Emerging opportunities in Hong Kong’s F&B industry

The food and beverage (F&B) industry in Hong Kong has undergone significant changes due to the pandemic. With the borders reopening and restrictions easing, what are the emerging trends and opportunities for operators?

As socialising and eating out are integral parts of local culture, lifting social restrictions is a welcome change for many Hong Kong residents. Despite the challenges of the pandemic, the F&B industry has continued to grow, with the number of licenced restaurants increasing. In fact, the growth rate in the first two months of 2023 was 2.3% (Figure 1), which is on par with the full-year growth rate in 2019, indicating a strong rebound.

Meanwhile, landlords have been more accommodating towards F&B operators, as core sections of high street shops became affordable in terms of rentals and chances of securing a spot in a shopping centre increased. This is the result of landlords struggling to maintain occupancy and using F&B as differentiators. According to JLL’s High Street Shops Vacancy and Trade Mix survey, the share of F&B increased from 12.5% as of 4Q19 to 14.9% at the end of 1Q23. During the same period, rentals dropped by 46.7%, making high-street shops in core areas more affordable to F&B tenants.

We also observe that major landlords of prime retail premises in Hong Kong are adopting a "community ecosystem" strategy, which focuses on creating a holistic community with enriched offerings and experiences, rather than just positioning individual shopping centers. Examples of this approach can be seen in the Lee Garden Area by Hysan Group in Causeway Bay, the Wanchai (Starstreet Precinct) and Taikoo Place Precinct by Swire Properties, and the Central portfolio by Hongkong Land.  These landlords invest in creating a vibrant and attractive neighborhood with a range of offerings, including F&B options, which are an important element used to promote and connect the community. As eating out is an integral part of many Hong Kong people, F&B offerings are an effective way for landlords to enhance the community experience and attract foot traffic to their premises.

While the number of licenced restaurants in Hong Kong has continued to grow, the pandemic has surely posed challenges to the industry. During 2020, when substantial lockdown and social distancing measures were in place for most of the year, the average monthly receipts per licenced restaurant dropped by over 30% (Figure 2).

However, as new COVID-19 cases stabilised in the second half of 2021, receipts picked up swiftly by 14.8% in 2021. Nonetheless, the lower average receipts per restaurant can also be attributed to underlying trends, such as the dropping size requirements of "General Restaurants" and an increasing number of takeaway-only or grab-and-go F&B tenants, as indicated by the growth in the number of "Light Refreshment Restaurants."

Hong Kong has long been an attractive destination for foreign restaurants. The city's extensive flight network makes it easy and cost-effective for restaurants to replicate recipes with the same ingredients they use back home, including fresh ones. Additionally, Hong Kong customers have diverse backgrounds, and many are savvy diners with a deep understanding of foreign food cultures.

In the 2019 pre-pandemic period, F&B operators accounted for 68% of all international newcomers to Hong Kong. This share surged to 85% in 2021 before coming down to 74% last year. These high percentages, compared to only 15% of newcomers in the F&B industry in 2013, highlight the growing importance of the sector in the city.

In terms of country/region, F&B operators from Japan accounted for 68% of all F&B new entrants to Hong Kong last year. This is mainly due to the strong connection between Japan and Hong Kong when it comes to food, as many diners in Hong Kong have a deep understanding and appreciation of Japanese cuisine. This also partly explains why “Sushiro” has been able to aggressively expand since entering the Hong Kong market in 2019, now with over 20 branches.

In 2023, the F&B sector in Hong Kong is expected to face a challenging landscape due to elevated costs of living, ongoing supply issues and labour shortages. However, amidst every difficulty lies opportunity. F&B operators can make use of the Restaurant Density Index (Figure 4) as a quick sieve to identify underserved areas and potential gaps in the market.

The Restaurant Density Index measures the percentage distribution of restaurants and private commercial stock among districts, allowing operators to pinpoint potentially underserved areas. Currently, the restaurant density in Yuen Long, Kowloon City, Shamshuipo, Kwun Tong, and Southern districts are relatively low, indicating potential gaps that F&B operators can further study for available opportunities.

While the challenging landscape may present obstacles, it is important for F&B operators to stay agile and innovative in their approach. By identifying underserved areas and adapting to changing consumer demands, operators can differentiate themselves and thrive in the post-pandemic landscape.

Looking ahead, over the next five years, Hong Kong is set to see numerous infrastructure projects, as well as new office, retail and residential supplies in both core and non-core submarkets. As shoppers and diners increasingly seek engaging and unique experiences, improved connectivity and new supplies will provide more options for F&B operators with quirky concepts to capture market demand.

For example, the emerging office hub in the West Kowloon area, where the West Kowloon Cultural District and the Express Rail Link are located, is set to become an important pioneer and growth driver of the Harbour Metropolis. With a cluster of current and upcoming high-quality office, hotel and retail spaces - many with sea views and alfresco dining areas - this hub will attract a diverse and affluent customer base, including business travelers and tourists, and provide excellent opportunities for F&B operators to thrive.

Unlike the last decade, which saw extremely limited new commercial supply in core districts, the next five years will see a sizable expansion of commercial projects in key submarkets such as Central and Causeway Bay. These include projects such as the Central Site 3 development and the redevelopment of the Excelsior Hotel. The completion of these projects will not only enhance the market vibrancy and ambience but also boost the working population and patronage, creating valuable customers for many F&B operators.

Finally, opportunities for F&B operators also exist in the areas where people live. Kowloon City, Yuen Long and Tuen Mun are the top three districts with the most private residential completions in the next five years. We expect these areas to be among the fastest-growing markets to watch out for, driven by rapidly expanding residential communities.

This article was published in the newsletter of Institute of Shopping Centre Management in April, 2023.