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PARIS — Japan, long an El Dorado for luxury goods firms, is becoming more of a worrying slog.
While the global luxury sector continues to ride high, many key players have seen growth sputter in Japan this year due to diverse factors such as a weak yen and competition from newly popular categories like home decor, personal care and leisure.
Analysts say luxury firms are coming up against an increasingly mature market that, while still vital, is now taking a backseat to more dynamic regions like the United States and Southeast Asia.
“Japan is already out of steam with low, single-digit growth expected for the coming 12 months,” said Antoine Colonna, managing director of equity research at Merrill Lynch in Paris. “The reason is mostly the economy but also the growing discrepancy between luxury brands’ systematic price increases — on the back of a weak yen in recent years — and the broadly static office ladies’ starting salary.”
The recent round of third-quarter figures underscored weakness in the market.
Despite strong momentum elsewhere, Louis Vuitton’s sales in Japan slid 2 percent in the third quarter on a like-for-like basis, according to calculations by Goldman Sachs analyst Jacques-Franck Dossin. In a research report, he noted sales there were affected by a “poor environment” and by the closure of the Matsuya department store.
On Monday, Deutsche Bank in Europe initiated coverage of LVMH with a “sell” rating based primarily on the bank’s concerns over Japan. “The Japanese ‘recovery’ of 2005 has now all but stalled,” the report said, estimating the country represents about 33 percent of Vuitton’s sales. “Furthermore, the yen is weakening, and pushing up prices is becoming increasingly risky.
“Having softened through the first half of the year and again in the third quarter, comments from Japanese department store operators and a number of the luxury companies suggest that overall luxury growth has all but stalled,” the Deutsche Bank study added.
And Vuitton isn’t the only one suffering. Reporting its results for the three months ended Sept. 30, PPR cited strong conditions for luxury in every region of the world except Japan, where sales for Gucci inched up 1.4 percent, trailing gains in North America (18 percent), Europe (17 percent) and Asia-Pacific (14 percent).
“In 2005, we experienced 11 percent growth in Japan,” noted Mark Lee, chief executive officer of Gucci. “Growth in 2006 has been slower due to a softer economy. The economic climate is presenting challenges for the entire luxury industry.”
Still, he added, “Despite the challenging economic conditions, I am very pleased to note we have expanded our market share there.”
Francesco Trapani, ceo of Bulgari SpA, said momentum in Japan has dropped off since the first half of the year. He called the country an increasingly mature and competitive market and said Bulgari would see “very contained” growth there in 2007. Third-quarter sales in Japan fell 2.3 percent to 56.3 million euros, or $72.1 million.
“Companies have a large, well-distributed presence there, so growing there is more difficult,” said Trapani.
Salvatore Ferragamo’s new ceo Michele Norsa also acknowledged in a recent interview that growth in Japan is lagging on a combination of factors, including a weak yen.
However, analysts are not yet sounding alarm bells, pointing out that it is difficult for big, established brands to eke out large gains. Still, they acknowledge the market is changing in significant ways.
Antoine Belge, luxury analyst at HSBC in Paris, estimates that Japanese consumers purchase between 30 percent to 45 percent of all luxury goods worldwide and have probably been overspending on such products. They now have a strong incentive to cut back. Because of the weak yen, European luxury brands have increased prices “massively” in local currency, and “this is starting to have an effect,” he said.
Disposable income is also migrating to other categories such as home decoration, spas and travel, Belge said, echoing other observers. He noted that Japanese tourists are even spending less time buying luxury goods abroad and instead are enjoying other attractions and leisure pursuits.
Still, Belge said faster growth in more dynamic luxury markets like Europe, the United States and China more than offsets low-single-digit growth in Japan.
“The Japanese market is not what it used to be,” acknowledged Christian Blaenkaert, senior executive vice president of Hermès International in charge of international affairs. “We used to have a growth of double digits. This is not a catastrophe. The market is becoming a little more rational.”
Blaenkaert acknowledged that competition is formidable. “The Japanese consumer has now a range of possibilities from big luxury brands that is absolutely huge,” he said. “Everybody’s there.”
Indeed, Chanel, Polo Ralph Lauren and Tod’s are among the latest players to plant their own buildings in Tokyo. Last October, Hermès expanded its 10-story flagship in the Ginza district to an adjacent building, adding 3,900 square feet of retail space. Earlier this month, Gucci inaugurated an eight-story Ginza building boasting five floors of retail, a cafe and a rooftop terrace for events.
And European and select American players continue to make large investments in the market. Giorgio Armani plans to christen a new 13-story retail complex in Ginza next fall, and Bulgari is opening two Tokyo stores next year — one being a 10-story tower boasting a rooftop garden, Italian restaurant, VIP rooms and a bridal lounge. Hermès plans to open a large store in Osaka next year.
Meanwhile, Coach, which saw its third-quarter sales in Japan rise 21 percent at constant currency, plans to continue its rollout, aiming to eventually have at least 180 stores in the country.
Blaenkaert insisted the Japanese market is stable and has “lots of potential” but that it demands excellence in product quality, service and presentation.
“I don’t think they’re turning their backs on luxury,” agreed Francoise Montenay, president of Chanel SA in Paris. “The expectation is one of more: more exceptional product, more original products special to the market and more service. This is what they are expecting from luxury brands.”
Montenay declined to give figures but said Chanel’s Japanese business is growing, with double-digit gains in fine jewelry and watches. She said Chanel is investing in training and staffing to ensure “very high levels” of service along with such pricey baubles as crocodile handbags. “We need to remain exclusive,” she said. “They love something that not all their friends will have.”
The Deutsche Bank report noted that hard luxury — watches and jewelry — is faring better than “the softer end and leather goods in particular.”
And Japan’s sheer scale — with some 127 million consumers — still offers the promise of a bonanza.
For example, Chloé, which had virtually no business in Japan four years ago, now calls the country its number-one market, with 20 shop-in-shops and five freestanding stores. Next spring, Chloé plans to open a boutique in Natoya and add a second Tokyo location.
“You can’t say it’s a growing market, but you can clearly break through it,” said Chloé chairman and ceo Ralph Toledano. “For us, it’s flying. Clearly what helped us is the accessories.”
Still, he stressed that succeeding in Japan requires “financial and management muscle” to run a flawless retail operation. “You can’t break through with wholesale,” he noted.
Gucci’s Lee said Japanese consumers continue to seek out more luxurious, high-quality products and that building “strong customer relationships across the country” is key.
“We have been in Japan for more than 40 years,” said Lee. “We intend to stay here for the long term.”