Luxe Demand Picks Up in Japan

After years of economic gloom and 2011’s natural disasters, the country's fashion-conscious consumers appear to be back in spending mode.

TOKYO — Japan’s fashion-conscious consumers appear to be back in spending mode.

This story first appeared in the May 29, 2013 issue of WWD.  Subscribe Today.

Encouraging sales figures from the world’s biggest luxury goods players signal that the underlying demand for luxury goods in Japan is definitely picking up after years of economic gloom and 2011’s natural disasters — although a weak yen greatly diminishes the real impact of those stronger sales on international companies’ balance sheets, and some are raising prices to offset the currency effect.

Japan’s luxury goods market, which bounced back relatively quickly after the tsunami disaster of 2011, appears healthier now than it has been for many years. The past couple of decades have seen the country slipping in and out of recession and consumers holding back on nonessential spending. To be sure, there’s a newly palpable sense of optimism in the country. Prime Minister Shinzo Abe’s economic policies have weakened the yen by 20 percent, giving exporters a major assist. Japan’s preliminary first-quarter gross domestic product rose 3.5 percent on an annualized basis. Consumer spending increased 0.9 percent, showing further improvement from the fourth quarter of last year, when it rose 0.4 percent.

LVMH Moët Hennessy Louis Vuitton said its first-quarter sales in Japan jumped 12 percent at constant exchange rates and on comparable structure terms. Kering’s luxury division saw first-quarter sales in Japan rise 10 percent in constant currency terms. Hermès International’s first-quarter sales in Japan rose 7 percent at constant rates but fell 8 percent in reported terms on the sharp depreciation of the yen. Similarly, Salvatore Ferragamo said sales in Japan increased 4 percent at constant exchange rates — although they fell 8 percent in real terms on yen weakness.

Last week, executives at Stella McCartney and Loewe, in Tokyo for events, said they are registering double-digit sales increases in the country.

In recent years, executives and designers have shifted their Asia focus to China in terms of events and personal appearances. That’s understandable given China’s massive growth over the past few years. But Japan’s importance should not be underestimated, according to some executives.

“I sometimes feel that in the rush to China, a lot of companies tend to forget about Japan, and Japan is still a massive market and one that we’re very happy to focus on,” said Frederick Lukoff, chief executive officer at Stella McCartney, which has a small but growing business in Japan with two flagships, four shops-in-shop and 50 wholesale accounts.

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Lisa Montague, ceo of Loewe, said that Japan has turned a corner after a couple of tough years. That’s significant for Loewe, which does about a third of its business in Japan and has just more than 40 stores here.

“We’re enjoying this year double-digit growth…that’s phenomenal for Japan in the last few years. There’ve been so many external factors that have really knocked the market sideways that to enjoy the growth now is really encouraging,” she said “There’s a great sense of optimism.”

Montague said Japan’s performance is stronger than that of the average market for the brand. While a weaker yen has meant that fewer Japanese tourists are shopping in Loewe’s stores in the brand’s native Spain, its business in Japan is “more than compensating that.”

Tod’s ceo Diego Della Valle also spoke of a renewed sense of optimism in Japan.

“Consumers are buying and then there’s really a positive mood in the country. For very many years we didn’t see that,” he said.

Despite those upbeat statements from executives, not everyone is convinced the Japanese market has definitively emerged from its long-standing stagnation. Earlier this month, Bain & Co. forecast that the personal luxury goods market in Japan is set to grow 5 percent to 21 billion euros, or $27.15 billion at constant exchange. That is in line with growth worldwide as the industry digests a slowdown. Japan’s market grew 1 percent in 2012 and 4 percent in 2011 in constant currency terms.

Claudia D’Arpizio, partner at Bain & Co., voiced skepticism about the market’s longer-term prospects, but said what happens in Japan remains important for the rest of the industry.

“Luxury brands are still struggling to capture changing consumer behavior, especially that of younger generations, which are not very interested in luxury. Japan is very relevant as a test market,” she said.

Others are more bullish on Japan’s prospects — currency fluctuations notwithstanding.

“Japan was a bit depressed, and it’s seeming a whole lot less depressed right now. There’s a sense of returning optimism, and you sort of feel it in what they’re spending as well. Their ready-to-wear purchases tended to be a bit basic in the past [but] now it is becoming…bolder, more affirmed,” Lukoff said.

Stella McCartney is seeing success in Japan across its entire rtw offering, and the brand’s chain-trimmed Falabella bag is gaining momentum in Japan, a delayed reaction compared with the U.S. and Europe, Lukoff added.

Montague said Loewe is seeing particularly strong success with lightweight men’s bags that transition from work to leisure time. The brand’s penchant for color is also working in its favor in Japan, she said.

“Even in a fairly neutral moment in the market…we sell color very strongly,” Montague said, adding that one of the brand’s recent hits was a limited-edition origami bag made of foldable napa leather that sold out quickly.

Another key factor that is likely to shape luxury goods companies’ performance in the country is pricing. The rapid depreciation of the yen bites into sales and profits — a situation many have moved to address. Earlier this spring, Louis Vuitton hiked its retail prices in Japan by an average of 12 percent to compensate for exchange rates. Harry Winston and Tiffany & Co. also increased prices.

Montague said the currency issue, along with Japan’s plans to increase sales tax next year and rising raw material costs, is forcing Loewe to reconsider its pricing structure.

“We will have to make a price adjustment at some stage, and we’re just discussing how to do that,” she said, stressing that the brand is aiming to make just one price hike and needs to maintain an adequate price-quality ratio. “At some point, one has to accept that there’s pressure.”