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By George Wehrfritz
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Shoppers lined up outside Tokyo's glitzy boutiques would seem to signal that all is well in Asia's pre-eminent luxury market. Unless, that is, the crowds have turned out to cherry-pick overstock items at cut-rate prices--as they did on Jan. 17, when bargain hunters mobbed an invitation-only Gucci sale at Tokyo's Isetan department store. Everything from womens wear, shoes and handbags was on offer, most at 30 to 70 percent discounts. The invitees--Isetan credit-card holders--turned away from Gucci in the months preceding the sale, and it took the lure of big discounts to bring them back. "Gucci is suffering more than the rest," says Tatsuyuki Iwamura, a spokesperson for the retailer. "But in general, none of the luxury brands are doing well."
Indeed, across the luxury-brand horizon, the Japanese market is looking less like the El Dorado it's been since the mid-1990s--and a lot more like Waterloo. In 2002, according to the Yano Research Institute in Tokyo, sales of imported luxury goods in Japan fell 2 percent to $11.1 billion--a dramatic change, since the sector boasted 9.7 percent growth in 2001. Even worse, the downturn comes at a moment when the world's elite brands are banking on the Japanese shopper to make up for lost sales elsewhere. Market leader Louis Vuitton christened a warehouse-size boutique in Tokyo's Omotesando shopping district just last September, earning $1 million in opening-day sales. This year, rivals Christian Dior, Salvatore Ferragamo and Prada will follow suit, while American handbag maker Coach plans to open as many as 30 new stores in Japan by 2006. Kensuke Kojima, founder of Kojima Fashion Marketing, whose consultancy tracks monthly sales of some 430 labels in Japan, thinks the luxury market will collapse under the weight of this pell-mell expansion, triggering a major shakeout. "A very small group of very popular brands are doing OK," he says. "The rest are dead."
Until recently, Japan's love of stylish brands had transcended macroeconomics. By the late 1990s a booming trade in high-end footwear, handbags and apparel seemed to defy grim data showing rising unemployment and falling industrial output. To optimists, strong demand for luxury goods foreshadowed a consumer-led recovery in which 120 million Japanese with fat bankbooks and expensive tastes literally would spend the country out of the economic doldrums.
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The illusion created by this so-called Gucci Recession may finally be evaporating. Even Tokyo's well-heeled "office ladies," the single females responsible for tripling Japan's consumption of luxury imports over the past decade, seem to be facing facts. "The biggest change we can see is in the spending trends of the young," says Masahiro Matsuoka, head of equity research at UBS Warburg in Tokyo. "Whenever I visit a department store I hear the same thing, that the younger generation--even the women--are starting to be concerned about their futures." His forecast for Japan's luxury import market in 2003: "Dreadful."
Luxury's numbers, in fact, are looking gloomier than the rest of the economy's. In 2002, Japan's luxury-goods consumption slipped while consumer spending rose slightly. Meanwhile, cuts in bonus pay contributed to a 3.8 percent slump in real wages as unemployment hit a record 5.5 percent. Surveys reveal a Japanese populace more pessimistic about their futures than at any time since World War II. They fret about retirement, fear job loss and doubt their government's pledge to revive long-term growth. Not surprisingly, the elderly guard their nest eggs fiercely, households with children are scrimping like never before, and even "parasite singles"--live-at-home young adults with high disposable incomes--are rethinking their free-spending ways. "As a result," forecasts a new report by Banque Nationale de Paris, "the chance of recovery in domestic demand is virtually nil."
Japan's luxury trade is succumbing to the same deflationary pressures that have ravaged so many other industries. Last year consumers spent less in full-price boutiques and more on so-called parallel imports, authentic luxury goods offered by independent traders. Often such products, obtained legally in lower-cost overseas markets like Europe and the United States, deeply undercut the retail prices charged in Japan's brand-managed stores. A few doors down from Coach's new flagship store in Ginza, for example, one parallel importer offers many of the same bags for 30 percent less. The newest price-busters are "recycling boutiques," high-end junk shops that trade in slightly used luxury goods, often for just a quarter of the original price.
This profusion of cut-rate alternatives has cost many major luxury labels their pricing power in Japan. Although most don't plaster their boutiques with sale placards, discreet clearances called "family sales" have become routine. Until a few years ago they were infrequent and very exclusive: company employees, their friends and maybe a few models or celebrities were invited to buy items used in photo shoots or store displays. Today, most stores hold such events seasonally to move mountains of unsold stock at huge discounts. "Often you have to wait for two hours to get in," says an industry watcher who runs an online fashion magazine. "People from the industry bring their friends, and once inside they put their names on the guest list so they can bring friends the next time. The invitees increase in geometric progression."
Prices can only go south. With luxury imports to Japan shrinking and discount selling "rising constantly," says Matsuoka of UBS Warburg, most brands will struggle to maintain their current levels of business, let alone expand. "The only way to recover consumption is to increase incomes, and there is no magic way to do that," says Masaaki Kanno, head of economic policy research at JPMorgan in Tokyo. In other words, Japan's luxury trade won't rebound until the overall economy does. Meanwhile, the lines outside Tokyo's trendiest shopping venues will be filled with bargain hunters who never pay retail.
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