HONG Kong’s third-largest supermarket chain U Select, run by state-owned conglomerate China Resources Holdings, has almost halved its network in less than a year as the city’s retailers struggle with economic headwinds and residents flock across the border for cheaper shopping.

The chain, which expanded rapidly during Covid and had around 100 stores in Hong Kong, shut dozens of money-losing branches as the economy slowed and consumer sentiment deteriorated, according to people familiar with the matter, who asked not to be identified because they aren’t authorised to speak publicly.

U Select now operates 57 stores in Hong Kong, according to its website. Management believes rising competition from mainland Chinese cities offering cheaper goods and more choices will also weigh on operations, the people said. U Select is talks with potential partners in the mainland to obtain new products to lure more customers, they added.

A representative from China Resources didn’t respond to requests for comment.

U Select’s abrupt strategy shift highlights how optimism about Hong Kong’s post-pandemic reopening quickly turned into a reckoning over the city’s declining appeal. While months of social unrest in 2019 and three years of strict Covid control fuelled an exodus of expatriate and local professionals, the economic slowdown and weakening yuan are sending record numbers of residents to mainland China for cheaper food and entertainment.

It’s not just U Select. Sales at Hong Kong’s supermarkets plunged 14 per cent year over year in January and have been in decline for 18 consecutive months, the longest stretch since record-keeping began in October 2005, according to government statistics. Officials will release February data later this month.

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By contrast, warehouse-style, membership supermarket chains across the border like Costco Wholesale and Walmart’s Sam’s Club have become increasingly popular. Tens of thousands of people – many from Hong Kong – lined up for more than three hours in January to enter a newly opened Costco in the neighbouring tech hub of Shenzhen.

Hong Kong travel agencies even offer package tours including membership cards and hours of shopping at Costco and Sam’s Club in nearby mainland Chinese cities. Neither has a branch in Hong Kong, where space is limited, rents are high and the market is dominated by local giants.

Tourists from Hong Kong could spend as much as HK$84 billion (S$14.3 billion) in Shenzhen and the rest of Guangdong province in mainland China this year, according to an estimate by Gary Ng, senior economist at Natixis That’s about 14 per cent of Hong Kong’s revenue from retail sales, catering services and hospitality.

While residents rush across the border, Hong Kong’s own tourism recovery has been slow, adding to pressure on local retailers, restaurants and bars. Mainland Chinese and international visitors made about 3.8 million trips to the city in January, just 56 per cent of 2019 levels, according to Hong Kong’s Tourism Board. BLOOMBERG