Sears holdings, one of the US’s largest broad-line retailers, sees Hong Kong as a strategic center in Asia as it moves from brick-and-mortar sales to increasingly embrace technology and B2C. It’s the sort of example tellingly illustrated at Hong Kong’s “Think Asia, Think Hong Kong” promotional campaigns in Chicago and Toronto in June.

By Martin Evan-Jones

Vijay Talwar is an engaged, playful mood as he passes business cards – even stopping to play football and throw a Frisbee or two – while he evaluates booths at the Hong Kong Gifts & Premium Fair in May. But Sears holdings’ President for Gifts and Special occasions is in full corporate mode when he speaks of the Illinois-based company’s view of Hong Kong’s strategic role.

“Ultimately what this is about is sourcing high quality products on time, at the lowest possible cost, and Hong Kong plays a very big role in the relationship we have with manufacturers and sellers across Asia,” comments Talwar. This is becoming even more significant as the firm heads towards a digital future.

Sears’ relationship with Hong Kong dates back to 1959 when it first established its offices in the territory. The city has progressively become the company’s prime sourcing and testing platform for Asia, particularly since the formation of Sears Holdings after the takeover of Sears, Roebuck & Company by US discount chain Kmart in 2005.

Done in Hong Kong

With some 500 staff, Sears’ two Hong Kong facilities comprise some of the world’s largest in-house sourcing and testing units for a multinational cooperation. It serves the group’s extensive collection of brands under both the Sears and Kmart operations.

The fourth largest broadline retailer in the United States, with some US$50 billion in annual revenues this year and about 3,800 full line and specialty stores in the US and Canada, uses Hong Kong as a central operation to source and test products aimed at feeding brands such as Jaclyn Smith, Joe Boxer, Craftsman, Diehard and the Shop Your Way social media online platform.

The Sears Holdings Global Sourcing facility in Mong Kok has some 30 technicians and backup staff, all locally hired, to inspect and test fiber and clothing constituents. Testing equipment include machines that evaluate the strength of clothing and stitching and whether buttons are sewn on to garments securely enough. The laboratory operates on a 24-hour basis, testing some 100 products every day. Its sister station handles the hard goods side.

The Sears sourcing office is a buying operation and exporter for items that include garments, household products, footwear, kitchen utensils, electrical home appliances and toys and games sourced across the Asian region, including India and Bangladesh.

“As products are manufactured on the Chinese mainland, in Hong Kong or in the rest of Asia we deal directly with our Hong Kong offices to source those products, but have to make sure these are tested before entering the US,” says Talwar.

Direct Dealings

Protecting the integrity of its brands is of the highest priority to Sears, particularly as it looks towards transforming into more of a retail model rather than asset model. That also means refining its buyer-driven commodity chain in which it took a pivotal role in the 1990s when decentralizing production networks to exporting countries, mainly in China and Southeast Asia.

Sears has been among retailers at the forefront of the so-called “manufacturers without factories” approach in the US, concentrating on high value research, design, sales and marketing, and acting as a strategic broker developing evolving product niches.

Hence, when meeting suppliers and manufacturers, particularly small and medium-sized ones, at the Gifts & Premium Fair, Sears can buy direct through its Hong Kong offices without needing to make a multitude of deals on behalf of different Sears units, explains Talwar.

That’s particularly significant given the requirement for increasing speed of delivery and tighter inventory management in the company’s global supply chains. These are some of the key “deliverables” under the group’s transformation program, aimed at rationalizing operations and reducing the losses registered over the past decade.

Sears is making progress in its approach. According to the unaudited first quarter 2015 results released on June 8, domestic adjusted net income with interest, taxes, depreciation and amortization added back (EBITDA) improved compared to the same period last year, while sales declines slowed due to more efficient and targeted promotional spending and focus on category sizes. As a result, net losses declined to US$303 million in the first quarter of 2015 compared to US$442 million the previous year.

Capitalizing on Hong Kong’s Advantages

As with many multinational retailers, Sears has continued to grapple with the uncertainty of demand in its prime markets, uneven consumer and commercial credit and the impact of rising fuel prices. With issues like those impacting the supply chain, its operation in Hong Kong becomes ever more crucial, say professional observers.

The Hong Kong SAR’s corporate advantages are well-documented, including its simple, single-tier tax system as well as high-level legal and accounting standards. Corporate tax stands at 16.5 percent and profits generated outside the SAR are not subject to tax, VAT or holding taxes, meaning minimal exposure to double tax liability.

Added to these is Hong Kong’s interface with Mainland China, particularly in the adjoining Pearl River Delta, for sourcing through networks of experienced suppliers. The SAR is also the most mature international offshore center for payments and other arrangements in renminbi.

However, as the Chinese market has opened up, it has become a more expensive sourcing platform. But due to Hong Kong’s geographical location, it’s also close to progressively attractive, convenient and connected sourcing centers in Southeast Asia, including Indonesia and Myanmar, and further afield in India and Bangladesh, particularly for clothing, textiles, jewelry and consumer electronics.

Perhaps less appreciated is the growing “hub” effect of a number of major players in the sourcing and services businesses in Hong Kong, creating more efficient logistics, increasing improvisational and creative supply chain operations.

Embracing Technology

In 2011, General Electric, the US infrastructure and technology giant, established its global operations office in Hong Kong. The confidence in Hong Kong’s technology capacity generated by such a move has proved effective in attracting firms such as Bindo. The New York-based company set up its regional headquarters in Hong Kong in 2013 to accelerate its cloud-based iPad point-of-sale system development to accommodate its online marketplace.

For Sears, the future is determined by a more extensive reliance on computer systems under its transformation plan, with Hong Kong again playing a key role. Talwar, who previously worked for online jewelry retailer Blue Nile, speaks of how Hong Kong was the central platform for development and testing into the Chinese mainland market before rolling out e-tail offerings.

He says that to Sears, Hong Kong is a leading technology-savvy base where the company can test the speed of its websites and apps before introducing online retail in other Asian centers. That fits with Sears’ determination to deliver connected digital and physical shopping experiences on a global basis.

Sears is developing its Shop Your Way social media shopping platform to offer members rewards for shopping online while offering full-line and specialty stores in the US through its virtual stores.

Additionally, the spun-off Sears Canada cemented a deal this year with Liz Lange to sell its maternity chic clothing collection in stores and online, while Sears units Hometown and Outlet stores in the US partnered with innovative sourcing website Quirky to create headphone design. The Hong Kong operation will be largely responsible for delivering on-time and compliant products for these new projects.

Sears’ fast track approach to its online offerings comes on time as it adapts to the changing business technology climate where US giants such as Wal-Mart and Amazon have increasingly set the pace.

The online B2C market is indeed the one where established retailers are set to engage in more fierce competition and aggressive marketing. Last April, technology researcher Forrester calculated that US online sales would rise to US$334 billion by the end of 2015 and grow to US$480 billion in 2019 with clothing, consumer electronics and even furniture being major sectors.

It is the sort of environment where Hong Kong’s sourcing and testing capabilities will be put further to the challenge.