It’s all in the Niche


W. David Marx | March 09, 2009

TOKYO – The current economic calamity has wrought complete panic in the European and American marketplaces: consumers are shying away from big buys and retail is offering heavy discounts to move product.

TOKYO – The current economic calamity has wrought complete panic in the European and American marketplaces: consumers are shying away from big buys and retail is offering heavy discounts to move product. The Japanese financial situation may be equally dire, but things feel distinctly less frenzied. Despite a pronounced lack of consumer expenditure, Japanese retail outlets have been conducting relatively normal winter sales, with discounts at the 40-50% level.

Nevertheless, there should be no doubt that Japan is in recession. The big-box brands have seen sales dip into the red over the last year. Most brands, however, had already been experiencing a slowdown in growth during the past few years. The industry’s first solution was to double-down on the market, attempting to blind the Japanese with extravagance.

Ralph Lauren opened his giant mansion-like Omotesando flagship store in 2006, while Giorgio Armani erected the monolithic Armani Ginza Tower in November 2007. Louis Vuitton had plans to construct its largest store in the world right on the main Ginza avenue, but due to a weaker Japanese consumer marketplace, last month the company announced the postponement of its project. In this climate, going big is no longer an option.

Another approach has been to target directly segments usually avoided in the past for fear of brand dilution. It’s widely known that Japanese female secretaries in their 20s have been the most reliable consumer base for luxury handbags and wallets. For most of their history in Japan, however, the more prestigious labels by and large avoided targeting these women in a public and direct way. But in the last five years, brands like Louis Vuitton have been featured in mass fashion magazines like CanCam. Most of Vuitton’s competitors have followed suit with their own advertorial features.

Jun Morimoto, a President of Richemont SA in Japan, explains, “The luxury brands never used to advertise in magazines like CanCam. Maybe their goods would be introduced by a third-party, like the stores actually selling the goods. But generally, the high-end brands would limit which top-tier magazines got to use pictures of their goods. That standard has now dropped.”

More recently, the rising value of the yen in late 2008 provided the perfect cover for another easy fix to less robust sales: lower prices. Between the months of November and December, Salvatore Ferragamo, J.M. Weston, Cartier, Mont Blanc, Louis Vuitton, Christian Dior, and Saint John all decreased prices between five and ten percent on selected items. In late December, Dunhill announced prices for its 2009 Spring/Summer clothing would be eight to ten percent less expensive than in previous seasons. John Lobb and Cole Haan were to do the same in January.

Although more reasonable prices nominally open the door to a wider range of customers, the revised price-tags are in fact little more than a return to 2004 levels — in other words, the standard before the euro’s steep climb. A J.M. Weston Japan employee was quoted in the Senken Shimbun saying that prices had gotten so out of control that customers could buy two pairs of shoes in Paris for what they pay for one pair in Japan. So, the easing of prices is more about bringing Japanese prices back in line with the global standard rather than taking drastic action to entice consumers. The well-publicised lower prices may have helped to bolster revenues to a small degree, but will probably not be enough to save second-tier brands in the mid- and long run.

Other luxury brands — namely Prada and Dior Homme — are holding full-out sales in Tokyo. They are not, however, loudly announcing the discounting; instead, sales staff discretely informs shoppers of the revised prices.

The strong yen has, however, increased sales for luxury brands — just not in Japan. Japanese customers are flocking to South Korea as the won-yen conversation rate has enriched the visiting tourist. According to a 2 January 2009 article from the Daily Chosuniblo (English Edition), 80% of the customers at the Louis Vuitton store in Cheongdam-dong area are Japanese. This suggests that Japanese consumers are not ‘over’ the big box-brands as much as they are waiting to buy them at significantly lower prices.

In markets outside of apparel and handbags, the story is more complicated. The decline in the watch market appears intractable. William T. Stonehill, a veteran timepiece marketer with over thirty years of experience selling to the Japanese, says the watch market has been “bloodily axe murdered.” He continues, “We’ve all been hit very hard, and it’s a good question what this business will look like when this is all over.”

According to Stonehill, Japanese companies like Seiko, Citizen, and Casio have all but abandoned their timepiece departments. With regards to strategies in response to the crisis, which apparently started around 1997, Stonehill says, “Nobody has come up with a good idea yet.”

Part of the problem is the nature of the customer. “Up to 60% of all customers of Japanese watch stores are repeat customers,” Stonehill explains. “Basically, the average customer of a watch store is a collector, or has a tendency towards being a collector.”

These customers have been hard hit by the current economic climate and are not willing to shell out for another watch. With most luxury sales in Japan going to ‘obsessives’ rather than to a large group of upper-class aesthetes, the recessionary air essentially destroys demand without much room for international luxury companies to manoeuvre.

Over the last few years, Japanese market researchers have been predicting a higher demand for ‘luxury experiences’, such as high-end travel, over luxury objects. But the market has yet to see this shift in any real sense. Nikkei’s Marketing Journal trade newspaper reported on 19 January 2009 that most of the major travel agents cannot fill the flights to Europe this winter, even though the airlines have dropped their high fuel surcharges. These flights were booked solid just last year.

While luxury markets dependent upon middle-class consumers have been hit hard, niche companies that pinpoint-target Japan’s small affluent families have stayed strong. For example, ICHO — a family-run designer brand selling almost exclusive bespoke casual items for men and women — has seen no change in order volume during the recessionary period. Assistant Manager Satoko Icho tells us, “Our customers are not salaried employees at companies. They tend to be the owners or self-employed. So they can better ride out the economic climate.”

What is it about ICHO that is so appealing to its small client base? First, ICHO’s clothing is constructed from the highest quality materials (mostly original fabrics) and hand-made in the brand’s Aoyama studio by craftsman and head designer Mitsunobu Icho.

Icho made-to-measure garments

Second, each piece is made exactly to the customer’s body and suggestions, with pieces never recreated for other clients. Everything is one-of-a-kind. Many of ICHO’s customers request entire seasonal collections to be made for themselves and their families. Third, ICHO does not advertise, nor is it active in branding or promotion, which is exactly what their clients demand. Satoko Icho explains, “A lot of brands grow their base through introductions from other customers but not us. Our customers want to keep us a secret.”

ICHO illustrates a successful case study of a brand fulfilling the ideals around which analysts claim the luxury market will now revolve once again: exclusivity, high-quality, durability, and high design-sense. ICHO’s business format harkens back to the aristocratic days of the 19th century, providing clothing in a fashion style more in tune with Comme des Garçons than Gieves & Hawkes. The ICHO model of selling exclusively to a stable of faithful wealthy customers is surely a winning solution for small luxury businessmen and craftsmen, but it is unclear whether these business tenets can be transferred to the mass scale desired by investors.

In other words, luxury can weather recession when the business gets back to its original roots as a purveyor of high-end items for a discreet audience, but those halcyon days of exclusivity were not necessarily an inviting time for big business and shareholders. The ‘massification’ of all luxury markets means greater profits in boom times, but much more risk in times of crisis.

W. David Marx, Tokyo Correspondent