Japan is known for worldwide most demanding and choosy customer. We are happy to present to you the newest report on what’s shifting in the world’s second-largest luxury market? To keep up, brands will need to confront challenges and explore new strategies.
The guest authors of this feature are Jean-Baptiste Coumau, a partner in McKinsey’s Tokyo office, where Naomi Yamakawa is an associate partner. Benjamin Durand-Servoingt is an associate partner in the Paris office, and Aimee Kim is a senior partner in the Seoul office. TextileFuture thanks them for their valuable contribution our readers will certainly appreciate.
With most attention focused on China and its consumers’ massive appetite for luxury goods, or to a lower extent on South Korea as the new trendsetter for fashion and beauty, Japan has been less looked after.
The perceived morose economic situation of the Japanese economy, its aging and declining population, or its historical deflation had much to do with it. Yet with 3.6 trillion yen (approximately 28 billion euros) spent each year in luxury goods, Japan is the second largest luxury market in the world—behind the United States, but still ahead of Mainland China.
The Japanese luxury market is in recovery, with a positive momentum ahead
For many luxury brands, Japan is often contemplated as their first market in terms of sales and more importantly in terms of profits: over half of local luxury executives report that Japan is seen by their headquarters as a growth engine and a profit generator.1 Indeed Japan accounts for up to 30 to 40 % of some global luxury brands’ profitability. And while the general perception may be that the Japanese luxury market is stable and unchangeable, there are, on the contrary, several forces at work that are likely to reshape it.
Between 2007 and 2012 the Japanese luxury market experienced a major downturn, dropping 6 % per annum. With the context of the global economic crisis, followed by the Fukushima catastrophe, Japan luxury spending shrank by over 1 trillion JPY (EUR 9 billion) and reached a floor level in 2012. In 2013, the market started to recover in what we called at the time a “Godzilla effect.” Since then we have observed a dynamic growth momentum at eight % per annum between 2012 and 2016, allowing the Japanese luxury market to recover all of the spending lost in the prior period. This robust recovery can be attributed in some part to the improvements observed in the Japanese macroeconomic environment that arose with Abenomics policies. With a cheaper yen, positive inflation trend, and an increase in household spending, Abenomics seems to have translated into a stronger confidence, up 19 % since the 2014 tax hike. This trend is also confirmed by our latest consumer research that we conducted with over 500 Japanese luxury consumers in March to April 20172 : their perspective on their own economic situation improved by nine points versus last year, with millennials (i.e., consumers younger than 30 years old) being the most optimistic (Exhibit 1).
However, the Japanese luxury market recovery has not benefited all market segments to the same magnitude. On the one hand, imported accessories (primarily leather goods) and local affordable luxury fashion labels over-performed total market growth, with growth rates of 12 % and 9 %, respectively, between 2012 and 2016. On the other, imported affordable fashion brands and local absolute luxury brands underperformed, with growth rates in the low single digits (Exhibit 2). This contrasted situation underlines the different faces of the Japanese luxury market:
- preference for local brands’ offering, Japanese-specific fashion styles and shapes that stand out from Western brands’ offering—especially in the affordable luxury segment
- local absolute luxury brands losing part of their relevancy, with many of them being associated with the 1980s and 1990s fashion trends, and facing difficulties in competing against global and preeminent luxury brands that eye Japan as their private garden
- affordable luxury accessories, driven by international giants, offering an entry access point for Western luxury consumption by many Japanese consumers
In the short term, we expect the Japanese luxury market to maintain its positive momentum: 82 % of luxury executives surveyed state that their sales outlook for 2017 is better or significantly better than 2016. Looking ahead to 2020, we anticipate the market to grow at a more moderate rate of 3 to 4 % per annum (Exhibit 3), with affordable luxury price points and the accessories category leading the way. This is confirmed by luxury brand local executives, with 86 % of them being optimistic or somewhat optimistic on the development of the Japanese luxury market in the next 3 to 4 years.
This momentum is likely to be fuelled by the reinforced role of the millennial generation, which is taking over part of the population. We observe that millennials are less willing to trade down, more optimistic about their luxury spending, and less reluctant to show off than the other age groups. Inbound tourists are also contributing to this positive outlook. Since 2015, we have observed a major boom from Chinese tourists visiting Japan, i.e. tripling in less than two years, impacting positively on the Tokyo and Osaka luxury markets in particular. With the upcoming 2020 Tokyo Olympics, tourists will continue to positively weigh on the market—especially if the government takes key measures to improve the country’s attractiveness to tourists.3
Japanese luxury consumers continue to have high expectations, with novelty gaining in importance
Digital touchpoints are starting to play a major role within Japanese luxury consumers’ journeys. Brand websites are now part of the top five touchpoints, with one out of three consumers experiencing it—still far below the reach of department stores (70 % of consumers) (Exhibit 4). In addition to brand websites, brand-curated social media like Instagram, Facebook, or Snapchat are progressing robustly versus last year. The reinforced role of digital highlights the generation shift previously described as well as changes in habits propelled by mass-market pure players like Rakuten, Amazon, or Zozotown. Yet with only 7 % penetration, online luxury sales are less developed than in many other markets, reflecting a lack of digital savviness for luxury goods purchases, the absence of Japanese language from some luxury brands’ e-shops, and the limited online presence of key local players like department stores.
The role of the point of sale remains paramount, whether it is a department store, a brand store, or another format. This role regards both information gathering and purchase, and is associated with high expectations from Japanese luxury consumers. These expectations focus particularly on sales excellence. Indeed “kind and easy to talk to” and “strong product knowledge” stand out as the top two factors in customer experience satisfaction. In addition, Japanese shoppers appreciate receiving a personal and exclusive treatment in the store. With tourist flows invading some stores in Ginza or Omotesando, this treatment has raised in importance and proved critical to building loyalty among high-demanding local customers. It is a particularly important issue for local luxury executives, for which retaining qualified staff and building customers’ loyalty are the two most pressing operational issues.
However, sales staff kindness and service quality are no longer sufficient to satisfy Japanese luxury consumers and capture their spending at home. While price disparities versus overseas have always been a major concern, novelty has become a major driver of dissatisfaction (Exhibit 5). More than 75 % of Japanese consumers perceive that their local luxury stores are not offering enough new products line-up and have a rather narrower assortment than what they can find overseas. This appeal for novelties also impacts brand preferences—as illustrated by the high brand rotation observed across department stores, select shops, and freestanding store retail spaces, with consumers’ brand loyalty being at a historical low.
Unprecedented channels reconfiguration driven by the evolution of consumer behaviors and generational shifts
As acknowledged above, department stores are the primary touchpoint and place of purchase for Japanese luxury consumers, still representing over half of the luxury market value. Nevertheless, Japanese department stores have been struggling for the past decade, experiencing 4 % per annum sales decline between 2010 and 2016. And this trend is likely to be reinforced in 2017, as our research uncovered an 8 % drop in department store frequentation from our survey’s respondents. While shoes still seem to rely strongly on them, leather goods and watch and jewellery categories have observed the biggest decline. This negative slope appears to be anchored in a series of challenges that department stores have not yet fully addressed:
- aging core consumer base, representing a major share of their revenues, still valorising a traditional model and acting as conservative agents
- formats and floor layouts becoming old fashioned and unappealing to younger customers
- significant drop in foot traffic in suburban areas where catchment areas are no longer attractive enough to support one or more department stores
- difficulties in embracing the digital and omnichannel opportunities
In parallel, younger-oriented formats—namely select shops and fashion buildings—are booming (Exhibit 6). Between 2012 and 2015, these two formats grew at double-digit rates thanks to new openings and share gains. Their success results from capturing millennial consumers’ attention thanks to renewed and more affordable offerings. Fashion buildings, i.e. multi-story shopping centres located within or close to train/subway stations, are home to the latest affordable luxury brands (mainly local), with a rather high tenant turnover that guarantees consumers find the trendiest look and products. Similarly select shops, i.e. multibrand retailer chains, offer a fast-moving assortment of local and international brands that they curate on a model inspired by Colette and 10 Corso Como. Less exclusive than these internationally renowned concept stores, select shops are now well-established retailers with hundreds of stores for the largest ones.
Select shops and fashion buildings have also embraced another trend that is shaping the Japanese luxury market: experiential shopping. Indeed, we observe more and more of these formats including cafés, restaurants, hair salons, or even flower shops within their walls as a way to become a destination for those in their 20s and 30s. Recently opened shopping malls like Ginza Six in Tokyo or Doton in Osaka, and booming freestanding stores, fashion districts like Aoyama and Daikanyama in Tokyo, are also becoming experiential places. Interestingly we have seen consumers stating that their primary motive for visiting these places is to go out with family or friends rather than to shop (Exhibit 7).
New shopping malls and booming street fashion districts are also at the centre of luxury brands’ attention. As 44 % of luxury brand executives see the Japanese luxury retail landscape increasing in complexity, with new channels and new locations gaining in importance, hunting for new prime spaces is the game of the moment.
Market outlook: Fierce competition requiring faster adaption from both local and international players
With the Japan luxury market growing again and remaining a major profit driver for many established luxury players, we have observed a renewed interest in Japan in the past year or so. Brands with no presence in the archipelago, or that exited it, are contemplating market entry—often as part of their Asian strategy. Newly entered brands and challengers investigate how to crack the Japanese “codes” (see sidebar, “The six codes of Japanese fashion and luxury”)—which highly benefit more established brands. In the meantime, local Japanese luxury brands that remain highly dependent on their home market—given their rather limited international presence—continue to struggle as they face challenges from consumers and department stores. This situation is likely to translate into fiercer competition over the coming years, with clear winners and losers across both international and local players.
As the market experiences a profound channels reconfiguration, along with changing consumer habits, we believe that players that adapt best to this new environment are likely to outperform those that continue to rely on traditional models. Shifting the paradigm and meeting the high expectations of Japanese luxury consumers would require luxury brands to:
- reconfigure their channels presence to embrace emerging consumer needs in terms of service and experience, starting with launching new store formats inspired from successful concept stores and innovative points of sale
- explore new locations—across different channels—in some cases taking bets on future upcoming fashion districts, requiring luxury brands to put further emphasis on retail development
- bring a continuous newness to their stores, be it a high frequency of product introductions or a perceived change with fast-rotating visual merchandising
- animate customer relationships, building on store staff excellence to create deeper intimacy with their customers, using private events and personalized services to achieve this objective
Facing this new world, international players and local brands will have to overcome distinct challenges. On the one hand, international brands are confronted with difficulties to understand the Japanese market codes, which often run counterintuitive to Western minds, leading to potential errors in decoding the Japanese consumers’ expectations and needs. On the other hand, local players that have been centered toward Japan and its codes can sometimes encounter challenges in changing the way they operate and champion new ideas. And as a Japanese proverb states, “haya-oki to sanmon no toku,” luxury brands that will adapt first are likely to benefit most from the world’s second-largest luxury market.