Deep Dive: Why Hong Kong’s small and medium-sized enterprises are struggling to survive

After eight years of business, Hong Kong restaurant owner Arthur Yeung has been forced to close his family business.

His Nebraska Steakhouse will close on November 10. The business has lost about HK$5 million since the Covid-19 pandemic began.

During its best years, it even served celebrities, such as Chow Yun-fat and Anthony Wong Chau-sang.

When the city ended pandemic restrictions last year, Yeung hoped customers would return. But things worsened as Hongkongers began travelling to mainland China to spend less on eating out and other activities.

“There have been many dead quiet nights without a single diner, especially in February after Lunar New Year and in June,” the 42-year-old said.

“The nearby streets look empty and lifeless with other eateries shutting down for good. I can’t bear to let go, but I am mentally and physically exhausted.”

His restaurant is one of many small and medium-sized enterprises (SMEs) that have closed in Hong Kong. A rising number of SMEs are struggling to stay open. Many of them do not have enough cash flow, and they have lost investors and customers.

A spokesman for financial consultant Pure Elite Advisor said many SMEs had cash-flow problems because they already had debts from the pandemic. Many of these business owners feel like the future will not get better.

But the recovery of SMEs is important for Hong Kong’s economy. This is because 360,000 SMEs make up more than 98 per cent of businesses in the city. They give jobs to 45 per cent of workers in the private sector.

The city’s economy grew by 3.3 per cent in the second quarter of 2024 compared to the same time last year. But there are other signs that times are still tough.

In May, 871 people filed for bankruptcy; this was the highest monthly number of bankruptcies in the past two years, according to official data. The first seven months of 2024 saw 5,279 bankruptcies; this was over a fifth more than in the same period last year.

Experts have shared some reasons SMEs are struggling. There have been more disagreements between the United States and China that affect businesses in Hong Kong. Interest rates are high. The property market is doing poorly in Hong Kong and on the mainland. Many people have left the city.

Businesses in retail, catering, manufacturing and construction are having the hardest time.
Staff writers

Question prompts:

1. What are the reasons Yeung had to close his restaurant?
(1) more Hongkongers spending across the border
(2) loss of customers because of the Covid-19 pandemic
(3) competition from larger restaurants
(4) not enough staff members

A. (1), (2) only
B. (1), (2), (3) only
C. (1), (2), (4) only
D. all of the above

2. List TWO problems affecting Hong Kong’s small and medium-sized enterprises and TWO possible reasons for them.

3. How important are SMEs to the city’s economy? Explain using News and Glossary.

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Question prompts:

1. List TWO details in the illustration that could explain why retail shops are closing.

2. What are the shops on the right and left of the closed store? Why do you think these stores are still surviving?

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• Traditional shops have been shutting; experiential stores, such as selfie shops and arcades, are taking over; and thousands of storefronts are empty

• People are spending less amid a struggling economy

Rickey Chan Chi-po, managing director of property agency Dorbo Shop, said he was alarmed by the persistent high vacancy rate of street-level shops in Hong Kong’s prime commercial areas.

These shops are ideal for attracting passers-by, so they used to be retailers’ top choice.

But the number of monthly transactions to rent street-level shops was at its worst in nearly three decades, he noted. Despite rents coming down by 70 per cent from the peak, he said there were few takers.

There were only about 70 sales transactions each month for such ground-level properties from January to August, merely a tenth of those done during the peak years of 2010 to 2013.

“The writing is on the wall for the retail industry, given the high vacancy rate,” he said.

Chan added that some landlords now preferred to rent their shops in short-term contracts to cover their property management expenses. Short-term rentals were typically only 20 per cent of regular rates. This led to the rise of claw-machine arcades and selfie shops that require minimal investment.

Argyle Centre, a shopping centre in a prime spot, has no fewer than five claw-machine arcades and six selfie shops. These “experiential stores” are taking over given the retail industry’s struggles.

The changes in Hong Kong’s retail scene have hit home with Michael Tien Puk-sun, who is a lawmaker and founder of the G2000 chain of casual-wear shops.

“Those shops are operating at a loss, so I’ve decided to close them,” he said.

He added he was planning to gradually close a third of the brand’s 40 stores from this year as landlords were reluctant to bring down rents by 20 to 30 per cent.

Tien said that the city had been affected by the decline in visitors, particularly from mainland China. The only hope lay in innovation and lower rents for physical stores.

Vera Yuen Wing-han, a lecturer at the University of Hong Kong’s business school, said the trends of online shopping and going across the border to shop and eat contributed to the closure of the city’s shops.

Yuen pointed out another reason for the retail crisis: the recent wave of emigration greatly affected the purchasing power of residents. Most of those who left were from middle-class families with strong purchasing power.

Experts point to a wide range of solutions, including government aid and stimulus measures. They say that SMEs will recover if they restructure, improve their grasp of rising trends and make better use of technology such as e-commerce.

Danny Lau Tat-pong, honorary chairman of the Hong Kong SME Association, said: “The core issue is a lack of people: investors, talent, expatriates and locals. The government should think of ways to lure them back.”
Staff writers

Question prompts:

1. Why did Chan say that “the writing is on the wall” for the city’s retail industry?

2. Identify TWO factors mentioned in Issue that are affecting Hong Kong’s retail scene.

3. What are THREE ways that landlords and the government can support the city’s SMEs and address the high vacancy rates of street-level shops in prime commercial areas? Explain using News, Issue and your own knowledge.

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Question prompts:

1. What is the shop in the photo? Use Issue to explain ONE reason these stores are popular among landlords at the moment.

2. To what extent do you believe Hong Kong’s retail industry will continue to struggle? Explain.

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• small and medium-sized enterprises (SMEs): businesses that have less money and workers compared to large corporations

• cash flow: the movement of money in and out of a company. It accounts for revenue, spending and investments. Positive cash flow means that a company is running well and will survive tough times.

• experiential stores: retail spaces designed to provide customers with new experiences, such as shops for taking photos and arcades where people play for a chance at winning prizes from claw machines

• e-commerce: the online buying and selling of goods and services, facilitated through digital platforms

News
1. A
2. They face problems with cash flow because many already had debts from the pandemic. / They have lost of investors because of many people leaving the city. / They have lost patrons because many Hongkongers are going to the mainland to eat out. (accept any reasonable answers)
3. Their ability to recover is crucial for Hong Kong’s economic future. This is because SMEs make up more than 98 per cent of business establishments in the city. They provide jobs for 45 per cent of workers in the private sector. Thus, SMEs are the most important part of Hong Kong’s economy.

Graphic
1. rents are high / there is an empty street with no customers
2. It looks like a claw-machine arcade and a camera shop. These stores use cameras and don’t have employees, so they survive for longer. (accept all reasonable answers)

Issue
1. The number of monthly transactions to rent street-level shops was at its worst in nearly three decades. Even as rents have been lowered, very few businesses are opening there. There were only about 70 sales transactions each month for such ground-level properties from January to August, merely a tenth of those done during the peak years of 2010 to 2013.
2. Fewer visitors from mainland China are coming to shop and spend in Hong Kong. / Many of the city’s middle-class families have left, so there are fewer people who have enough extra money to spend at these shops. / More people are shopping online. / Landlords are not lowering the rent by enough to help businesses survive. (any two)
3. To aid the recovery of Hong Kong’s SMEs and prevent further closures, the government could give financial assistance to these small businesses or ask banks to give them more time to pay back their debts. / Authorities could encourage landlords to reduce rents by 20 to 30 per cent to make it more feasible for SMEs to survive. / Officials could supporting SMEs in adopting technology to can help them save costs, reach more customers and adapt to changing consumer behaviours. /The government can also implement financial aid and stimulus measures aimed at supporting SMEs. Encouraging local consumption through promotional campaigns can increase foot traffic in retail areas. Furthermore, efforts to attract tourists and retain local talent, including expatriates, will be vital for revitalising the retail landscape. (accept all reasonable answers)

Photo
1. This is a claw-machine arcade. Some landlords now prefer to rent their shops in short-term contracts to cover their property management expenses. Claw-machine arcades are more suited to these short-term rentals since they require minimal investment.
2. I strongly believe that Hong Kong’s retail industry is likely to continue struggling significantly due to several persistent challenges. The high vacancy rates of street-level shops in prime commercial areas indicate a substantial decline in retail activity. Despite rents dropping by 70 per cent from peak levels in some places, the low number of monthly transactions reflects the ongoing difficulties retailers face in attracting customers, particularly as local consumption power declines and many residents opt to shop in mainland China or online. The wave of emigration has further diminished the consumer base. Without significant intervention – such as government aid, innovative business models, and incentives to attract both locals and tourists – the retail industry may struggle to recover fully in the near future. The overall sentiment of pessimism among retailers and experts also points to a challenging road ahead. (accept all reasonable answers)