Overview

• Market-wise, modest holiday sales increases were recorded for the US, France, Italy and the UK. In Asia, retail performance of the mainland was encouraging, while Japan showed tepid year-end sales.
  
  
• Product-wise, consumer electronics and video games were big hits. High-end jewellery and timepieces were other standouts. Demand for seasonal clothes has also been lifted by a cold snap in the US and Europe.
  
  
• In 2008, consumption in the US will slacken further. Likewise, spending in the EU and, more notably, Japan will moderate a tad. Yet sturdy expansion should take hold on the mainland.

Reports from TDC's branch offices indicated mixed results for Christmas sales in Hong Kong's major overseas markets. In the US, sales were below the good gains made at the start of the festive season, with retailers posting a modest increase despite heavy promotions. In the EU, holiday spending was cautious. But better performances were still recorded for the UK, France and Italy, and sales in Germany roughly managed to match last year's level. The continued economic revival in Japan also touched off a moderate expansion in year-end sales. On 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, such as flat-panel TVs, portable media players and mobile phones, were this year's hot sellers across the board. Video game consoles, led by Nintendo's Wii and Sony's PS3, were another popular buy this Christmas worldwide, while sales of traditional toys were largely satisfactory, as the recent recalls only had limited impact. For jewellery and watches, holiday sales were somewhat facilitated by the sustained demand for up-scale merchandise. With regard to clothing, performance was not particularly remarkable, although year-end sales of warm clothes received a boost from the cold spell on both sides of the Atlantic.

By and large, this portrait of Christmas sales in 2007 should shape the retail outlook for overseas markets in 2008. In the US, economic activity will likely take a breather amid lingering housing corrections and the accompanying sub-prime fallout. The long-running consumption binge, already losing some of its earlier steam, is expected to slacken further. In Europe and Japan, sustained-but-slower economic growth should take hold next year, and a steady appetite from the EU and, to a lesser extent from Japan, will provide some buffer against the uninspiring demand from the US. Regarding the mainland, retail sales should further improve in 2008, as the government seeks to rely more on consumer spending as the growth driver.

I. 2007 Christmas Sales in Major Overseas Markets

(i) US - Modest Increase Despite Heavy Promotions

While sales results for the entire holiday season will not be available until retailers announce their official December sales figures in January, preliminary indications reveal that Christmas sales in the US were below the solid gains achieved at the beginning of the festive season. Sales got off on a high note after Thanksgiving amid retailers' aggressive tactics, not least bigger bargains and longer hours such as midnight openings, but then slowed at a pace more significant than the last few years. To be sure, retailers were faced with a rather difficult holiday season, as consumers have become more conservative in view of the weak housing market, harder-to-get credits, vicissitudes of Wall Street and still-high energy prices. Yet job and wage growth were major silver linings. A slightly longer Thanksgiving-to-Christmas period, which lasted for 32 days vis-à-vis 31 days last year, was another positive factor, whereas an influx of tourists, particularly from Europe, also facilitated sales in the US. On the whole, growth in holiday sales is estimated to have moderated to some 4%, the slowest rate in five years, despite a last-minute flurry.

Evidently, consumer confidence has been shaky, notwithstanding falling interest rates and measures to bail out homeowners. A contraction of the housing market and the resultant decline in home values have made shoppers feel less wealthy. Tighter credits have made it more difficult to buy big-ticket items. Vagaries of the stock market were not conducive to the mood for spending. And, elevated energy prices were squeezing wallets, with lower-income consumers being the most affected. While loosening their purse strings, they tended to keep spending tight, and hammer out shopping plans to clamour for steep discounts instead of buying on impulse. For these prudent shoppers, "buying procrastination" has become a usual practice, in the hope of doing better on prices. To lure procrastinating shoppers as Christmas drew near, retailers resorted to a string of deep discounts and heavy promotions, to an extent seemingly more aggressive than those of recent years, thus eroding profit margins.

Since prudence was generally the watchword, the phenomenon of shoppers "trading down" has been ubiquitous, and discounters were once again favoured over department stores, which were also outsmarted by luxury retailers benefiting from a sustained appetite of higher-income shoppers least threatened by the economic headwinds. Still the demand for lower-tiered luxury goods has softened somewhat, with only the most elite brands and expensive items likely to escape unscathed. Meanwhile, e-tailers registered an increase of around 20% in holiday business, given the proliferation of broadband connections and attraction of special promotions, plus the convenience of price comparison, which has become more important in the quest for value for money. In another development, the continued popularity of gift certificates has further encouraged the trend of procrastination, serving to depress sales results as revenue will not be counted until the certificates have been redeemed. On a brighter note, gift certificate holders often buy merchandise worth more than the certificate value. It is estimated that sales of gift certificates could have expanded by over 6% this season.

In the absence of must-have items, consumer electronics remained the biggest draw. Topping the shopping list of US consumers were flat-panel TVs, portable media players and mobile phones (e.g. Apple's iPod models and iPhone), whereas digital cameras, digital photo frames, notebook computers and GPS navigation systems were among other hot sellers. Electronic entertainment gear, led by Nintendo's Wii and Sony's PS3, was popular too. Other than game consoles and related software, robotic toys, educational toys and web-compatible toys also sold well, as did certain more traditional items like Barbie and Cookie Monster. It appeared that the recent recalls did not have much impact on sales, as most parents were inclined to buy some toys for their kids. To some extent, jewellery sales were shored up by the robust demand for up-scale merchandise. For the same reason, performance of luxury timepieces was satisfactory. The spending binge of high-income shoppers further stimulated the sales of high-end apparel, while a cold spell helped inspire shoppers to snap up winter clothes. Sales of home-related merchandise, on the other hand, were hampered by the lacklustre housing market.

(ii) EU - Still Cautious Festive Spending

Likewise across the Atlantic, festive spending in the EU was again cautious. Nonetheless, holiday shoppers did not overly tighten their holiday budget, as the EU economy has been stronger than for many years. For the EU as a whole, economic activity last year was the strongest in six years, and the growth momentum, though slowing a tad, has largely continued so far, with falling joblessness and the strength of the European currencies boosting its domestic consumption and import absorption power. Yet stronger European currencies enticed EU shoppers to buy abroad. Escalating oil prices, despite their recent relapse, have further triggered inflationary pressures. To a certain extent, rising prices have weakened the purchasing power of Christmas shoppers, while the spectre of higher interest rates and tighter credits in certain parts of the region have further weighed on consumer sentiment, although favourable exchange rate movements should lessen the adverse impact of high oil prices.

Not unexpectedly, most EU retailers relied on discounts and promotions to attract Christmas shoppers. The degree of dependence on such sales tactics, however, varied from country to country, and from retailer to retailer. For example, in Germany, where solid performance of the external sector has spilled over into the domestic front, price cuts were less intense. In terms of retailers, luxury stores tended to enjoy better sales, as sustained economic expansion has whetted an appetite for up-scale merchandise. E-tailers are another winner. Given the proliferation of broadband connections and a growing confidence in the reliability of online sales, EU's online holiday sales are estimated to have expanded by over 50%, with the UK and Germany leading the pack. Separately, gift certificates continued to flourish across many EU markets this festive season, mimicking the prevailing trend in the US.

Germany

In Germany, Christmas was none too uninspiring for retailers, with sales roughly matching the level of last year, when consumption was spurred by a rush into buying big-ticket items ahead of the 3% VAT hike from January 2007. In view of the largely constructive retail environment amid falling unemployment and rising wages, German retailers, though extending business hours, were not required to engage in excessive discounting. Product-wise, sales of consumer electronics, notably flat-screen TVs, portable media players, digital cameras, mobile phones and GPS navigation systems, were robust. Electronic game consoles were much sought after, whereas traditional toys like puzzles and board games remained favoured year-end presents. For apparel, demand for winter clothes was bolstered by the early cold winter, although overall clothing sales were only mediocre this holiday season. The performance of jewellery and watches, on the other hand, was satisfactory.

France and Italy

Christmas sales results were satisfactory in both France and Italy. In France, where domestic demand has been stronger, year-end sales increased slightly over last year. While the French president's measures to spur confidence and consumption have stimulated holiday sales, massive strikes were a main drag. For its part, the export-led growth of the Italian economy was hamstrung by moderating overseas demand but intensifying competition. Yet consumers did not appear to have cut back their festive spending, fuelled by widespread discounts during the holiday period. In addition to their modest rises in holiday sales, both markets also exhibited quite similar demand pattern. For instance, consumer electronics remained this year's holiday standout, exemplified by the solid performance of a few electronic gadgets such as flat-panel TVs, portable media players, mobile phones and computers. High-end jewellery and watches were among other favoured gifts. However, garments and toys were more sought after in France, but fared less well in Italy.

UK

Among EU member states, Christmas sales in the UK remained one bright spot, with festive spending estimated to have increased by around 2.5%, the best showing among the four largest EU economies. Yet such growth was already slower than last year's, hindered by slackening property prices and tighter credits despite a recent interest rate cut. With falling consumer confidence and spending power, UK retailers have embarked on a wide array of discounting and promotional activities to spark holiday sales. As it turned out, most products, with the major exceptions of big-ticket and home-related items, managed to exhibit better sales. To a large extent, festive spending was stoked by the sustained popularity of electronic gadgets like flat-panel TVs, portable media players, digital cameras, digital photo frames, mobile phones and laptops. Electronic game consoles were another hot-selling item, while other toys and games posted modest gains. Thanks to a healthy appetite for luxury goods, high-end jewellery and timepieces again did well. Though not particularly remarkable, clothing sales were helped by a conducive climatic factor.

(iii) Japan - Tepid Year-end Sales

In tandem with the continued resurgence of the Japanese economy, which has remained fairly strong by recent standards, year-end sales in the country are expected to have increased modestly. Given a small rise in winter bonuses, Japanese consumers, though staying largely timid, were generally willing to spend money during Christmas, a major year-end occasion for gift exchange in Japan, with higher-income customers having a penchant for luxury items. Like the US and the EU, consumer electronics, such as mobile phones and portable media players, were a hit this year. Electronic entertainment gear, with Wii and PS3 being the key drivers of sales, was another popular buy. But apart from game consoles, there were no other must-have items on the Japanese toy market. For timepieces, shoppers appeared to have a keen interest in European brand watches. As for jewelley, performance was less encouraging, notwithstanding a strong appetite for certain high-end items. As regards clothing, sales were facilitated by the recent chilly weather.

(iv) Chinese Mainland - Inspiring Retail Performance

Despite the macro-tightening measures and recent adjustments of the red-hot stock market, economic fundamentals on the mainland have remained sound. In particular, consumer spending has been revved up by better wages and increased welfare payments, although the tax on deposit interests has been reduced, and interest rates have been raised successively. Amid the favourable consumption atmosphere, retail sales surged by 18.8% in November, the biggest growth since 1999, and by 16.4% in January-November. This brisk performance has underscored not only accelerating inflation, but also the strengthening trend in consumption. While Christmas is not traditionally celebrated across the mainland, it has begun to catch on in the more advanced urban cities, as 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, watches, jewellery and toys, were among favoured gifts.

II. Outlook for 2008

(i) US - Dwindling Consumer Outlays

The US economy should keep on course its transition to a much slower rate of expansion, thanks to further housing corrections and the accompanying sub-prime fallout. A deepening slump in housing, which will dampen sales and prices, will likely drag on for quite a while amid continuing credit problems, with the adverse impact on sentiment and consumption becoming increasingly apparent. Apart from dwindling house prices and tighter mortgage standards, consumer confidence and spending power will be hindered by slower employment growth, as housing-related job losses are expected to mount. That said, the economic and consumption prospects for the US are none too uninspiring. Provided that the high crude prices do not incite undue inflationary pressures, further monetary relaxation by the Fed should be able to limit the fallout of the housing downturn and tightening in credit conditions. On the other hand, US exports are expected to perform well, on the back of a weakening US dollar and sustained demand from overseas markets, particularly emerging markets.

Thus far, consumer spending has been held up by still strong job and wage growth. But the long-running consumption binge, already losing some of its earlier steam, will likely slow further in the course of 2008. Given the worsening housing market and tighter credit conditions, US consumers are finding it more difficult to tap the equity in their properties, the value of which constitutes some 30% of all household assets. Surging oil prices will be another weight on consumer budgets, especially in the case of lower-income shoppers, who seem to be more vulnerable to high gasoline prices. In all, rising consumer cautiousness will lead to a growing demand for products that are competitively priced, environmentally friendly as well as safe, although high-income consumers may sustain their spending spree for more expensive items.

(ii) EU - Slower but Sustainable Expansion

If anything, the EU could give some buffer to softer demand from the US, as it is on a moderate and sustainable expansion path. While the prevailing recovery is expected to remain largely on track, a combination of slower foreign demand, strong European currencies and relatively high interest rates should restrain growth in 2008. Evidently, high interest rates, in tandem with faltering confidence and stringent lending standards, will result in some cooling of the EU housing market and in turn consumer spending. Yet the impact should be less pronounced than in the US, where consumers are inclined to convert the increasing value of their houses, through home equity loans, into cash for spending, while such practices in Europe are far less common. In addition, high capacity utilisation and fairly solid corporate profits should bode well for investment and employment, thus propping up wage and consumption growth. The strong currencies of member states, though suppressing exports, will also lessen the adverse impact of high crude prices on the EU economy.

Within the euro zone, Germany, despite the firm euro, will benefit from sustained demand for capital goods from the emerging world. Amid favourable business sentiment, rising employment and wages should foster consumption. By contrast, Italy, which is dependent on exports of more labour-intensive products, will continue to suffer from intense competition from emerging suppliers, inevitably with a negative spillover effect on the domestic front. In France, where economic growth relies more on domestic demand, consumption should remain relatively robust, due in part to the reforms crafted by the new government. On the other hand, the UK, with its economic growth faster than the euro zone in most years, may outshine again in 2008. Under the twin bite of a credit crunch and a slackening housing market, however, disposable incomes are set to falter, and consumer spending will likely perform less well.

By and large, the continued economic expansion in the EU, though slowing somewhat, should lead to steady consumption and sustained demand for imports. To a certain extent, the sustained economic growth will likely continue to whet an 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 remains the catchphrase, the prospects for competitively priced Hong Kong products that are also safe and environmentally friendly should remain steady. The expected further appreciation of the euro, which serves to maintain the price competitiveness of Hong Kong exports, is another favourable factor, although the currency is unlikely to rise at the very fast pace of 2007.

(iii) Japan - Still Lukewarm Demand

In Japan, there are signs that the economy is heading for a steady and sustainable recovery after the long recession. But growth should only be tepid, as its export sector is vulnerable to developments in the US, and a more stable yen, albeit lessening the negative impact of high oil prices, will further erode the price competitiveness of Japanese exports. For their part, still healthy corporate profits and relatively high capacity utilisation will support moderate growth in business investment, which should in turn facilitate job creation and set the stage for a moderate pickup in consumer spending. Probably, the prevailing moderate recovery of the Japanese economy will whet an appetite for higher-end products. But for most consumers, cautiousness will remain the main tenet. In this regard, Japanese retailers and importers will tend to stick to sources that can offer high value-added products, which are safe and environmentally friendly as well, at competitive prices. As such, competitively priced Hong Kong exports are expected to benefit from the market's continued adherence to value for money. To a limited extent, the expected firmer yen may also favour the sales of consumer goods.

(iv) Chinese Mainland - A Pleasant Outlook

On the mainland, economic growth will remain at a double-digit rate in 2008, despite further policy curbs in response to signs of overheating, notably rising consumer prices and exorbitant asset prices. Externally, mainland exports will moderate somewhat, as foreign demand, not least US demand, is forecast to slow, aggravated by pervasive protectionist sentiment in overseas markets, as well as its changing processing trade policies and rising production costs. Although the mainland will also step up its efforts to rein in the fast expansion in fixed asset investment, especially the property and other overheated sectors, consumption should make up for some lost ground. Consumption growth is expected to stay strong next year, as the stimulating effect attributable to rising disposable incomes should remain in place, while the government also seeks to rely more on consumer spending, rather than investment and exports, as the driver of economic growth. To this end, the government will raise minimum wages, increase the personal tax threshold, improve health care, enlarge the social net, encourage job creation in the private sector and launch a new subsidy scheme to stimulate farmers' consumption.

In addition, the Beijing Olympics is another tonic for consumption. Hong Kong's domestic exports to the mainland will be further facilitated by CEPA, under which all products of Hong Kong origin have become tariff-free, whereas appreciation 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 has become a shopping centre and display showcase for high-income mainlanders.