Decoding the enduring appeal of the Japanese market to the luxury industry

Photo by Momo Angela

The Hills (Azabudai Hills), Japan’s tallest building in Tokyo’s high-end business district, is known as a model of “modern urban village”, permeating an almost utopian atmosphere. The restaurant on the upper floor of the building is crowded with working-class people in suits, while wealthy shoppers lounge downstairs with exquisite desserts and coffee in the brand-new luxury boutique.

Credit: Courtesy of Mori Building Co.

Officially opened in November 2023, the 150-store commercial complex, costing about 640 billion yen ($4.26 billion), is made up of gardens and village-like streets, interwoven in the shadow of the 64-story Senjp Tower. LVMH’s high-end fashion brand Celine opened a store here in February this year, and other head brands such as Dior, Cartier and Hermès will follow suit in the coming weeks.

Conceived by Mori Construction (whose founder, Yoshiro Mori, was once the world’s richest man), the mound of the Makotai is considered Tokyo’s latest luxury shopping destination. When everything is working properly, the management hopes to attract 30 million tourists every year.

Yet the idea of a large luxury countryside in Japan seems out of touch with the times. The country officially slipped into recession this month, losing its status as the world’s third-largest economy to be replaced by Germany. Even so, Japan’s luxury consumers remain characteristic resilience.

As the luxury market fluctuates in China and slows in western countries, the Japanese luxury industry is bucking the trend of strong growth. Retailers and market experts say the weak yen is luring overseas visitors and prompting yen consumers to stay in the country, while investment in branded stories and experiential retailing will lure them into stores.

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Danish women’s clothing brand Ganni plans to open more pop-up stores in Tokyo and Osaka this year. The brand aims to test the Japanese market gently before adopting any permanent retail layout. Andrea Baldo, CEO of Ganni, said: “Japan is an extremely complex fashion city, so it is essential to adopt a tailor-made development strategy for this market”.

In order to ensure a smooth implementation, Ganni partnered with the local public relations and consulting agency Seiya Nakamura 2.24 to leverage the latter’s local retail network and influence. Baldo added: “As is the case with other markets in Asia, it is extremely important to work closely with local teams to ensure that the brand is aligned with the best local development strategies. Without a strong local team, it is difficult for overseas brands to operate locally.”

Photo by: Ganni

# **Japan’s luxury market is booming * *

According to market research firm Euromonitor International, the Japanese luxury market has exceeded $41.1 billion and is expected to grow steadily to $42.3 billion by 2026. The number of high net worth individuals in the country declined during the epidemic, but is steadily recovering.

On a recent working day, international tourists lined up outside the Chanel flagship store in Ginza in the winter cold, waiting for an hour to enter. Although Gucci’s sales in the western market are struggling, its sales in the Japanese market are also booming: the Italian brand’s sales in the United States fell by 1/5 in 2023, but its sales in Japan rose by 26%. Prada also said Japan remained the best performing market, surging 47 percent, mainly driven by demand from local consumers.

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“All in all, the luxury market is quite strong, both for Japanese consumers and tourists,” said Loic Bizel, a French and Japanese luxury specialist who works with luxury groups including LVMH. Bizel said that brands such as Chanel and Hermès have increased their prices significantly in recent months. He said: “Inbound sales are part of the brand’s growth because the yen has weakened, but prices have still risen.”

Even so, high net worth individuals do not appear to be bothered by the rate hike. In the VOGUE Business Brand Index, 63.3 percent of respondents admitted that higher prices would not affect their decision to buy designer brands, while nearly 1/4 said they had spent more than $10000 on fashionable luxury goods in the past year.

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# **Luxury outside Tokyo * *

Interestingly, Japanese residents outside of Tokyo are also very fond of buying luxury goods. Hermès’s overall sales in the Japanese market last year increased by 26% year-on-year, mainly driven by the renovation and expansion of its Takashimaya department store in Kyoto and its Dabaru branch in Sapporo. Sapporo, in particular, has seen an influx of tourists to the city in recent quarters, lured by the nearby Japanese ski resort of Niseko, which is praised as “the Aspen of Asia”. High-end hotel brands Park Hyatt and Ritz-Carlton have opened hotels in Ichigu, and Aman, Hongxinoya and Six Senses will also land in the next few years.

Osaka, on the other hand, is home to the headquarters of the Hankyu Department Store and its Umeda flagship store, with visits by international travelers driving the growth in inbound sales. In April 2021, when affluent Chinese residents were stranded at home due to the new crown epidemic, Hankyu Department Store opened a shopping store about seven stories high in Ningbo, about two hours from Shanghai, and grew into a popular destination for high-end Chinese consumers.

Image source: garde-intl.com

When overseas consumers visit Japan, Hankyu Department Store is planning to use the customer relationships it has established in Ningbo to convert them into luxury sales. “When our top Chinese customers come to Hankyu Department Store in Umeda, Osaka, we make sure that the VIC (core customer) team will also appear,” said Norifumi Morii, director of the company’s women’s and men’s fashion department.”

This strategy is paying off. In 2023, Hankyu Department Store had more than 20% of inbound sales, up from 12% before the epidemic. Sales at the Umeda flagship store hit an all-time high, rising 20 percent to 300 billion yen (nearly $2 billion) last year. The automatic duty-free machines in the mall have also helped in the past few years. “Everything is going well,” Morii said.”

# **Huge shift in tourist shopping behavior * *

Data from the Japan National Tourism Administration (JNTO) shows that the number of tourists to Japan has recently returned to pre-epidemic levels, but since 2019, the number of Japanese overseas tourists has fallen by more than 52%. The weak yen is an important factor: attracting more tourists to Japan, while also keeping Japanese residents in the country. These two different types of consumer spending create the ideal conditions for a market boom, allowing it to withstand economic headwinds.

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At the avant-garde Dover Street Marke t-an international network of multi-brand designer outlets created by Comme des Garçons(CDG)-Japan’s consumer base has changed. “In the past, we had more customers from Europe, but now our market share has completely changed. We have the most South Korea, followed by Southeast Asian countries such as Malaysia and Singapore, and the number of customers from Canada and Australia has also increased,” said Yo Arakida, general manager of the Ginza store.”

It is not just the nationality of tourists that has changed. Gone are the days when group travel was regarded as the norm throughout Asia. Instead, luxury retailers across the country reported an increase in the number of families, friends and couples. Morii said: “Before the new crown outbreak, tourists would buy a lot of cosmetics in droves. Now more are traveling as couples or family members and spending more on luxury goods.”

“People come with children,” Arakida added: “I think the way families get along has changed.”

Chanel’s flagship store in Ginza. Photograph: Prisma by Dukas/Getty Images

# **Offline retail is still the main battlefield * *

Retailers say that Japan’s e-commerce retail industry is slowly recovering, although it is still a sluggish industry-mainstream Japanese consumers prefer to be able to see what they want to buy in real life. Roberts Fflur, global head of Euromonitor’s luxury business, said: “The scale of social media and mobile phone holdings are huge, but Japanese residents do not necessarily use mobile phones to shop.”

To circumvent this phenomenon, brands and retailers are increasingly reaching out to consumers through social media to increase their influence. At one of Chanel’s most recent limited-time events, the brand created a “mini app” for guests to check in. Prada, on the other hand, uses activities to connect with users of Line, a popular instant messaging service in Japan. After becoming a “friend” of Prada, users can receive the release of branded products or messages of celebrity cooperation every week to learn about its latest trends.

Photo by Prada

“Brands (in Japan) are still not very good at turning consumers’ attention to online sales channels, but they create these apps to get data and connect with customers. So maybe these people will pay attention to the brand’s social media and then visit the offline physical stores.”

At the Dover Street Market in Ginza, the number of visitors is now 1.5 times what it was before the outbreak. Online sales tripled throughout the pandemic and have since stabilized. This phenomenon has also changed the way customers use the Internet for fashion education. “Our customers used to buy so-called entry-level products like Play CDG and CDG wallets. Now they are learning about fashion from social media and moving to more expensive products,” explains Arakida “.

# **Experiential Retail Takes the Lead * *

Creative retail storytelling is a key tool for brands to target Japanese consumers. According to Euromonitor International, the country’s experiential luxury market has soared from $42.3 million in 2019 to $87.1 million in 2023 and may reach $0.103 billion in 2026.

“Other markets may have Tiffany Blue Box cafes, Ralph Lauren Polo bars, or some luxury brand bars. But in Japan, almost every luxury brand offers catering services,” Roberts said. “The concentration (of these stores) is amazing.”

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This all-encompassing sense of luxury is maximized at the mound of linen tabernacle: high-end stores are adjacent to an international school, Michelin-starred restaurants, and even the Center for Preventive Medicine at Keio University Hospital, where high-end hotel giant Aman opened the world’s first flagship store for its brand new Janu last year. The perennially popular Teamlab unbounded gallery has also relocated its digital art museum to the complex, and the management of the mound of the tapestry hopes these moves will attract more foreign visitors.

The symbiosis of fashion with dining and entertainment is not a new phenomenon in Japan. Alain’s Ducasse beige restaurant has sat on top of Chanel’s Ginza flagship store since 2004-but in the wake of the pandemic, brands and retailers have gone into experiential flooding.

Dior has jointly opened a brand cafe with French premium dessert brand Ladurée in Ginza Six. Armani has a cafe and a restaurant in Omotesando and Ginza respectively. Louis Vuitton launched the world’s first cafe “Le Cafe V” in Osaka in 2020 and opened a second in Ginza flagship store a year later. “It’s about brand extension,” says Bizel. “They do it to reach new customers and create an experience that goes beyond the product.”

Photo by Soichi Kajino

In Shibuya’s comprehensive trend mall Parco, 70% of customers are in their 20 s or 30 s, which is regarded as an entertainment destination by mall executives. “Young people and even older generations are tired of department stores that only sell shoes or bags,” said Yugo Hiratatsu, the store’s director. So Parco has created a very different ecology: the Kowloon Peninsula-style restaurant on the ground floor satisfies shoppers’ appetites, while the Nintendo and Pokemon store on the sixth floor is always packed with players. The middle fifth floor is the fashion area, where international and domestic designers compete for the attention of consumers.

The Shibuya Parco department store in Tokyo. Credit: Kiyoshi Ota/Getty Images

The first floor is the Gucci concession area, with the world’s only Gucci Arcade (retro game hall), where shoppers can experience dreamy handbags and sunglasses, similar to the style of the computer game Space Invaders, while Loewe’s latest giant metal pebble device allows guests to take selfies.

This way of experiential consumption stimulates the consumer desire of shoppers at home and abroad. Since Parco’s renovation and opening in 2019, Gucci’s sales have doubled, while Loewe’s sales have tripled. “There are a lot of families who come to visit our Pokemon store and will go downstairs to spend at Loewe,” Hiramatsu said.”

# **Focus on Shibuya
# Tokyo Generation Z Focus * *

Japan’s aging population cannot be ignored, and this concern has prompted luxury players to constantly conceive new and innovative measures to attract Generation Z consumers. “Baby boomers currently have all the wealth, and luxury brands are worried about this,” said the Roberts of Euromonitor International. “The biggest challenge for brands is how to successfully connect with and resonate with young consumers.”

Tokyo fashion week street shoot. Photo by Momo Angela

Tokyo’s Shibuya district straddles the Harajuku district where young people gather and the upscale Omotesando district, and has naturally become an important area for luxury brands to attract young people. People between the ages of 20 and 40 account for more than half of the area’s foot traffic, according to Tokyo Metro Advertising.

Brands have responded by turning the area into a pop-up shop paradise. BMW, Christian Louboutin and Dior have all opened limited-time concept stores in Omotesando Crossroads Park in the past year. Netflix opened a limited-time pop-up event at Q Plaza in Harajuku to promote popular episodes such as “Emily in Paris. Luxury resale platform Komehyo opened a concept store in Shibuya in November last year and lowered prices to attract younger consumers.

Image source: arquitecturaviva.com

Low-cost beauty programs are also a pillar of the strategy. Prada Beauty opened its first pop-up store in Shibuya in late November last year, taking over the space previously occupied by Chanel Beauty across the street from Uemura’s global flagship store. This beauty center is close to Omotesando’s main shopping street and is a hot spot for luxury brands to attract the attention of the next generation of customers. “Cosmetics are the first point of contact for young people,” Bizel said. “They can’t afford a bag, but they can buy lipstick for 6000 yen (about $40).”

Japan outperformed other major markets in terms of luxury consumption growth, which attracted more brands to increase investment in Japan, such as opening more offline stores or refurbishing existing sales points, as well as brand activities. Experiential retail remains irreplaceable in Japan, with dining and entertainment playing a major role in the luxury shopping experience in major cities such as Tokyo, Sapporo and Osaka. Perfume and beauty are important for brands to target young Japanese consumers, who are happy to shop across gender boundaries.

Tokyo Fashion Week street style. Photo by Momo Angela

(Source: VOGUE Business)