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McKinsey's Japan report: The Godzilla of luxury set for another strong year

By Brian Salsberg, Naomi Yamakawa and Nathalie Remy
McKinsey's Japan report: The Godzilla of luxury set for another strong year

Japan’s recent economic surge has lifted spending in the country's important luxury market, keeping Japan firmly on the map for global luxury.

McKinsey's most recent survey of Japanese luxury executives and consumers reveals that spending is up in one of the world's most important luxury markets

Several years ago it seemed that Japan’s days as a premier luxury market were  numbered. The massive earthquake and tsunami of 2011 sapped consumer confidence and put the brakes on luxury spending. In the face of human tragedy and massive financial losses, spending on high-end goods seemed extravagant.

This sober mood was reflected in McKinsey's consumer survey, where in 2011, we recorded the highest percentage of luxury consumers (25 percent) agreeing with the statement: “I don’t feel the need to buy luxury brands, since more affordable (non-luxury) brands also offer good style.”

But today there’s a different sentiment in Japan, thanks in part to Prime Minister Shinzo Abe’s bold economic strategy known as Abenomics. The doubling of Japan’s money supply in two years, increased public spending and the promised deregulation of the country’s notoriously non-entrepreneurial business culture has lifted spirits, at least in some sectors of the economy. Over the past year, the stock market has soared more than 60 percent and a devalued yen has boosted exports and raised corporate earnings. For the first quarter of 2013, Japan’s $5 trillion economy grew at a brisk annualized rate of 3.5 percent, with household consumption accounting for much of that growth.

To understand just how much consumer consumption patterns are changing in Japan, look no further than sales of fancy watches, sports cars and handcrafted leather handbags. In a survey, McKinsey asked 40 country managers a series of questions about their outlook for 2013. Nearly everyone (95 percent) revealed that they expect their company’s sales growth to be higher this year than last. Some 51percent rated their outlook as “significantly better,” while percent said it was “somewhat better.”

An executive at a super-premium auto manufacturer told us that his company had achieved its strongest sales on record. And nearly all accessory and apparel players reported that their store traffic and transaction volumes had accelerated to their highest levels in three years. Not only is Japan still on the map when it comes to the global market for luxury goods, it is expected to remain front and center for some time. Japanese luxury sales are projected to total an estimated $6.7 billion this year and $6.8 billion in 2014.1 According to McKinsey’s proprietary CityScope database, in 2025, three Japanese cities will rank in the top 20 markets for luxury women’s apparel: Tokyo at #2 (Paris comes in at #1), Osaka at #7 and Nagoya at #15. Tokyo is also expected to be #2 for luxury cosmetics and Osaka #12. This despite a rash of new cities from China entering the top 50.

For the past five years, McKinsey has surveyed hundreds of Japanese luxury consumers about what they are buying, how they think about brands, and what they expect when they go shopping. This year’s survey includes 500+ “current” and “lapsed” Japanese luxury consumers, 68 percent of whom are female and 32 percent male. We asked them about their purchases of 76 fashion brands, 52 leather goods/shoe brands and 46 watch/jewelry brands. As we’ve seen in previous years, the Japanese luxury shopper is an increasingly discerning, yet fiercely loyal consumer who is embracing digital methods of browsing, price comparing and purchasing. This year there are some new findings as well. In addition to a gathering tide of optimism not seen in years, we found that the department store channel continues to dominate and that, despite the increased use of digital technology, some very old fashioned modes of marketing influence the way Japanese luxury shoppers think about brands. We also asked consumers what brands they are buying, providing us with a list of the most popular brands purchased in Japan within the last 24 months.

For fashion goods, the top five brands in order of popularity are: Burberry, Ralph Lauren, Coach, Paul Smith and Louis Vuitton.

Leather goods: Coach, LV, Gucci, Burberry and Loewe

Jewelry/watches: Tiffany, Cartier, Gucci, Hermes and Rolex

Shoes: Ferragamo, Gucci, Bally, YSL and Prada

Here are some of this year's other notable findings:

Say goodbye to status symbols:

Until recently, women in Japan gained much of their status and confidence in the form of proudly worn and eagerly displayed branded apparel, handbags, jewelry, and other accessories. Conformity trumped individual expression. Today, the flaunting of luxury goods is no longer in vogue and consumers are looking to express a more individual style. Among the consumers we surveyed, 51 percent agree that showing off luxury goods is in bad taste, up from 24 percent in 2010.

Reports of the death of department stores have been greatly exaggerated:

While the department store in Japan no longer monopolizes the luxury-goods and fashion apparel market like it once did, it is still the #1 place Japanese consumers go to buy luxury goods. Eighty percent of consumers say they have purchased fashion goods at a department store within the past 12 months, with 82 percent saying they have purchased shoes. The difference now is that department stores have to share the stage with brand shops, duty free stores, outlets, and online stores. Unlike these other channels, department stores don’t have much chance of growing their share of the luxury market. A majority of luxury executive (61 percent) regard the future of department stores as bleak. Only 3 percent of executives consider the outlook of this channel to be good. Luxury brands need to understand the important role department stores currently play, especially for women and older shoppers, while at the same time acknowledge that their heyday lies in the past and that future growth will reside in other channels.

Windows matter:

Even as the business of luxury grows increasingly digital, the time-tested, analog showpiece of store window displays continues to take top billing as shopping aid. Among Japanese luxury shoppers, it’s just not true that you can’t judge a book by its cover: Shoppers look to windows to find out what’s new and to assess a brand’s style and image. Companies should regard windows and other store displays not as superficial relics, but an important communication tool. Consumers gave store windows an 8.5 rating (out of 10) in terms of helpfulness when buying a luxury brand. Word of mouth from friends and relatives received a 7.1, magazine articles a 7.0, and magazine ads a 6.7.

Digital luxury:

Smart phones are increasingly becoming an important tool in the purchase process for younger consumers. Sixteen percent of shoppers in their 30s, 11 percent in their 40s and 10 percent in their 20s used their smartphone or tablet PC for  their last luxury purchase, although not necessarily to complete the actual transaction (Exhibit 8). The most popular use for smartphones and tablets was to compare prices (69 percent of smart phone/tablet users went on luxury web sites to price shop), and more often than not this happened on a brand’s Japanese web site. Japanese luxury sites remain more popular with shoppers than brands’ global, non-Japanese sites, although the use of global sites is on the rise compared to last year. Forty-one percent of smart phone users said they browsed a brand’s global site during a purchase, up from 20 percent in 2012. As a result, the way in which a global site links to and integrates with specific country sites is becoming increasingly critical. Additionally, it is important to note that the use of multi-brand web sites has slowed in favor of single brand sites.

The trend toward both digital browsing and online sales is unmistakable. Sixty-nine percent of luxury executives in Japan say that online sales represent a meaningful slice (more than 5 percent of the total) of their Japanese business. As a result, many luxury companies have already adjusted their priorities to target this new digital behavior, although there remains room for improvement. Fifty-nine percent of luxury executives say digital marketing is “very important” relative to overall marketing. Thirtyone percent told us it was “somewhat important” and just 10 percent declared it to be “not important.” Most companies are allocating up to 25 percent of their marketing budget to digital marketing. Half say they are spending between 10 and 25 percent.