Global Retail   //   May 14, 2024

Japan is edging out China as a luxury hotspot

For years, luxury goods companies have relied on China, the world’s second-largest economy, for growth. Mainland China is expected to account for 24% to 26% of the luxury purchases in the world by 2030, per Bain. And yet, as the country faces economic hurdles, a different market — Japan — is solidifying itself as a luxury juggernaut.

Over the past four weeks, some of the world’s biggest luxury conglomerates have posted strong numbers in Japan, even as their general businesses declined. On April 16, LVMH reported that organic revenue at its fashion and leather goods business had slowed down at the start of the year. And yet, in Japan, the company posted “double-digit revenue growth” during its first quarter, per a press release. LVMH’s organic revenue in Asia excluding Japan, meanwhile, declined 6% year-over-year in the same quarter.

Gucci’s owner Kering recently worried investors when saying its revenue could decline up to 45% in the first half of fiscal year 2024. Still, when divulging earnings three weeks ago, Kering said that sales in Japan were up 16% year-over-year. In contrast, Kering’s sales in the Asia-Pacific region as a whole dipped. Tapestry, which is struggling to get its acquisition of Capri Holdings over the line, said last week that sales in Japan were up 2% year-over-year, while sales in Greater China were down 2% year-over-year.

When China lifted its zero-Covid restrictions last year, luxury companies benefitted from a boom in sales. The past few quarters, though, have seen a decline in the number of shoppers buying luxury goods in China as the country grapples with a mix of high inflation, rising debt and elevated levels of youth unemployment. In December, the World Bank projected China’s growth in 2024 at 4.5%, down from 5.2% in 2023.

While many shoppers still turn to China for luxury apparel, footwear and accessories, Japan is gaining traction in the sector. Some of this is due to Japan’s weakening currency. As WWD recently reported, the Japanese yen is now at a 34-year low against the dollar, meaning price differences for luxury goods between Mainland China and Japan have reached their highest level in some 18 months. This has encouraged some Chinese shoppers to travel to Japan to make luxury purchases, per Bloomberg. Japan also has a tax refund on certain products bought in the country. According to Luxurynsight, Chinese shoppers can save up to 25% after a tax refund by buying goods in Japan.

Jessica Ramírez, senior research analyst at Jane Hali & Associates, told Modern Retail that while luxury companies have seen varying success in China, “Japan is a strength.” Japan had a negative interest rate for eight years straight, in part to try and boost economic growth. Now, that growth is becoming more pronounced, so much so that in March, Japan raised its interest rate for the first time in 17 years.

Still, some luxury companies have managed to hold onto sales in China. Hermes’s revenue in the Asia-Pacific market, excluding Japan, jumped 14% to €1.92 billion during its most recent quarter. And Prada’s revenue in the Asia-Pacific market climbed 16% year-over-year. “For some conglomerates, China has been decent,” Ramírez said. “And for others, it hasn’t. It’s a variation of how strong the brand is resonating with that customer. It’s a mixed bag.”

That mixed bag has been reflected across the luxury landscape. Compared to the early days of the pandemic — a time when many shoppers “revenge-spent” on bags, watches and other expensive items — luxury is now going through a period of normalization, experts say. The luxury category is expected to grow 3% to 5% in 2024, compared with 5% to 7% in 2023, according to McKinsey.

In terms of who is doing well in luxury, “it’s really come down to pricing power,” Brian Ehrig, partner at Kearney, told Modern Retail. “Unit volumes are down, I think, for just about everyone, even last year, when things seemed to be really hot. The growth that was coming was primarily due to increases in price. And it seems that we’ve come to a point where even very wealthy consumers are looking at the value for the money and saying, ‘I don’t think I should pay more for this bag or shoes.'”

Some fashion houses are making moves to try and stave off a slowdown. Tapestry, which is dealing with a lawsuit from the U.S. government over its planned $8.5 billion acquisition of Capri, is upping its focus on outlet stores and adding high-demand products at full prices. In the meantime, Kering’s beauty division appointed L’Oréal alumnus Alexandre Choueiri its new Americas president and CEO in April. And LVMH is stepping up its succession plans, with its chairman appointing two of his children to the board in the last few weeks.