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The Wonton vs Sushi story
Publication Date : 15-03-2013
My friends know that I am a noodle foodie. Everywhere I go throughout Asia, I try the noodles, from laksa in Penang, pad thai in Bangkok, beef pho in Hanoi, mohinga in Yangon; each bowl showcases the culture and flavour of the place, through the different texture, spices, and taste. Somehow, I remember a place by the quality of its noodles.
There is nothing quite like the great wonton and noodle shops in Hong Kong. They are not fancy places, but have been in the same location for ages, and have become beloved local institutions with lifetime customers. In the past few months. several historic Hong Kong noodle shops and cafes have closed from rising rents. The closure of the 42-year-old Lei Yuen Congee Noodles in Causeway Bay this January made the South China Morning Post. Hundreds of tourists and residents flocked to the shop in its last days, waiting in hour-long queues at lunch time for their last chance to eat there.
Rising rent, in Hong Kong, is nothing new. Hong Kong competes with Tokyo as one of the world’s most expensive real estate market. Yet Tokyo is full of small ramen and sushi shops that have been around for decades brought to international attention recently by the film Jiro Dreams of Sushi about a dedicated Michelin star sushi shop in the Tokyo subway. Tokyo sushi shops also have to pay the high rent demanded by landlords, but perhaps their landlords realise that Japanese culture is poorer if there is no local sushi and ramen shop around.
It is part of the economic cycle that rent will increase in line with inflation and supply and demand. But property prices in Hong Kong are both a function of location as well as interest rates, which are now the lowest for decades. Thus, low interest rates and the US dollar peg does mean that real estate prices and rents will rise faster in a faster growing Hong Kong than in the US.
The 91-year-old owner of the recently-shuttered Kam Kee Cafe in Shau Kei Wan only retired after 45 years because his rent jumped from HK$20,000 to HK$50,000 (US$2,600 to US$6,400) a month, not because he was tired of serving milk tea. If he owned his shop, at HK$50,000 a month, he might as well retire on the rental income and let someone else take all the business risks.
The point of this parable is not just to highlight the vagaries of the Hong Kong real estate market or the particular reverence Japanese people have for veteran sushi makers. Hong Kong hasn’t had rent control laws on the books since 1998, but neither does Tokyo. Hong Kong is instead an extreme example of the sociological effect of what can happen to small and medium enterprises when rent inflation occurs in a situation of low land supply response.
The free market view is that if location is good and rents are rising, the shop must convert to higher value-added products. So wonton shops may change to selling sushi or become bars that can charge higher prices. Hollywood Road is famous world wide as the Chinese antique centre of the world, but today, the antique shops are being replaced by bars and pubs. Even antique dealers find it hard to make money with high rents. The more entrepreneurial ones have moved into cyberspace, but the Hollywood Road brand, created by the cluster of small and large antique shops that have been around for decades, may become lost because tourists can’t find too many antique shops around as before.
In economics, the inestimable social value of an old cafe is called a “positive externality”, because its social value to the community lies beyond its rental value. The inability of the real estate market to take this external value into account is a market failure.
Even town planners realise that the shopping experience has to cater for a range of tastes, from the poor to the rich, in order for the real estate to be long-term sustainable. It is the diversity that makes the place vibrant. The growing retail business model of “clicks versus bricks” is that you need only a few premium stores like Apple in prime locations, and the rest will be bought off the web. The small wonton or sushi shop simply cannot have the scale to do that. Small businesses tend to be local, not global. So young entrepreneurs will be driven out of business by high rents and start-ups become more and more expensive to fund.
We are witnessing Schumpeterian “creative destruction” in action. In the United States, the rise of Amazon not only created the demise of small “mom and pop” bookshops, it brought down large chains that could not compete against the convenience of browsing the whole range of products on the Web.
So what is the right business model for small businesses in the age of massive social and technological change? Individually, the noodle shop or small business is a price taker, not a price maker like a famous brand. They have no influence on their rents, nor their selling price. If they get driven out of business, there is not just an inflationary effect, but social choice will decline as diversity is lost. You only get fastfoods instead.
This is a classic collective action trap as no individual player can change the game on their own, not the state, the landlords or the businesses. Markets are moving faster than town planning and land supply rules can change.
Planners across Asia in cities like Mumbai, Jakarta or Kuala Lumpur will have to provide retail space at affordable prices for the new wave of migrant entrepreneurs selling bakso noodles or nasi lemak for the masses that keep prices down. No to do so would only increase the social divide between the haves and have nots.
Markets change and land use rules and regulations must change with the times.
Andrew Sheng is President of the Fung Global Institute. http://www.fungglobalinstitute.org/