Overview

• Market-wise, sales increases were recorded for the US and the major EU markets. In Asia, retail performance of the mainland was encouraging, while Japan also showed stronger year-end sales.
  
  
• Product-wise, consumer electronics, particularly flat-panel TVs and MP3 players, were a big hit. Video games were another hot seller, but clothing sales were hampered by the mild weather.
  
  
• Next year, consumption in the US will grow at a slower pace. Spending in the EU and Japan will also moderate a tad. However, sturdy expansion should take hold on the mainland.

Reports from TDC's branch offices indicate generally good Christmas sales results in Hong Kong's major overseas markets. In the US, sales were below the good gains made at the start of the festive season, but retailers still managed to post a fairly solid increase, helped by a last-minute flurry. In the EU, better Christmas sales over last year were recorded for the major markets, with the UK staging the best performance and Germany showing a modest growth. Improving sentiment in Japan also touched off a moderate expansion in year-end sales. In the Chinese mainland, where the consumption atmosphere has remained favourable, year-end sales were heartening, aided by the rising popularity of Christmas there.

In terms of products, different categories experienced mixed fortunes. As in past years, consumer electronics, especially flat-panel TVs and digital music players, were this year's holiday standout across-the-board. Video game consoles, led by Nintendo's Wii, were another popular buy this Christmas worldwide, while TMX Elmo appeared to be a must-have item in the US. For jewellery and watches, holiday sales were facilitated by the sustained demand for up-scale merchandise, especially in the US. As for clothing, the spending spree of high-income consumers also stimulated an appetite for high-end apparel. But mild temperatures in virtually all major markets put a damper on overall clothing sales.

Broadly speaking, the retail outlook for overseas markets in 2007 is expected to follow the pattern of Christmas sales in 2006. In the US, economic growth will moderate. A sustained adjustment of the housing market will affect consumption, although US shoppers have largely remained confident. In the EU, economic recovery should remain on track. Yet ongoing fiscal consolidation will likely hamper consumption. Likewise in Japan, activity will likely take a breather, and consumers are expected to remain cautious amid anticipated tax increases and rising social contributions. Regarding the mainland, retail sales should further improve on the back of sustained economic vigour and a favourable consumption environment.

(i) US - Fairly Solid Expansion Amid Aggressive Promotions

Although sales results for the entire holiday season will not be available until retailers announce their official December sales figures in January, preliminary indications suggest that Christmas sales in the US were below the good gains made at the start of the festive season. Due to widespread discounts, sales started off strongly after Thanksgiving, but then slowed down as holiday shoppers adopted a wait-and-see approach to buying. Still holiday sales, helped by a last-minute shopping spree amid even more aggressive promotions, are estimated to have increased by 4-5% from 2005, a stellar year for US retailers when sales expanded by more than 6%. Evidently, a slightly longer Thanksgiving-to-Christmas period, which lasted for 31 days against 30 days last year, was a positive factor, whereas a Christmas day on Monday had allowed shoppers a full weekend of last-minute gift purchases. An influx of tourists, particularly from Europe, also shored up Christmas sales in the US.

Despite slackening of the housing market, fundamentals for consumer spending have remained strong in the US. Any housing-related fallout on consumption has not been substantial so far, chiefly due to low joblessness, steady income growth, respite of oil prices and windfalls from the stock market. But while US shoppers loosened their purse strings, the prevailing economic slowdown has clouded their minds. Indeed, fuel costs have remained high, and lower-income consumers were the most affected. Not surprisingly, they tended to keep spending tight, and were largely selective about their purchases. For these cost-conscious shoppers, procrastinated holiday buying has evolved into a usual practice, in the hope of doing better on prices. To attract procrastinated shoppers as Christmas drew near, retailers embarked on a series of deep discounts and promotions, to an extent seemingly more aggressive than those of last year. One major reason for the extensive discounts this season was the fact that retailers' holiday sales plans were mostly worked out and implemented when oil prices were much higher.

As caution was generally the buzzword, discounters, though with declining traffic, continued to be the most favoured holiday shopping location. Department stores were also a popular shopping venue. But the major bright spots were luxury stores and e-tailers. The good showing of luxury stores was a testament to the sustained demand from higher-income shoppers, who benefited most from the booming stock market but were less affected by high energy prices. Meanwhile, e-tailers registered an almost 30% increase in holiday business, as consumers took advantage of lower prices and free delivery, which have become more important in times of high energy costs. Further increase in the popularity of gift certificates was another prominent development. The use of gift certificates effectively suppressed Christmas sales results, since revenue would not be counted until the certificates have been redeemed. On a brighter note, gift certificate holders would often buy merchandise worth more than the certificate value. It is estimated that sales of gift certificates would expand by over 30% this Christmas.

Product-wise, consumer electronics continued to be the star performer. Topping the shopping list of US consumers were flat-panel TVs and handheld digital audio players, whereas DVD players, digital cameras, mobile phones and notebook computers were popular too. Another hot seller was video game consoles, led by Nintendo's Wii and Sony's PS3. Other than game consoles, TMX Elmo appeared to be a must-have toy item. To a lesser extent, certain dolls and licensed toys, such as Barbie, Bratz and Dora the Explorer, also sold well, as did educational toys, robots, trucks and cars, and children's MP3 players. For jewellery, sales were facilitated by the sustained demand for up-scale merchandise. For the same reason, performance of high-end watches was satisfactory, while holiday sales of clocks were mainly driven by newly developed gadgets and novelty items. The spending binge of high-income shoppers further propped up sales of high-end apparel. Nonetheless, mild weather throughout most part of the US did not inspire shoppers to snap up winter clothes during this festive season.

(ii) Europe - Generally Firmer Festive Spending

Compared with their US counterparts, European consumers continued to be more conservative during this festive season, although the EU economy has been on a moderate expansion path, and better Christmas sales over last year were recorded for the major markets in the region. Generally speaking, falling unemployment in the EU, while remaining at a high level, has facilitated consumption. Yet oil prices, notwithstanding their recent relapse, have fuelled inflationary pressures, leading to higher interest rates and in turn weighing on consumer sentiment. Stronger European currencies also enticed EU shoppers to buy abroad, although surging tourists from Asia, especially China, have somewhat bolstered retail sales in Europe.

To no one's surprise, most EU retailers relied heavily on discounts and promotions to lure Christmas shoppers, despite the fact that luxury stores tended to display better performance. Capitalising on the focus on price and convenience, along with the rising popularity of high-speed Internet connections, EU's e-tailers evidently enjoyed solid sales, particularly in Germany, France and the UK, which have the largest number of broadband households in the EU. In another development, gift certificates continued to flourish across many EU markets this festive season, mimicking the prevailing trend in the US.

Germany

Reversing the lacklustre performance over the past years, Christmas sales in Germany are estimated to have increased by 2% from last year's level. Evidently, a resurgent German economy, signified by a pickup in employment and improving consumer confidence, became the major booster to consumption. A slew of related developments, including not only relaxed rules on opening times of retailers and recent union pressure for wage rises, but more importantly, spending in advance of a three-point hike in VAT as of January 2007, also enlivened year-end sales. Once again, consumer electronics, such as flat-screen TVs, digital cameras, digital music players, DVD players and GPS navigation systems, topped the list of Christmas gifts. Likewise, electronic games and educational toys were sought after, whereas board games, model trains, plush toys and doll sets remained traditional year-end gifts. Even for high-priced items like fine jewellery and branded watches, sales were encouraging during this festive season. Sales of clothing, however, were dragged down by relatively mild temperatures.

France and Italy

Christmas sales also performed fairly well in France and Italy vis-à-vis last year. Especially in the case of France, festive spending was buttressed by declining joblessness and increasing incomes. For its part, the export-led growth of the Italian economy has fed through into the domestic sector. While there was no evidence of profligate consumption, shoppers in the two countries were in better mood to spend during this holiday season. As it turned out, most products managed to exhibit better sales. Similar to the trends in the US and other EU member states, consumer electronics remained this year's holiday standout, exemplified by the solid performance of a few electronics gadgets like flat-panel TVs, digital cameras, digital audio players, as well as mobile phones. Regarding toys, video games were well received. For clothing, sales were uninspiring in France, but fared better in Italy. As for jewellery and timepieces, demand in France was sturdy.

UK

Among EU member states, Christmas sales in the UK were one bright spot, with festive spending expected to have increased by around 3-4%, the best performance among the four largest EU markets. While continued low unemployment and a firming of house prices served to prop up consumer spending, sentiment was affected by interest rate hikes and the unseasonably warm and wet weather. In particular, the unfavourable climatic factor has led to large discounts on winter clothes, and hence better volume sales for many apparel retailers. More importantly, festive spending was stoked by the sustained popularity of electronic gadgets, particularly flat-screen TVs, home cinema products, digital music players, mobile phones and laptop computers. Toys and games were another hot selling item, with electronic games, especially Nintendo's Wii consoles, as well as educational toys and classic toys like Barbie, posting remarkable gains. Jewellery also did well. Sales of timepieces, on the other hand, were less robust, due in part to a lack of new designs.

(iii) Japan - Healthier Year-end Sales

In line with the continued resurgence of the Japanese economy, year-end sales in Japan are expected to have increased modestly. Sentiment among Japanese corporations has improved, while rising corporate profits provided a boost to job creation and personal incomes. Given a rise in winter bonuses and better job prospects, consumers were more willing to spend money during Christmas, a major year-end occasion for gift exchange in the country, with higher-income customers having a penchant for luxury items. Like the US and Europe, consumer electronics, such as flat-panel TVs and portable music players, were a big hit. Deterred by warm weather, clothing sales were soft, despite better showing of expensive items. For toys, video games, shored up by the launch of Wii and PS3, were a popular buy, although music toys and educational toys also sold well. As for watches and clocks, better performance was registered for imported brands, whereas radio-controlled and solar timepieces were other key drivers of sales. As regards jewellery, sales were generally satisfactory, notwithstanding a slight drop in the demand for platinum due to high material prices.

(iv) Chinese Mainland - Robust Retail Performance

In the Chinese mainland, year-end sales were brisk. Despite the tightening measures to cool down investment, economic fundamentals have remained sound. To some extent, the over 5% appreciation of the RMB against the US dollar since the exchange reform in July 2005 has whet an appetite for imports. Amid the favourable consumption atmosphere, retail sales expanded by almost 14% during January-November, and are projected to grow at a similar pace in December. While Christmas was not traditionally celebrated across the mainland, it has begun to catch on in the more sophisticated urban cities. Evidently, more and more retailers have put up Yuletide decorations, and undertaken related promotional activities. Feedback from TDC's network on the mainland showed that Christmas sales promotions have somewhat encouraged consumption, although that might relate as well to the Lunar New Year a month or so away. Most consumer products, including consumer electronics, garments, footwear and jewellery, were among favoured gift items. A growing number of consumers also thronged Hong Kong for holiday shopping sprees here.

II. Outlook for 2007

(i) US - On a Modest Growth Trajectory

The US economy, which has moderated recently, will continue its transition to a slower rate of expansion in 2007, probably driven by a sustained consolidation of the housing market. To be sure, the lingering impact of interest rate hikes will remain a damper on the housing market, and in turn further weigh on sentiment and consumption. According to the Fed, the amount of cash that homeowners draw from their home equity has declined by over 40% since the third quarter of 2005 and, as a share of after-tax incomes, such amount has shrunk by nearly half to 5%. While Christmas sales results suggest that US shoppers are still generally confident, overall consumption has already lost some of its earlier steam, and the long-running spending spree will likely slow further in the course of 2007.

Given the lacklustre housing market, US consumers are finding it increasingly difficult to tap the equity in their properties. Perhaps, as the housing decline quickens, even the more profligate consumers will tighten their purse strings. Any resurgence of oil prices will only add to the woe, especially in the case of lower-income shoppers, who seem to be more vulnerable to high fuel prices and are inclined to buy competitively priced products. In any event, higher-income consumers will likely sustain their spending binge for value-for-money luxury items. These items are not always expensive but are instead small indulgences. As such, Hong Kong exporters should opt for product strategies with a balanced mix of price and quality.

(ii) Europe - A More Sustainable Pace of Expansion

In the EU, a gradual economic recovery is finally underway. While the prevailing revival is expected to remain on track, the juxtaposition of fiscal deficit reduction, slower foreign demand, rising interest rates, as well as a strengthening euro amid narrower interest rate differentials across the Atlantic, may constrain growth in 2007. Within the euro zone, consumer demand in Germany will be severely hamstrung by the 3-percentage point increase in VAT in January 2007. Fiscal consolidation will likewise cast a shadow over the growth outlook in Italy, where the new government is expected to bring in measures to tackle its budgetary problems. In contrast, growth in France will likely be stronger, with consumption buttressed by sustained job creation and income expansion. Outside the euro zone, the prospects of a stable British economy seem to be staying. Barring a drastic adjustment in house prices, which have rebounded following a period of stabilisation, consumer spending should remain steady against the background of a relatively low unemployment rate within the EU.

Overall, the continued recovery in the EU, though slowing somewhat, should lead to steady consumption and sustained demand for imports. To some extent, the sustained economic rebound will likely continue to whet the appetite for higher-end products, such as luxury items with prestige European brands sought after by higher-income earners. European buyers, in the main, tend to look for sources that can offer valued-added products at competitive prices. As value-for-money continues to be the catchphrase, the prospects for quality but competitively priced Hong Kong products should remain steady, especially with the recent appreciation of the euro, which serves to maintain the price competitiveness of Hong Kong exports, although the currency is unlikely to rise at a very fast pace next year.

(iii) Japan - Continued but Tepid Revival

Although there are signs that the Japanese economy is heading for a steady and sustainable recovery, growth should decelerate next year, given the moderation of demand from China, aggravated by weaker appetite in the US and an end to Japan's zero-interest-rate policy. On the consumer front, a sustained improvement in the labour market, coupled with the ensuing wage increases, should provide the much-needed stimulus to spending. Probably, the prevailing recovery, albeit slowing a tad, would continue to whet an appetite for higher-end products chiefly dominated by European and American brands. Amid concerns over anticipated tax increases and rising social contributions, however, Japanese buyers will become more conservative, and tend to stick to sources that can offer higher value-added products at competitive prices. As such, competitively priced Hong Kong exports are expected to further benefit from the continued adherence to value-for-money. Additionally, a stable yen, due to a slow monetary tightening in Japan and the peaking of interest rates in the US, will also help.

(iv) Chinese Mainland - Promising Prospects

In 2007, the mainland economy will likely maintain a robust pace of growth. As the tightening measures only affect the overheated sectors, the direct impact on Hong Kong exports will unlikely be substantial. To be sure, sturdy consumption on the mainland will provide a tonic for Hong Kong exports. Consumer demand is expected to remain strong, spurred partly by government polices to encourage spending, such as introduction of minimum wages, salary reform for civil servants, expansion of the rural consumption market, and increases in welfare expenditure. In a wider context, rapid urbanisation, estimated at a level of almost 43%, as well as growth of a prosperous middle class, consisting of over 200 million inhabitants, continue apace, creating enormous demand for a wide range of sophisticated consumer goods.

For Hong Kong companies interested in exploring this lucrative market, keeping abreast of the latest developments is of vital importance. For one thing, Hong Kong's domestic exports to the mainland continue to be facilitated by CEPA, under which all products of Hong Kong origin have become tariff-free. For another, continued revaluation of the RMB will enable products produced in Hong Kong, as well as other countries, to be sold to the mainland more easily. In reaching out to their potential customers across the border, Hong Kong suppliers should note that the mainland is a diverse market, making it necessary to take into account the unique consumption patterns and preferences of different regions when formulating marketing strategies. Alternatively, they could serve their mainland customers in Hong Kong, which is increasingly a shopping centre and display showcase for high-income mainlanders.