard Perregaux and Parmigiani, only in their Hong Kong locations. In the case of Emperor Watch & Jewellery, there are eight brands offered in Hong Kong that are not offered in  China and these also represent the highest end of the market, for e.g., Patek Philippe, Jaeger-LeCoultre.

Beyond the actual product assortment, there is a perception that shopping assistants in HK are generally more knowledgeable and that the quality of service is impeccable.