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Whether they sell luxury watches from Switzerland or farm hens from Mississippi, a surprising concern is occupying a number of corporate executives this earnings season: Hong Kong’s protests.
An AI model trained by Bloomberg News to scour thousands of quarterly analyst calls and investor updates revealed that the city’s pro-democracy demonstrations, which show few signs of resolution after five months, are pressuring companies that sell all kinds of consumer goods.
Of some 2,500 transcripts of calls held during the month of October, the AI model identified dozens of instances of protest-related discussion among businesses ranging from skincare products to talent recruitment.
Zero consumption tax
The far-reaching impact of the protests speaks to the out-sized role that Hong Kong has hitherto played as a thoroughfare for Chinese shoppers. Buyers have flocked to the city for its zero consumption tax and variety of global imports, whether luxury handbags or infant formula. Now, the protests are accelerating a shift away from Hong Kong by global businesses as Chinese travellers -- the city’s biggest tourist segment -- stay away.
“Hong Kong has been extremely challenging [and] tourism has fallen off a cliff,” said Andre Hoffman, vice chairman of luxury skincare company L’Occitane, in a call on Oct. 22. “But we see very strong growth from China, Korea and Macau, so I think some of that business is being transferred to other countries in the region.”
Whatever the outcome of the protests, the blow to Hong Kong’s role as a consumption hub for the region is likely to be lasting, some executives said. The city’s economy has already been plunged into a technical recession and full-year growth is very likely to be negative.
Hong Kong’s business outlook continued to drop in October, with the purchasing manager’s index for the whole economy falling to 39.3, according to IHS Markit. The reading was the lowest since the depths of the financial crisis in November 2008.
“Business did not just arrive back at the doors as soon as the protest finished,” Paul Edgecliffe-Johnson, chief financial officer at InterContinental Hotels Group plc. said in a call on October 18, referring to the Occupy Central protests of 2014. Those protests are widely seen as the precursor to this year’s movement.
Retail sales
Retailers and hotel operators have been hardest-hit as clashes between protesters and police bring the city to a near-halt every weekend. Retail sales by value fell 18.3% in September, compared with a decline of 22.9% in August. Hotel occupancy rates were 63% in September, 23 percentage points below the same period the year before, according to data from the Hong Kong Tourism Board.
The protests in Hong Kong “impacted traffic and caused some of our stores to close temporarily,” Harmit J Singh, chief financial officer of denim company Levi Strauss & Co, told analysts in a call on October 8. Crocs Inc, a maker of rubber-like shoes, said its stores in the city were “significantly impacted by everything that’s going on there,” Andrew Rees, the company’s president and chief executive officer, told analysts in a call on October 30.
Sales of products like medicine, baby food and other daily necessities have been hit by a drop in Chinese tourists who come to Hong Kong to buy goods for resale in the mainland -- one of the many causes which demonstrators have taken up. Mainland arrivals to Hong Kong were down 35% in September compared with the same month a year earlier. Industries away from the consumer front lines have also felt the heat. Recruitment consultancy PageGroup PLC said on October 8 that social unrest in the city was having an impact on its clients’ confidence.
US exports of broiler chickens have also been affected. “We have seen a little decline [in overall exports] to Hong Kong and I think some of the unrest there has been a big part of that,” Eric Scholer, vice president of Express Markets Analytics, told delegates at an investor day on October 18 hosted by Sanderson Farms Inc, a Laurel, Mississippi-headquartered food producer.
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