TOKYO — Most major European luxury brands are experiencing flat sales in Japan. Most major European luxury brands continue to open massive flagships here.
While that might seem like a recipe for disaster, the hunger for high-end Western fashion and accessories is robust and resilient enough in Japan that company executives and analysts remain upbeat about overall business prospects, even if the outlook is modest compared with past booms.
China may be rising, but Japan continues to own the spotlight in Asia, with its citizens consuming an estimated 41 percent of the world’s luxury goods, and some 45 percent of upscale handbags and accessories.
Expressing their bullish outlooks, Chanel, Christian Dior, Brooks Bros. and Emilio Pucci all christened major Tokyo flagships in recent weeks in the booming Ginza district, with Tod’s set to unveil a seven-story building on Omotesando on Friday.
They say such temples are vital to convey a brand’s image, attract new and younger customers and gain an edge in a highly competitive marketplace.
Still, accelerating price increases for luxury goods in Japan are giving some analysts pause. They also warn that some small, weak players are bound to wither in the shadow of the growing number of megastores constructed by “superbrands” such as Louis Vuitton, Hermès, Burberry, Gucci and Chanel.
“It’s really a war for market share,” is how Mark Lee, president and managing director of Gucci, described the competitive situation in Japan. Gucci’s next salvo will be the brand’s 11,000-square-foot flagship in Ginza, slated to bow in 2006 opposite Hermès.
As reported, most European luxury firms posted flat sales in Japan this year, which often dented the performance of their shares. Among those hit was LVMH Moët Hennessy Louis Vuitton, as its core Vuitton brand derives more than 30 percent of revenues from Japan, and Tiffany, which saw comp sales in Japan drop 10 percent year-on-year in the second quarter.
Analysts insist the market overreacted to the news, as sales to Japanese consumers remained strong, albeit outside of Japan.
“They are still by far the most important nationality for this industry,” stressed Goldman Sach’s luxury analyst Jacques-Franck Dossin.He said flat sales reflect the fact that Japanese “stayed home massively” last year in the wake of the Iraq war and the SARS threat, which meant record local sales. “They’re very risk-averse,” he said. By contrast, in the second quarter of 2004, Japanese travel flows surged 94 percent, the biggest swing of the past 15 years.
Japanese consumers buy two-thirds of their luxury goods outside the country, partly because those products are more expensive at home and partly because of the cultural tradition of omiyage, returning from travel with gifts for friends and family.
But, then, why the flurry of openings in Japan?
Kana Sasaki, senior analyst at UFJ Tsubasa Securities Co. Ltd. in Tokyo, asserted that it is an ideal time for foreign brands to open in places like Ginza as land prices have eased and it is a key area in the city’s redevelopment plan.
“Luxury fashion brands are experiencing a re-expansion phase in Japan now along with redevelopment of the Tokyo area after the long-lasting recession,” Sasaki said. “The increase rate of the luxury market here is higher than the nation’s GDP [which currently is less than 1 percent]. The main customers of the Japanese luxury market are between the age of 20 through the 40s, whose disposable income increases.”
According to the Yano Research Institute, the market for Japanese luxury goods is expected to total 1.18 trillion yen, or $11.49 billion at current exchange, in 2004, slightly down from 1.22 trillion yen, or $11.88 billion, in 2003. The decrease reflects in part the retrenchment of weaker brands and currency effects.
Antoine Colonna, luxury analyst at Merrill Lynch in Paris, said luxury firms continue to build retail networks despite high fixed costs largely because they have no alternative: Department stores in Japan are still in the doldrums.
In his estimation, the retail “ramp up” of most Western players is more or less completed, which translates into a low-growth future in what he describes as the “most mature” luxury market in the world.
“It’s fair to say it’s going to be tough going forward [in Japan]. I don’t think we should look at more than low- to mid-single-digit growth: 2 to 5 percent maximum,” he said. “You just need to be innovative and create some like-for-like sales growth.”Still, luxury executives said they intend to squeeze out more growth and win market share, variously citing affordable pricing, men’s wear and jewelry as key opportunities.
“We are still enjoying double-digit growth and we believe we are very far from reaching flat or a slowdown in sales,” said Patrizio di Marco, chief executive of Bottega Veneta, which plans to open flagships in Ginza and Omotesando within two years. A third is slated for Tokyo’s Marunouchi financial district.
“Japan has always been and will continue to be a very important market for the group,” agreed Davide Sesia, president of Prada Japan. “We will continue to move forward in our expansion in this critical market. Prada Japan plans to open several boutiques and to renew others within department stores next year.” The next opening will be in Shinsaibashi Daimaru (Osaka) in March, he added.
Sidney Toledano, president of Christian Dior, said the hunger for a richer brand “experience” is the chief justification for lavish Tokyo flagships, such as its year-old Omotesando building and the Ginza flagship, which bowed last October. On the planning board for spring is a 7,000-square-foot Dior unit in Osaka and a boutique in the resort destination of Okinawa.
“The time when you could have a small accessories store and have the Japanese buying only wallets and accessories is over,” Toledano stressed. “They want the whole package.”
“If you look back seven or eight years ago, Japan was quite behind in terms of stores and presentation standards,” said Gucci’s Lee. “More than ever, what a brand looks like at home affects the perception of the brand when [Japanese] travel.”
Still, Lee said growth would also come from improving productivity within Gucci’s network of 49 stores, which includes four jewelry units. “We still see opportunity in every category,” he said, listing jewelry, shoes, luggage and men’s among key priorities. “It’s about improving our positioning, category by category.”
Flagships are also critical to Coach’s growth strategy, which has tripled Japanese sales in the past three years and is projected to do $350 million there in fiscal 2005. The brand plans to build at least 10 to 12 flagships, double the current network.Ian Bickley, president and ceo of Coach Japan, a joint venture with Sumitomo, said consumer research in Japan shows flagships positively influence brand perceptions, attract younger and more fashionable consumers and secure more first-time buyers.
Not so long ago, a foreign brand name with tradition and authenticity was practically assured of success in Japan. Today, those are characterized as the minimum cost of entry.
“It is not an easy market to penetrate, although many feel it is,” cautioned Brian Blake, president and ceo of Burberry, where 40 percent of total retail sales are generated in Japan. “You need product that meets the basic test of quality and value, but also fashion — world fashion relevance. Historical longevity is an important factor, as is brand image, design protection and exclusivity.”
“You have to be innovative, original and relevant for consumers’ evolving lifestyles,” Bickley agreed. “We see a trend toward more value, and people looking for more innovation and change.”
For example, he said the interval between purchases is getting shorter, increasing the need for fresh merchandise on the floor.
Toledano asserted that store quality would be a key factor as brands battle for market share. “Competition will be at a very high level,” he said. “This is why it’s important to have a really big space to service the client.”
Reflecting an ever more sophisticated luxury consumer, Japanese shoppers “take more time, they shop with friends, they come in couples,” he explained. “You need to offer a shopping experience. The quality of the atmosphere is really important.”
Still, the executives acknowledged there are challenges ahead in 2005, including a dwindling supply of prime real estate and a strong euro.
Masayoshi Soutome, research director in the management consulting department of Mitsubishi Research Institute in Tokyo, said Chuo Dori Street and Namiki Dori Street are already crowded and land prices have started to increase.
Dossin said the price of luxury goods in Japan looms as a future concern, since most firms now base pricing on a yen-euro calculation rather than yen-dollar to protect their margins from big dollar-euro swings.According to Goldman Sachs calculations, the price premium in Japan over travel destinations outside of Europe has increased to 41 percent from 27 percent in the last two years. “It basically gives a further incentive not to shop domestically,” Dossin said. “Even Japanese consumers are reaching the point where price is becoming an issue.”
That’s why analysts see a big opportunity for so-called affordable luxury brands like Furla, Coach, Bally, Longchamp and Burberry.
“Now that the dollar is dropping again, it will be interesting to see what happens,” Dossin said.
To be sure, most observers foresee tough times ahead for smaller brands.
Merrill Lynch’s Colonna noted, for example, that 50 percent of the handbag market in Japan is controlled by players who each hold less than 1 percent market share. He said it would become increasingly tough for these smaller names to compete with the most powerful brands, which have the largest retail and advertising presence.
“In such a mature market as Japan, the customers are very knowledgeable and they’re not going to go with a wishy-washy brand,” Colonna said. “I still think the leaders can gain further market share. If you are too small, you are vulnerable in Japan.”
George Kumekawa, chief operating officer at Itochu Corp., said brands continually need to “refresh their image” to succeed in Japan.
Underscoring the high-risk stakes, roughly 15 percent of the 100 or so brands Itochu distributes ultimately do not succeed in the market. Among those riding high at present are Paul Smith, Lanvin and Bulgari and activewear names such as Converse, Airwalk and Head, Kumekawa said.
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