Hong Kong’s small but colourful businesses can lead tourism recovery

Big shift from luxury tourism means glitzy retail outlets in prestigious locations simply won’t deliver the tourist dollars they once did

Damien Green

Published: 5:30am, 24 Jun 2024

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To start winning again in tourism, Hong Kong needs to face a new normal in which lower-cost business models have the advantage in attracting leisure travellers. A heavier emphasis on business travel, as opposed to luxury travel, may yield better results for the city too.

The big shift away from luxury tourism is a trend that our city’s prevailing high-cost business models are not geared to profitably harness.

Specifically, luxury retail outlets in prestigious locations are simply not going to deliver the sustained economic benefit they once did. This is not a declaration that the luxury travel segment is over in Hong Kong. It remains important – but it’s increasingly apparent that the city cannot rely on luxury the way it used to.

Fortunately, Hong Kong has the economic foundations in place to foster a thriving parallel low-cost tourism ecosystem, represented by its 362,000 small to medium-sized enterprises (SMEs).

SMEs have been identified as “an important driving force in Hong Kong’s economic development” by the city’s Trade and Industry Department for good reason. Today, the segment represents 45 per cent of private-sector employment in the city and accounts for 99 per cent of all its businesses.

Importantly, in terms of physical distribution and cultural authenticity, Hong Kong SMEs span every corner of the city, from the tourism hotspots to the bustling neighbourhoods.

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Amid the stories of economic woe in Hong Kong, it needs to be recognised that visitor arrivals have recovered dramatically since 2020, rising by 852 per cent to a healthy 34 million last year. And the number continues to improve, with the first five months of this year seeing an increase in arrivals of 78 per cent year on year.

But Hong Kong’s mainland visitors have changed, driven by a new and widespread desire for thrifty urban cultural experiences strongly influenced by the burgeoning Xiaohongshu social media platform.

These days, tourists flocking to the city tend to be urban adventurers looking for iconic street scenes, locales and experiences. And occupying these locales are Hong Kong’s SMEs, embedded in communities and reflecting the city’s unique culture. These SMEs are ready to do business and generate value.

Connecting the products and services provided by the vast number of SMEs with the needs of the abundant new wave of mainland tourists will surely help Hong Kong find a new vein of economic opportunity.

Consider the extraordinary number of independent local restaurants and cafes, fashion and beauty shops and niche-interest vendors that populate the districts of Kowloon, such as in Kwun Tong and Kowloon City, just waiting to be discovered.

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These local, mostly owner-operated businesses do not need to be aggregated into shopping malls or curated into thematic complexes and districts. They can be found right where they are – by tourists seeking that very experience of discovery.

The power of an SME-led recovery in tourism is that these businesses generally have lower start-up and operating costs, and are able to adjust much more quickly. And one of Hong Kong’s greatest economic assets is the enterprising and inherently commercial nature of the local culture and its small business operators. I have every confidence that we will see results if we put this to work to help solve the challenge of finding value from changing tourism trends.

The government clearly sees the importance of the SME sector and is providing support through funding schemes and a “one-stop” support platform launched recently by the Monetary Authority that is focused on easing financing and credit challenges. Beyond this is an opportunity to rethink how tourism is promoted in the city to give SMEs a fighting chance to engage with the new wave of experience-hungry tourists.

The latest official snapshot of tourism statistics further illustrate the need to develop a thriving parallel low-cost inbound tourism segment. While Hong Kong’s visitor arrivals have recovered, they remain dramatically lower than the heady pre-pandemic days of 2018, when the city welcomed a record 65.1 million visitors.

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Notwithstanding the strong growth rates since 2020, the statistics tell a story of how Hong Kong’s hotel room capacity has not been reined in despite the volatility of the past few years. Consequently, the hotel industry’s cost base clearly does not match the new normal.

Hotel rooms have increased by 14 per cent since 2017 and visitor arrivals are down by 42 per cent – yet the average room price remains much the same. The clear oversupply of rooms and inflexibility in price suggests a major financial dilemma for the large operators constrained by property-centric high-cost business models.

The common belief is that, together with the reduction in visitors, the average length of stay now and how much tourists are spending are the major problems. The statistics show otherwise. The average length of stay in Hong Kong has increased by 13 per cent, both for mainland visitors and overall. Also, per capita spending for overnight visitors has increased since 2017, by 8 per cent. These are positive signs that should guide the city’s tourism strategy.

Finally, with over 90 per cent of Hong Kong’s gross domestic product coming from services and about 20 per cent from the financing and insurance sector, business travel is a natural strength for the city.

Hong Kong is working to expand its position as an international finance centre and domicile for global financial groups. It follows that there is an opportunity for government departments and the private sector to work hand in hand to leverage business travel as a high-yield hedge on luxury tourism.

Damien Green is a Hong Kong based financial services executive. He has served as president and CEO of Manulife Asia and before that was the CEO of Manulife Hong Kong and Macau