Hong Kong’s rise of the claw machines reflects property fall

In June, 20-year-old Tara Wan and her boyfriend rented a shop in one of Hong Kong’s premier retail districts, Causeway Bay. The space costs them just HKD 6,000 (USD 768) a month, and rather than peddling merchandise, they have installed arcade games known as claw machines.

Wan’s business plan for the next few years is to open more shops with the games also called “UFO catchers” in Japan—glass cases filled with dolls or other prizes that players attempt to extract by moving an impossibly flimsy claw. She does not see it as a long-term business, but rather a way to quickly capitalize on Hong Kong’s rental downturn.

If a merchant sells a doll, they can make as much as the price they set, said Wan, a business major. “But if you put it in a machine, your upside is, in theory, unlimited.”

Wan and her partner are part of a growing contingent of young Hong Kongers using claw machines to grab the opportunity presented by the plunge in shop rents, which in some cases have fallen by as much as 90% from the peak in 2015. In a city where space was at a premium and high costs discouraged many from starting their own businesses, the shift has opened doors for a new generation of entrepreneurs.

Yet, the rise of the claw machines can also be seen as a reflection of the end of an era—when Hong Kong stores were packed with visitors from the mainland who would spend billions of dollars a year. Some of the arcades have taken over locations once rented by major jewelry brands and drugstores that had catered to Chinese tourists.

“The more claw machine stores there are, the more it reflects a worsening economy,” said Stanley Poon, managing director of local agency Centaline Property.

China’s darkening economic outlook and weakening yuan have changed the behavior of the Chinese big spenders who were once key for Hong Kong. While wealthy Chinese are still bringing cash to Hong Kong, they are not spending it on designer clothes or branded jewelry but are exchanging it for the greenback-pegged local currency and parking it in high-yielding deposits or insurance products, observers say.

Hong Kongers, for their part, are flocking to the mainland city of Shenzhen, just over the border, for inexpensive weekend getaways and cheaper groceries.

Across Hong Kong, the sales value of jewelry, watches and luxury gifts dropped 28.7% in April from a year earlier, marking a third consecutive monthly contraction. Prominent jeweler Chow Tai Fook has scaled down its network of direct distribution stores in Hong Kong, to 68 as of the end of March from 87 in 2020, while expanding on the mainland.

The local retail industry is “in deep water,” said Annie Yau, CEO of Hong Kong jewelry group Tse Sui Luen, at an industry conference last month.

The retail woes have sent a chill through the property market.

With weak demand for space hitting rental yields, there are few buyers for commercial property. In the first three months of this year, commercial property transactions were down 24% from the previous quarter, to 131. Total rental value for the same period declined 13% on the year to HKD 89 million (USD 11.3 million).

Centaline predicted another 5% drop in the April-June term from the first quarter.

Under the circumstances, Hong Kong property agents say they are fielding more requests from people looking to open claw machine shops in major shopping areas like Causeway Bay and Tsim Sha Tsui. And shop owners are willing to charge much less than they used to—typically on short-term leases, as they hope to free up the shops when big brands return.

Owners “have accepted the reality that the price will not bounce back in the short term,” said Kevin Lam, executive director of retail services at Cushman & Wakefield. But since most commercial space is fully paid, unlike residential properties, many shop owners do not have the pressure of paying off loans.

Some landlords who would have once preferred to leave their shops empty have lowered their expectations and are willing to rent to lower-end businesses for short durations, Lam said.

Landlords renting to claw machine shops “are those who have relatively stronger holding power,” said Terry Ho, senior regional sales director at Centaline, referring to owners who are under no pressure to repay loans or sell to generate cash.

On a once-coveted street corner in Causeway Bay, a shop formerly rented by Chow Tai Fook for HKD 1 million (USD 128,000) back in 2011 is now occupied by a claw machine business renting for HKD 140,000 (USD 17,920).

Another new claw arcade, “Money Claw,” rents for HKD 80,000 (USD 10,240) a month on the shopping street Pak Lai Avenue in Tsim Sha Tsui. That is 67% less than an electrical appliance store was paying for the same spot in 2016. It is one of three claw machine centers on the same street.

Across Hong Kong’s most expensive shopping areas—Central, Tsim Sha Tsui, Causeway Bay, and Mong Kok—there were 29 claw machine shops as of the end of March, up from 15 in 2022 and nine in 2021, according to property agency Midland. But this does not capture the full picture, as the data only covers ground-level facilities. Many more “clawtrepreneurs,” like Tara Wan and her boyfriend, are renting on the upper floors of commercial buildings, and their shops are often simply categorized as “retail.”

Since ground-floor shops still have higher rents, the difference can be significant. A newly opened shop in June on the busiest street in Mong Kok pays about HKD 200,000 (USD 25,600) a month, although it is a few times bigger than Wan’s HKD 6,000-a-month location.

For the claw machine operators, the relatively low rents and limited operating costs—most shops run without any staff—mean easy money.

“I spend one hour per week setting up the machines, and can leave it to do business,” said Justin Choi, 25, who runs four claw machine shops in Hong Kong, the latest of which opened in Causeway Bay in December.

“I was in the pet business before,” Choi said. “It’s harder to control [stock quality]. Animals will get sick and die, your stock cost is high.” On the other hand, if you handle claw machines properly, “they don’t break.”

For HKD 5 (USD 0.6) per try, players can attempt to grab Disney dolls and other prizes inside the machines’ cabinets. Some machine owners offer fancier rewards, like Nintendo Switches.

Choi and two partners spent half a million Hong Kong dollars opening their Causeway Bay shop and are expecting to make their money back in 12–18 months. If a merchant can get a net return of 30% of total cost—including stock, labor, and rent—then it is considered a good return, Choi said.

Some owners straddle the line of full-fledged gambling, allowing players to win money by using a claw to roll dice. This is a legal gray area as claw machines do not require a gambling license.

Machine suppliers are clear winners.

Andy Chan, owner of claw machine supplier Cool Bear Amusement based in Guangzhou, said he is shipping 500 machines to Hong Kong per month, versus about 200 a month in 2022.

“This is the best time for this business,” said Chan, who is in his mid-30s. Amid the economic doldrums, “it is easier for people to invest in the business due to the relatively lower capital on equipment and rents,” he said, adding that he believes there is still room for growth.

But some expect Hong Kong’s claw machine boom to be short-lived, not necessarily because they expect the property market to recover, but because the influx of newcomers to the business could lead to overcrowding.

Choi said he is already looking to use the money he has made from his claw machines to go into business on the mainland or overseas. Opening unstaffed billiards halls is an option, Choi said.

“Hong Kong is facing too many internal and external challenges,” Choi said. He predicts a wipeout for catering and retail businesses that will drive shop rents “even lower in the upcoming five years.”

“It’s a cycle,” he said. “Many things in Hong Kong are going backward. It’s not hard to see there will be more downtrends.”

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.

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