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Japan’s Luxury Market Enters a New Era

As a recent economic surge lifts spending in Japan’s luxury market — the second largest in the world — how can brands capitalise on this momentum?
Inside the Ginza Six department store in Tokyo | Source: Shutterstock
  • Kati Chitrakorn

TOKYO, Japan — Japan's luxury-goods market is growing steadily again, about five years after it was knocked off course. The global financial crisis in 2011, followed by the Tōhoku and Fukushima catastrophes, hurt consumer confidence, causing luxury spending in Japan to shrink by over 1 trillion yen ($10.6 billion) in 2012, and saw the world's third-largest economy to fall into years of tepid growth and deflation.

Today, Japan is looking very different. According to a new report by McKinsey & Co shared exclusively with BoF, Japanese consumers are now spending 3.6 trillion yen (about $33 billion) each year on luxury goods. Business leaders are also feeling more optimistic, with over half of local luxury executives surveyed by McKinsey viewing Japan, which accounts for as much as 30 to 40 percent of some global brands' profitability, as a growth engine and profit generator.

The country is back on track, thanks in part to prime minister Shinzō Abe's economic strategy known as "Abenomics." The policy, which launched in 2013, helped propel the Japanese economy into a cycle of rising wages, spending and inflation. Recent figures showed that GDP grew 1.4 percent between July and September 2017, driven by stronger global demand for Japanese exports, putting the country on course for its seventh consecutive quarter of growth.

As unemployment falls and household wages increase, boosting the spending power of the nation’s consumers, the outlook continues to be optimistic for next year, with the Bank of Japan forecasting GDP to rise 1.4 percent in 2018.

Fewer Status Symbols

Japan is the second-largest luxury market in the world — behind the United States, but still ahead of China — and is estimated to grow between 3 and 4 percent over the next three years. The younger generation are purchasing brands like Céline, Balenciaga and Gucci, which are coveted across the world. Those from the older generation are making statutory purchases from brands like Hermès and Chanel, which are seen as "very reliable" and "have a heritage," said Benjamin Durand-Servoingt, McKinsey's associate partner and co-author of the report.

However, Durand-Servoingt warns that individual expression remains key, with affordable luxury price points and accessories leading the way. “[Millennials] won’t wear one single luxury brand but [they will] mix it up with more discreet or lesser-known labels.” While Japanese Millennials are more optimistic about their spending, their priority is expressing their personal style — and the styles certainly are numerous, from the doll-like kawaii to the avant-garde cuts of fashion-forward designers.

Department Stores: Down but Not Out

Japanese department stores have been struggling, experiencing a 4 percent decline each year between 2010 and 2016, but they remain the primary place of purchase for Japanese luxury shoppers. Among the consumers surveyed in the report, 70 percent still buy luxury products in a department store. The difference now is that department stores have to compete alongside brands’ free-standing stores, duty-free stores, outlets and online stores.

Department stores still hold great significance for older shoppers who continue to do the majority of their shopping there, but future growth will come from other younger-oriented shopping channels,” said Durand-Servoingt. Home to the latest affordable luxury brands, “fashion buildings” — multi-storey shopping centres, often located within or close to train stations — account for 15 percent of luxury consumer shopping and is growing at 7 percent each year.

Fashion buildings and select stores have also embraced another trend that is shaping the Japanese luxury market: experiential shopping. Recently opened shopping malls like Ginza Six in Tokyo or Doton in Osaka are highly experiential places. “Consumers, especially the younger generation, put more emphasis on the place they shop, rather than the brand they buy,” said Durand-Servoingt.

To develop online luxury consumption, brands need to provide the right offers online and educate consumers.

Tapping Inbound Tourism

Tourism is contributing to Japan's positive outlook, with Chinese tourists estimated to account for 7 to 10 percent of the Japanese luxury market, thanks to a favourable weak yen and higher prices for luxury goods in China, fuelling "daigou" shoppers who return to the country with luxury goods to sell. In the wake of the 2020 Tokyo Olympics, tourists are expected to further boost the market — especially if the Japanese government takes key measures to improve the nation's attractiveness, according to the report.

However, Durand-Servoingt noted that there is still too much focus on Tokyo, which accounts for roughly one third of the Japanese luxury market and was driving 40 to 45 percent of the last three to four years of market growth. “In another report that McKinsey published, we encourage the government to unleash [the country’s] tourism potential by developing other cities beyond Tokyo and Kyoto, and looking towards regions like Yokohama,” he said.

Osaka and the surrounding Kansai region has also recently emerged as a popular tourist destination. Almost 10 million overseas travellers visited the city in 2016 — a 363 percent jump over five years — and the boom is boosting the local economy. Duty-free sales at department stores in the region were up almost 60 percent in the first eight months of 2017 from the same period a year earlier.

Digital Gains Importance

With only 7 percent penetration, online luxury sales are less developed than in neighbouring countries like China or Korea. Many brands are reluctant to sell online, partly because physical retail remains a popular form of luxury shopping. Japanese shoppers appreciate the personal treatment they receive in store, where staff kindness and service quality stand out as a key factor for their visit. This is particularly important in Japanese culture, where a drive to focus on the task at hand — and do it well — is practised by many Japanese.

Still, “the digital journey is important. Luxury shoppers of all ages like to familiarise themselves [online] to prepare for their shopping journey and what brands and products they will purchase,” said Durand-Servoingt.

There is also an absence of dedicated luxury e-commerce sites in both English and Japanese languages, and a limited presence from key local players like department stores and global e-commerce sites, although platforms like Net-a-Porter have an increasing presence. “Consumers are less used to purchasing luxury online. To develop online luxury consumption, you need the brands and key players to provide the right offers online and educate them. Once they start to do that, they will shop more luxury items online and that will drive the online luxury sector.”

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