A survey last week by property consultant Jones Lang LaSalle shows retailers are still grappling with rising operating costs like rent and wages.
One key finding is that 60 percent of Hong Kong retailers expect their turnover to be better in 2007; last year 80 percent thought their turnover for 2006 would be better.
However the survey found that only 35 percent of retailers thought their profit margins would be better next year. Last year the figure for 2006 was 50 percent.
Despite this, 80 percent of retailers said they would add store numbers in 2007 with a majority, at 70 percent, still favoring Hong Kong as the place to open up shop.
According to Jones Lang LaSalle managing director Fung Kin-keung, there are ways to minimize the impact of rising costs.
In its survey, tenant mix topped the list of most important non-financial elements offered by the landlord to bring more business to retailers, followed by promotional activity.
Fung said local developers, who in general did well on both counts, are now sophisticated enough to test new concepts such as Kerry Properties' (0683) 1.1 million square feet MegaBox vertical shopping mall currently nearing completion in the former industrial area of Kowloon Bay.
For one thing, mall owners should not take things for granted after opening because a mall has a "life of its own," Fung said. "You can't throw it to one side after opening and leasing out and not look after it."
He said the positioning of a mall is an important part of its success and that has to change with the times, pointing to examples like Swire Pacific's (0019) Pacific Place in Admiralty and Festival Walk in Kowloon Tong.
One particular example is Citygate in Tung Chung with its 462,852 square feet of retail space.
Swire owns 20 percent of the mall adjacent to the MTR Corp's (0066) Tung Chung station.
Originally it was supposed to be a "neighborhood center" on the expectation that Tung Chung's population would increase. "But unfortunately the speed of the population increase was not as good as expected," Fung said.
With visitor traffic low and vacancy rates high, the mall then decided to reposition itself as an "outlet mall."
According to Swire Pacific's 2005 annual report, Citygate would act as an outlet mall for international brands.
A Swire Properties spokeswoman said that these included shoe brands such as Nike, fashion store Esprit, jeweler Mabelle and cosmetics store Body Shop.
"Now if you go to Citygate, it has changed a lot," Fung said.
He noted that Sun Hung Kai Properties (0016) was repositioning its World Trade Centre in Causeway Bay.
The company announced last June it would spend HK$200 million on a revamp that would allow annual leasing revenue to reach HK$160 million a year on completion in late 2008.
"Tenants expect things like this to be done," Fung said.
Promotion of the mall is another important thing landlords can do to bring in extra visitors, especially in the run- up to Christmas.
Developers such as Swire began their Christmas promotion campaigns at malls like Pacific Place at the end of last month.
Fung said the cost of promotions could be anywhere from a few million dollars to tens of millions of dollars, with some landlords setting a budget equivalent to two months' rent for the mall. "Why are owners willing to do this? Of course, tenants will pay a part of this money," Fung said.
In addition, typically landlords also get a turnover rent from revenues of the tenant so more visitors means more money for the landlord.
"That's why Hong Kong [mall] owners place so much emphasis on this promotion activity,"Fung said.
Retailers may also help themselves a bit. Fung said, going on the survey results, retailers are not fretting about falling business but are worried about smaller profit margins caused by obvious costs like rising rents and wages, and also to some extent, over- expansion of stores.
"If you look at the results of listed retailers, you can see their revenues increasing each year but their margin has not increased," Fung said.
Latest annual results from retailers like Mirabell International Holdings (1179), Sa Sa International Holdings (0178) and IT Limited (0999) show stagnant gross profit margins despite increasing turnover, as much as 26 percent over the year before in IT's case.
Tenants may consider expanding their product range to appeal to more potential buyers, Fung said, pointing to IT, which previously sold high-end goods but now has more mass-appeal products on offer.
Having a brand name also helps because this means the store need not be in a high-rent area like Central to be close to shoppers.