Overview

• Amid the global financial crisis, Christmas sales in Hong Kong's traditional markets were largely lacklustre. In the US, sales were below the good gains made at the start of the festive season, with retailers posting a more than 2% fall in business, the worst in decades, despite heavy discounts and promotions.

• In Western Europe, holiday spending was cautious, and most retailers relied on discounts and promotions to stimulate sales. The UK showed a 1% fall or, at best, zero growth in sales, while both France and Italy recorded declines. Yet sales in Germany were comparable to last year's, a good showing by German standards.

• In Asia, Japan exhibited faltering year-end sales. But the retail performance of the Chinese mainland was fairly encouraging. In other parts of the emerging world, year-end sales varied. In Central and Eastern Europe, sales were stronger in Russia and Poland. Regarding Latin America, Brazil and Chile were able to fare better.

• In both traditional and emerging markets, since prudence was generally the watchword for holiday shoppers, the phenomenon of trading down has been commonplace, and discounters and hypermarkets were favoured over department stores and luxury stores.

• Given the trend of trading down, luxury and big-ticket items did not fare well, whereas practical and smaller-ticket items were the biggest draw. In some markets like the US and the UK, AV equipment and video games were among other sellable items, as consumers were inclined to stay at home rather than going on vacation.

• By contrast, sales of home-related items were hindered by the struggling housing sectors in many overseas markets. Sales of jewellery and watches, notably high-end items, also suffered from the waning demand for up-scale merchandise. For the same reason, performance of high-end apparel was not satisfactory.

• By and large, this portrait of Christmas sales results in 2008 should shape the retail outlook for overseas markets in 2009. Overshadowed by the lingering global financial crisis, prospects for the traditional markets are grim in the year ahead. But increasing consumer cautiousness will stimulate an appetite for basic products.

• Despite the contagious effect of the financial crisis, there are still some welcome export outlets in the emerging world, and the mainland looks set to hold the best promise. Elsewhere, Russia and Poland are brighter spots in Central and Eastern Europe, while Brazil and Chile show better potential in Latin America.

I. 2008 Christmas Sales in Major Overseas Markets

(i) US - Sales Decline despite Unprecedented Promotions

While sales results for the entire holiday season will not be available until retailers announce their official December sales figures in January, preliminary indications reveal that Christmas sales in the US were below the solid gains achieved at the beginning of the festive season. Sales got off to an unexpectedly firm start after Thanksgiving amid retailers' aggressive tactics, not least deeper discounts of over 70% and longer hours such as around-the-clock openings, but then slowed at a pace more significant than the last few years. To be sure, retailers were faced with a difficult holiday season, as the US, the epicentre of the global financial crisis, has been already in recession since last December. Although consumers still celebrated and exchanged Christmas presents, they have become more conservative in view of the financial crises and a lack of confidence in the economy. A shorter Thanksgiving-to-Christmas period, which lasted for 27 days vis-à-vis 32 days last year, and a severe winter storm spreading across the country, were other negative factors. Despite falling inflation and energy prices, holiday sales are estimated to have contracted by more than 2%, the worst in decades.

Evidently, consumers were not in the mood for holiday shopping, notwithstanding the US$700 billion rescue package and interest rate cuts. Plunging home values and vagaries of the stock market have not only made shoppers feel less wealthy, but indeed obstructed the sources of financing for lavish spending. Tighter credits, along with meagre income gains and rising job concerns, have further made it more difficult to buy big-ticket items. Unlike past downturns, even the wealthiest consumers have felt the pinch. While loosening their purse strings, consumers tended to be more frugal and practical than in past seasons, and hammered out shopping plans to clamour for steep discounts instead of buying on impulse, procrastinating even more and sticking to a smaller budget. Well aware of the thrifty consumer mindset, retailers cut their inventories, adopted a generous product return policy, and resorted to a string of big bargains and heavy promotions, to an extent seemingly more aggressive than those of recent years, thus significantly eating into profit margins. These heavily discounted items also included offers from liquidated firms like Circuit City Stores and KB Toys.

Since prudence was generally the watchword for holiday shoppers, the phenomenon of trading down has been ubiquitous, and mass merchandisers and discounters, notably Wal-Mart, were once again favoured over department stores, as well as luxury stores, which were barely dented in recent seasons. Meanwhile, e-tailers managed to exhibit resilience, given the attraction of massive discounts, special promotions and free delivery offers, plus the convenience of price comparison, which has become more important in the quest for value-for-money. Bucking the trend in recent years, the declining popularity of gift certificates was another salient development in this festive season, as the bankruptcy of certain retail chains served as a reminder that some shops may not be around after Christmas for redeeming gift certificates. Such developments, while facilitating holiday sales in November and December, will depress post-Christmas sales, particularly in January, when shoppers are expected to redeem their gift certificates to take advantage of post-holiday sales.

With the trend of trading down, luxury and big-ticket items did not fare well, whereas practical and smaller-ticket items were the biggest draw. Opting for less expensive models and brands, certain consumer electronics such as potable media players, digital cameras and GPS systems were better received. Flat-panel TVs and video games were among other sellable items, as consumers were inclined to stay at home rather than going on vacation. Other than electronic entertainment gear and related software, again led by Nintendo's Wii, educational toys performed relatively well, as did some traditional toys like Barbie and Elmo. It appeared that even in rough times, most parents will buy toys for their kids. On the other hand, sales of home-related merchandise were hampered by the struggling housing market. Sales of jewellery and watches, especially luxury items, also suffered from the waning demand for up-scale merchandise. For the same reason, performance of high-end apparel was not satisfactory, although a cold spell helped inspire shoppers to snap up winter clothes, and lower-priced garments were fairly popular.

(ii) Western Europe - Cautious Festive Spending

Likewise across the Atlantic, festive spending in Western Europe was largely conservative. Faced with increasing economic hardships, holiday shoppers have generally kept their spending tight, despite various rescue measures and interest rate cuts, as well as declining inflation and energy prices. For the EU as a whole, economic activity was strong in the early part of the year, but the growth momentum has slowed abruptly as the US financial crisis has spread to Europe and then around the globe. The attendant rising joblessness and the weakening of the European currencies have eroded its domestic consumption and import absorption power. Yet weaker European currencies were not able to entice overseas buyers to shop in Europe, since overseas consumers have been hurt by the global financial crisis too. The faltering EU housing market and harder-to-get credits have further curbed consumers' ability and willingness to spend money in stores.

Given growing consumer conservatism, most EU retailers relied on discounts and promotions to attract Christmas shoppers. The degree of dependence on such sales tactics, however, varied from country to country, and from retailer to retailer. For example, in Germany, where consumer sentiment has remained relatively favourable, price cuts and sales promotions were less intense. In terms of retailers, as the tendency of trading down has whetted an appetite for mass merchandise, hypermarkets tended to outsmart department stores and luxury stores. Cashing in on the convenience of price comparison, e-tailers were another winner in this festive season, especially in the UK. In another development, the popularity of gift certificates has fallen somewhat for fear of the possible collapse of certain retailers, mimicking the prevailing trend in the US.

Germany

Despite appearances to the contrary, Christmas was relatively inspiring for retailers in Germany, with sales comparable to last year's, a fairly hearty performance by German standards. Holiday shoppers, in view of still-healthy employment and a high savings rate, did not seem to have been significantly affected by the global financial crisis in this holiday season. Given relatively decent consumer sentiment, German retailers, though providing special offers to alleviate the feeling of guilt to shop at difficult economic times, were not required to engage in excessive discounting. Product-wise, sales of consumer electronics, notably flat-screen TVs, DVD players and GPS navigation systems, were robust. Electronic game consoles were again sought after, whereas traditional toys like dolls, wooden toys, construction sets and board games remained favoured year-end presents. For apparel, demand for winter clothes was sustained by the early cold winter, although overall clothing sales were only mediocre. The performance of jewellery and watches, on the other hand, was satisfactory.

Italy and France

By contrast, Christmas sales, featured by declines from last year's levels, were lacklustre in both Italy and France. Especially in Italy, the economy, already the weakest among major EU member states, has deteriorated further in the face of the global financial crisis. In light of sliding consumer confidence, Italian consumers cut back their year-end spending. While sales of most products fell, portable media players, mobile phones and electronic game consoles were some of the more sellable items. In France, year-end sales were not much better, as consumer confidence has been at its lowest point in over a decade. In relative terms, toys, footwear and timepieces were this year's holiday standouts. Consumer electronics and electrical appliances were also on the shopping list of many Christmas shoppers. But the demand for furniture and furnishing products was crippled by the sluggish housing market, while sales of clothing and jewellery were not encouraging.

UK

In the UK, Christmas sales are expected to have contracted by 1% and, at best, levelled off during this festive season, the worst for 30 years. Like the US, holiday sales, despite a VAT reduction and increasing numbers of Continental bargain hunters capitalising on a weak pound, were dragged by the financial crisis and bursting of the housing bubble, with big-ticket and home-related products taking a tumble. While cheaper products, including even lower-end jewellery and watches, were sought after, the growing trend of entertaining at home tended to support the sales of certain AV equipment, such as lower-priced flat-screen TVs, as well as video games. Likewise, small electronic and electrical items held up well, as did mobile phones, laptops and PDAs. Nonetheless, toy sales were static, with the credit crunch driving the market away from high-end toys and back to value-for-money basics, including many good old favourites like Barbie, Star Wars, Indiana Jones, Power Rangers and Elmo. For their part, demand for clothing and footwear was lukewarm, despite the early arrival of colder and much wetter weather than last year.

(iii) Japan - Faltering Year-end Sales

Despite the government's stopgap measures and retailers' promotional efforts, year-end sales in Japan, though not much affected directly by the global financial crisis, were in the doldrums. While the custom of gift-giving remained, consumers cut back their Christmas spending as the economic downturn has taken its toll. Apparently, growing anxiety about job security has dampened consumer confidence, as the purchasing power of consumers was hampered by the decline in winter bonuses. Another negative development was the sharp appreciation of the yen, which served to encourage overseas travel and hence suppress year-end sales. Given their cautiousness, holiday shoppers generally opted for basics for year-end gifts and avoided extravagant items, tending to shift their purchases from department stores to discount stores to economise on expenses. In this setting, jewellery, watches and big-ticket household items did not perform well. Toys did not fare well either, although a few items, such as educational toys and video games, were better received. Sales of consumer electronics and electrical appliances were slow. Demand for clothing and footwear was further suppressed by the relatively warm weather.

(iv) Chinese Mainland - Fairly Solid Retail Performance

In the Chinese mainland, year-end sales were fairly solid, spurred by slower inflation, falling interest rates and discount sales. Yet economic moderation and the ensuing increase in unemployment, particularly in costal regions that have suffered much from dwindling exports, have cast a shadow on consumption. The sluggish stock and property markets have further weighed on consumer sentiment and spending. While those who got burned in the asset markets pared back their year-end shopping, most middle-class consumers were still capable of spending. Against this background, retail sales rose by 20.8% in November, and by 21.9% in the first 11 months of 2008. Although Christmas is not traditionally celebrated across the mainland, it has begun to catch on in the more advanced urban cities, as more and more retailers have put up Yuletide decorations, and undertaken related promotional activities. Feedback from TDC's network on the mainland showed that with the major exception of luxuries and high-end merchandise, robust retail sales were registered for most consumer products. This is notwithstanding the fact that such a pleasant showing might relate as well to the Lunar New Year a month away.

(v) Other Emerging Markets - Mixed Performances in Central and Eastern Europe and Latin America

Compared with Western Europe, consumer sentiment in Central and Eastern Europe seemed to be more optimistic, although Christmas sales results varied from one country to another. But with the looming economic difficulties, consumers were generally more conservative than last year. Like their counterparts in Western Europe, therefore, Christmas shoppers favoured hypermarkets, and discounts and promotions were required to boost sales. Market-wise, Russia, where the economy has been increasingly impaired by the global financial crisis and falling oil prices, year-end sales were still brisk, as consumers trimmed their spending on food and drink than on Christmas gifts. Likewise in Poland, consumers had yet to feel the pinch of the financial crisis, and they did not appear to have bought less than during the last few years. By contrast, sales in the Czech Republic and Hungary were less robust, with Christmas shoppers opting to spend in a more controlled manner. Product-wise, consumer electronics, not least flat-panel TVs, laptops, MP3 players and navigation systems, topped the list of favoured gifts. Toys were also in demand. While the market was still dominated by traditional toys, electronic toys and game consoles were more and more received.

As regards Latin America, the knock-on effect of the US financial crisis, characterised by increased financial costs and deterioration of expectations, tended to have blighted Christmas sales across the region. Aided by deep discounts and special promotions, however, some countries, notably Brazil and Chile, were able to show better year-end sales. On the other hand, retailers' promotional efforts were less effective in luring sales in Argentina and Mexico, where year-end sales seemed to have declined from last year's levels. Similar to the trends in the US and elsewhere, Christmas shoppers mostly preferred practical and long-lasting items rather than big-ticket items and luxuries, with prices being a major determinant for purchases. As it turned out, garments, footwear and toys did relatively well in Brazil and Chile, while consumer electronics, timepieces and jewellery were less sellable. As for Argentina and Mexico, most consumer products of interest to Hong Kong were likely to have shown lacklustre sales during this festive season.

II. Outlook for 2009

(i) US - Shrinking Consumer Outlays

Overshadowed by the lingering financial crisis, prospects for the US economy are bleak in the year ahead. Despite the pump-priming measures pledged by the new administration, complete recovery of the financial sector will be a long drawn-out process. Evidently, bank recapitalisation, leverage cutback and restoration of confidence will take considerable time. As credit problems persist, corrections of the housing market, underlined by dwindling sales and prices, will likely drag on for quite a while. Outside the financial and housing sectors, corporate profit and investment will also be undercut by tighter credits, faltering overseas demand compounded with a firm US dollar, as well as sustained retrenchment of the household sector. Not surprisingly, retail sales will remain feeble in 2009.

Already, the long-running consumption binge has subsided, with consumer confidence hitting an all-time low. Consumers, faced with tight credits, plunging home prices, tumbling investments, rising joblessness and sagging wage growth, are likely to increase their savings. Continued volatility of the stock market is also not conducive to consumption. While the US will remain a dismal market for Hong Kong exporters, the higher-end segment will be particularly affected, as the repercussions of the financial tsunami have even reached the very wealthy class. Increasing consumer cautiousness, on the other hand, will stimulate an appetite for basic products. Not surprisingly, the sales outlook for competitively priced products that are stylish, safe and environmentally friendly, an area where Hong Kong exporters excel, appears to be a bit more encouraging.

(ii) Western Europe - Abrupt Worsening of Growth Prospects

Across the Atlantic, the recent arrival of the financial tsunami has suddenly darkened the economic outlook for Western Europe. The EU's financial sector is plagued with significant exposure to the US, as well as the collapse of the housing bubble in member states like the UK and France, Spain and Ireland. The financial turmoil, along with tight credit conditions, severely dampens business and consumer sentiment. To compound problems, EU exports will be increasingly curtailed by the spreading of the financial tsunami to previously fast-growing European markets in the emerging world. The attendant cutbacks in business investment will spur unemployment, which will in turn invigorate consumer pessimism.

A slew of stimulus actions notwithstanding, recession will become a common sight across much of the EU. In Germany, which relies heavily on external demand to fuel economic growth, exports will be increasingly held back by slower expansion in its major markets. Despite stronger fundamentals, therefore, the German economy will take a beating. Italy, which is dependent on exports of more labour-intensive products, will likewise suffer from diminishing overseas demand, as well as intense competition from emerging suppliers. In France, where the economy depends more on domestic demand, growth outlook is tainted by its cooling property market. Even more so for the UK, growth momentum will be terribly dragged not only by its gloomy housing market, but also wobbles in the financial sector, which is the largest and most important among EU members.

By and large, the ongoing credit crunch, in tandem with the housing shock in several member states, will put a brake on consumer spending. Given increasing weakness in the job market, European consumers, who are also faced with falling home values and plummeting stock prices, are shying away from prolific consumption. Like the US, even the wealthy consumers are affected by the financial tsunami. In this context, the EU will become a listless market in 2009, and back-to-basics will be the catchphrase across Europe. Furthermore, the weakening of the euro amid the escalation of the financial crisis in Europe will erode the price competitiveness of Hong Kong exports. Yet competitively priced products that are safe and environmentally friendly should perform better.

(iii) Japan - Intensifying Contagious Effect

Despite a serious of stimulus packages, economic prospects for Japan do not look much better than the US and the EU. Exposure of Japan's financial sector to the US subprime market is limited, but its merchandise export sector is likely to be constrained by the global downturn and a strong yen. Given the grimmer external environment, business confidence becomes fragile, and corporate investment and hence employment will turn weaker. A sluggish job market and stagnant wages will put a cap on consumption, although the strong yen may facilitate imports of consumer goods. Even the affluent class is not immune from the ripples of the financial tsunami. Caution will thus become the buzzword for most Japanese shoppers, and retailers and importers are inclined to be more selective in the foreseeable future, sticking to sources that can offer quality goods at low prices. As such, competitively priced Hong Kong exports, which are safe and environmentally friendly as well, are expected to better survive the market's increased conservatism.

(iv) Chinese Mainland - A Pleasing Outlook

Given the headwinds from the developed economies, the mainland is likely to grapple with an economic slowdown and increasing unemployment. Yet it will remain in the spotlight in the world economic scene. While mainland exports will moderate amid cooling global demand, the government, endowed with the largest foreign reserves worldwide, is well poised to adopt stimulus measures to counteract the negative external shock. In particular, the government is expected to take bolder steps to stimulate domestic consumption, now targeted as a more important impetus to economic growth. Likely measures include more interest rate cuts, rising thresholds for personal income taxes, more subsidies for low-income families and farmers, encouragement to credit spending, as well as accelerating spending on health, education and pensions. Even with slower economic growth, the mainland thus holds the best promise among all major markets for consumer goods.

Indeed, sustained economic development, high savings ratio and a middle class of over 200 million inhabitants, alongside stimulative public policies, should lead to a huge demand for a wide array of consumer goods. As a result of the adjustments in the property and stock markets, some wealthy mainland consumers may recoil from lavish spending. Instead, they may be inclined to purchase Hong Kong's mid-end products. In the meantime, the new generation's growing penchant for stylish and trendy products may shore up the demand for quality Hong Kong products. Geographically, while coastal regions are more affected by the external shock, inner provinces, which are less export-dependent, will likely add a new dimension to Hong Kong suppliers. In addition, Hong Kong suppliers should target second- and third-tier cities that may benefit from the government's efforts to boost rural consumption, currently constituting around one third of total retail sales, although their demand is expected to focus on lower-end products. In reaching out to their potential customers across the border, Hong Kong suppliers should also note the changes of the mainland's distribution sector, such as the rising popularity of specialty stores, and formulate appropriate channel strategies accordingly.

(v) Other Emerging Markets - Still Some Welcome Outlets

Despite the contagious effect of the global financial crisis, there are still some welcome export outlets in other parts of the emerging world. In Central and Eastern Europe, while Hungary is burdened with high government and external debts, Poland and the Czech Republic, aided by their prudent fiscal policies, are less vulnerable to the current storm. Especially in Poland, massive EU-funded investment projects will prop up domestic demand, although the higher export dependency of the Czech Republic will make its economy more exposed to the slackening demand from Western Europe. Outside the EU, Russia, though hammered by a weak financial system and the prevailing softness of oil demand, will be able to take advantage of the accumulated wealth derived from high oil and commodity prices in the past years. In all likelihood, a large consumer market should enliven the prospects for Hong Kong's value-for-money products in the region.

In Latin America, economic growth will slow amid the sharp adjustments in commodity prices. Although the spillover effect of the US financial problems is not expected to be overly damaging due to the relatively sound economic fundamentals in the region, lulling US demand for Latin American exports will dent regional growth, particularly hurting nations with closer links with the US, notably Mexico. As the recent government seizure of public pension assets in Argentina has also caused heightened concerns over a hard landing of its economy, the business focus will be on Brazil and Chile, where relatively robust domestic consumption and a growing interest in trade with Asia will generate more opportunities for Hong Kong suppliers.