The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
TOKYO, Japan — For department stores with serious heritage, look no further than Japan. It was 1611 when Genzaemon Sukemichi Ito opened a kimono fabric and fancy goods store in Nagoya. By 1745 there was a branch in Kyoto and, just 20 years later, the Matsuzakaya store could boast its third branch on the edge of Tokyo.
Today Matsuzakaya department stores continue to trade in two of the three cities they did centuries ago. But now they are part of J. Front Retailing, the group steered by Ryoichi Yamamoto, who founded the massive 13-storey Ginza Six shopping complex — where Dior, Valentino and Céline opened flagships — in Tokyo's oldest luxury district earlier this year.
Matsuzakaya is by no means an outlier; there are several other department-store chains in Japan over a century old. But consider that, with roots as deep as Matsuzakaya, more than 10 generations could have been shopping on the same premises, under the same banner. No wonder these much-loved names evoke a sense of loyalty among their clients. Known locally as hyakkaten or depāto, Japan's myriad department stores are a world apart.
Walking into a department store is an extraordinary experience. You feel the weight of history from the very first moment you step through the door.
A byword for quality, phenomenal service and incremental innovation, these sumptuous stores offer a retail experience that goes far beyond the call of duty, with gourmet food halls, white-gloved hostesses, manicured lift attendants and — collectively — the widest selection of fashion in the retail world. Over the last two decades they also helped prop up brand sales in a market where consumers are spending $33 billion a year on luxury goods, according to a new report by McKinsey & Company, compelling high-end labels to provide exclusive concessions in shops such as Mitsukoshi, Matsuya and Isetan.
As a result, department stores were often regarded as the beating heart of Japan’s fashion industry, operating out of hundreds of sites around the country and shaping its aesthetic. Now, however, with the department-store market shrinking to two-thirds of its peak in 1991 and last year seeing sales fall consecutively for nine months in a row, they appear to be in a more precarious position.
“In the 1990s, department stores were turning over 10 billion yen ($90 million) a year,” says Nobuko Kobayashi, a Tokyo-based partner with A.T. Kearney. “And they looked untouchable, wielding complete control over luxury brands and attracting visitors from around Asia to what was by far the best shopping experience on the continent.” Times have clearly changed.
Travel Retail: a Mixed Blessing
External factors are partly to blame for the sector’s particularly weak 2016 results. The increase in strength of the yen is the most notable, dampening Chinese tourists’ previously enthusiastic spending, encouraging Japanese customers to shop abroad and contributing to the country’s luxury market shrink by around 1 percent according to a report by digital advisory firm L2.
The Ginza Mitsukoshi department store | Source: Shutterstock
However, recently released results for 2017 show a small jump in the right direction for department stores, with both J. Front Retailing (which owns Daimaru and Matsuzakaya) and Takashimaya announcing unexpected profit increases for the half ending August, according to figures released by the Japan Department Stores Association.
By many estimates, Japan remains the second-biggest luxury market in the world, sandwiched between the US and China, and department stores are where some of the biggest purchases are made. Indeed, among those surveyed in a recent McKinsey & Company report, 70 percent of Japanese shoppers still buy their luxury products in a department store.
Overall, Japanese department stores are seeing a 4 percent rise in single transactions worth over 4 million yen (about $35,000) for the first half of 2017 ending July, particularly for jewellery, which has risen 6 percent, and art, which is surging ahead by 25 percent.
The country is also back on track on a macro level. 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.
Tax-free sales spiked by about 50 percent for both J. Front Retailing and Takashimaya, with 30 percent of all sales made to overseas customers. Both companies also reported high revenues in Tokyo, Osaka and Kyoto, cities that welcome low-cost carrier flights from around Asia.
“It is no secret that foreign shoppers are propping up our department stores,” says Kobayashi. “Inbound consumption this year is up by 55 percent. Although I believe it is dangerous to rely too heavily on visitors, as their spending fluctuates depending on the value of the yen or import tax by the Chinese government.”
It is no secret that foreign shoppers are propping up our department stores.
The bulk of Japan’s travel retail visitors come from China — a particularly risky partner as the recent Thaad Missile Crisis in South Korea illustrated, during which Beijing placed restrictions on Chinese international travel in order to play a stronger hand in foreign policy.
However, department stores may have no choice as domestic sales dropped year on year for 2017 too, with revenue falling by a further 1 percent over the last 12 months if tax-free sales and purchases over 4 million yen are excluded.
And it is difficult to work out why. In a world where retailers are constantly being told to curate an "experience" worthy of leaving the laptop, many of these stores should be enjoying greater success.
Pioneers of Experiential Retail
Not only do Japanese department stores have some of the most meticulously chosen branded products across Asia, they also house creches, banks, pharmacies, tailors, formal order salons, equestrian departments, gourmet restaurants, theatres and, most importantly of all, offer a highly personalised service, with members of staff setting aside products for certain clients or even bringing purchases directly to their homes.
“Walking into a Japanese department store is an extraordinary experience,” says Nicole Nicole Bargwanna, the founder of fashion boutique consultancy CPR Tokyo. “You feel the weight of history and tradition from the very first moment you are bowed to as you step through the door, until the time you start browsing through the best possible selection of products, all of which are made to the highest quality in the world. These stores are designed to make you feel completely spoiled.”
Alongside this traditional emphasis on service, Japan’s department stores are ahead of the curve in other respects. Aiko Chihira, a humanoid robot, greets shoppers at the entrance of Mitsukoshi dressed in a silk kimono; botanical artists cover the walls of Daimaru in vertical gardens and silk-clad assistants jump to attention at Isetan. There are art salons, kimono salons, theatres, kogei rooms, hairdressers, photo salons and even rooms to write letters in. So why are emporiums this extraordinary still losing domestic customers?
An Isetan department store in Tokyo | Source: Shutterstock
“It goes all the way back to the financial crisis,” says Kobayashi. “Back in 2008, [Japanese] customers stopped looking for an aspirational shopping experience and started looking for an affordable one. So as a result, department stores had to consolidate on a macro level — their headquarters halved in size, and I believe that a decade on, they are still struggling to accept this new, smaller reality.”
This is one of the challenges department stores around the world are facing — the other is the ever-tightening grip of e-commerce. However, unlike most major international fashion destinations, Japanese department stores are woefully behind on their internet operations. Seibu Sogo and Mitsukoshi Holdings respectively launched luxury portals in November 2015 and June 2016, but with significantly fewer brands than both their shop floors and sites such as Net-a-Porter and Farfetch.
“These stores are very rigidly structured. Each department is overseen by a separate team with their own budgets and sales targets,” says Kobayashi. “They aren’t accustomed to collaborating or to breaking away from their decades-old ways of working. This makes it particularly difficult to get department heads to work together and put their many wares online.”
Furthermore, some appear to be outplayed by international competitors when it comes to delivery. The delivery times of Isetan’s Noren Noren site are listed as seven to 10 days, compared with two to four days on Farfetch. And these global players are mounting an increasingly impressive rival operation, with Farfetch partnering with select Japanese stores to offer click-and-collect service in Tokyo — one of 10 cities worldwide where the site offers 90-minute delivery of certain luxury items.
Lagging Behind Online
However, this only paints half a picture. Unlike some of its Asian neighbours and despite its reputation as a high-tech innovator in most other sectors, Japan has not leapt on the e-commerce bandwagon with gusto.
“In Japan, shopping is a culture thing — you meet with friends and wander the stores and it is all about the experience — that is why they put so much effort into the interiors and the service,” says Bargwanna. “They need to be coolest place in the city with the best clothes in the country, as well as designer coffee corners and incredible food. It is a curated experience from start to finish that the internet [still] can’t compete with.”
These stores are very rigidly structured. They aren't accustomed to collaborating or to breaking away from their decades-old ways of working.
According to the L2 report, fashion e-commerce penetration currently only sits at 10 percent, which is unusually low for a developed nation. While Japan’s e-commerce giants like Rakuten continue to expand their offering in the mass market, high-end players are less dynamic.
“Japan feels behind to the entire internet experience,” says Ashley Clarke, a journalist specialising in Japanese fashion. “The language barrier means the Japanese internet has developed in quite an insular way... As a result, a lot of fashion stores treat the internet as a holding page with information, rather than another sales opportunity.”
So while America’s much-discussed "retail apocalypse" is due largely to the ever-more prevalent role played by online shopping, the reasons behind the challenges facing Japanese department stores are not as clear-cut.
"It is pretty much unique to us [in Japan] that the internet channel has not taken the lion's share of commerce," says Kobayashi. "And as a result department stores aren't really feeling the heat from Amazon. Instead, they are competing with fast-fashion shops such as Zara, Forever 21 and Uniqlo. Unlike the older generation, young people in Japan want to spend their money on experiences rather than things, so they are attracted to the cheap clothing these mass brands offer."
But while they cannot compete on price, some department stores have made a concerted effort to appeal to the young, creative, fashion-conscious set, with Isetan and Mitsukoshi in particular offering edgy pop-stores every month filled with wares from breakthrough designers from around the world.
"Department store buyers today are trying to innovate everywhere from nice local foods products to even trying to collaborate directly with textile manufacturing people to make their own [private label] lines. They are also trying to reach out to edgy small brands to diversify," says Akiko Shinoda, the director of international affairs at Japan Fashion Week. "But it is still very challenging for them to attract young people."
A lot of fashion stores treat the internet as a holding page with information, rather than another sales opportunity.
Yet, in a country with an aging population and a high proportion of retirees, the focus on attracting youthful customers is not quite as acute as it is elsewhere.
“Japanese department stores have not only thought about the ageing population, they are already catering to them,” says Samuel Thomas, a Tokyo-based consultant for Mitsukoshi. “Most of our customers are aged 40 to 60, and as a result we provide space for people to sit down with complimentary green tea in case they are thirsty. This focus on what older people want is normal in departments stores in Japan and should be the same in Europe.”
“These stores see people as life-time customers,” he continues. “And while older people are not as susceptible to changes in fashion, they do have a higher disposable income.”
Too Rigid or Complacent
However, while some of Japan’s department stores have adapted to consumers’ modern needs, others remain firmly entrenched in the past.
“Sometimes I think all this tradition is strangling them, making it hard for them to adapt to modern times and holding them back,” says Bargwanna. “They are [perhaps even] too rigorous [on quality] — they meticulously vet everything that goes into the store and reject any piece of apparel that does not to reach their exacting standards. As a result, younger brands that would easily find a place in Selfridges are being turned down.”
As the Japanese market continues to evolve leaving some department stores behind, the relationship dynamics they currently hold with fashion and luxury brands will need to change too.
A Mitsukoshi Department Store in Tokyo | Source: Shutterstock
“For many years, department stores were such a glorious and hyped-about channel that they got arrogant and looked down on tenants, demanding they provide exclusive items,” says Kobayashi. “But brands don’t need them in the way they once did, so they have to learn how to coexist and collaborate as partners. And I think they are coming to that realisation a little too late.”
However, amid the many issues they face, this year’s boost in revenues illustrates that the market for Japanese department stores is still vast and extremely important, although not necessarily as big as in its heyday 20 years ago. Demographic patterns and changing consumer trends mean that department stores in regional cities are losing revenue far more rapidly than those in Tokyo or Osaka. But there is still greater potential for growth abroad in China and South East Asian markets.
“Department stores not only have experienced a high inbound boon, they also have a lot of repeat customers from overseas that they need to capitalise on,” says Kobayashi. “And they will — they have opened dedicated duty-free stores as a stop-gap before they expand further into Asia.”
Already Takashimaya is one of the most successful Japanese department stores in South East Asia, with its Singapore outlet logging sales of 58 billion yen ($520 million) last year. Isetan Mitsukoshi, meanwhile, is planning to open their first department store in the Philippines in 2018.
So while these department stores continue to serve a vast market, thanks to their extraordinary fusion of tradition and innovation, they have seen their client-base shift over the last few years. If they can respond more quickly to the fast-changing consumer, rebalance their relationships with fashion brands and be more agile in the era of "new retail," their popularity at home and across Asia could help them to help shape the tastes of an entire continent.