JAPANluxury.pdf

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Special Report:Japan Luxury Goods Survey 2011

Brian Salsberg

Naomi Yamakawa

No seismic shiftfor luxury in post-

quake Japan

McKinsey Consumer and Shopper Insights

June 2011


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Japan remains one of the worlds most

important markets for luxury goods.

Based on publicly available data, it

accounts for about 18 percent of global

sales for Tiffany, Herms, Coach, and

Bulgari; 14 percent for Gucci; 9 percent

for LVMH; and 8 percent for Burberry.1

As a result of the global recession, 2008

and 2009 were difficult years for the

industry. But in 2010, there were signs

of improvement and 2011 began with

promise. Then came the terrible natural

and nuclear disasters of March 11. Rocked

by these crises, Japanese consumers,

and especially those in eastern Japan,

including Tokyo, lost their shopping mojo,

adopting a spirit ofjishuku or voluntary

restraint. Will they recover their taste for

luxury? Or willjishuku reign?

McKinsey & Company Japan set out

to try and answer these questions in

May 2011 by meeting with, and also

conducting a survey of, senior executives

from more than two dozen of the

worlds most renowned luxury-goods

companies, representing leather goods

and accessories; apparel; jewelry and

watches; and the skincare and cosmetics

sectors. We also talked to officials of three

premium automakers. The picture that

emerges, while not definitive, is that the

desire to own luxury goods has not waned

in the wake of what has been called the

nations worst crisis since World War II.

Besides the most powerful earthquake on

record in Japan, the devastating tsunami

that followed, and a lingering nuclear

crisis, the country has had to deal with

collateral damage related to a general

state of anxiety, a crippled economy due

largely to supply chain disruptions, a

sharp drop in tourism, and the looming

threat of disruptive power outages in July

and August.

Despite this gloomy backdrop, just 10

weeks after the disaster the situation is

not nearly as bleak as many had predicted.

In particular, most companies report

no meaningful changes in shopping

behavior in the west of Japan (which

includes Osaka and Nagoya). Many luxury

consumers agree, for instance, that active

consumption is important today precisely

because of the crisis. Purchases of watches

and jewelry have held up well, largely for

two related reasons: in the aftermath of the

earthquake and continuing aftershocks,

consumers are afraid to be alone, leading

to a flurry of engagements and weddings,

and jewelry and watches are among the few

items of value that are easy to bring along

in case of evacuation. Even in categories

that are seeing a slip in purchases, such as

premium skincare, the drop is just as likely

to reflect normal, cyclical downturns as

changing consumer behaviors post-March

11 (including, for example, consumers

who are too anxious to sit for facials or

makeovers due to fears of aftershocks).

Even before March 11, McKinsey and

others had identified a trend toward

nestingthat is, spending more

time at home.2 In the aftermath of the

disasters, some consumers are staying

even closer to home, with shopping

patterns changing accordingly. This

Dealt an earthquake and a nuclear crisis, Japans luxury consumers still couldnot be stopped for long. With travel during the May break known as Golden Weekdown 30 percent, shoppers took to the streets closer to home and once againopened their wallets at crowded luxury boutiques. They did so with caution,however: continuing a two-year trend, consumers are increasingly looking for adeal or other specific reason to purchase, and planned buys are far outweighing

impulse buys. With a continued focus on quality, service, and marketing, Japansluxury market should recover to pre-March 11 levels.

1 Based on publicly available inormation, and not independently verifed by McKinsey.

2 See, or example The New Japanese Consumer, McKinsey Quarterly, March 2010.


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seems to be particularly true in eastern

Japan (including Tokyo), where at least

anecdotally, some have been refraining

from shopping in the center of Tokyo, and

would rather shop closer to home.

Of course, Japan is not, and will not, be

a growth story for luxury, but rather a

share game. A meaningful proportion

of consumers (between 13-20 percent,

depending on age group) are buying

less frequently now than they were in

the past 12-24 months [Exhibit 1] , and

specify two main reasons, their income

is less than it has been in the past, and, as

many responded in our survey, they have

fewer needs or occasions to use luxurygoods. We have also seen the highest

percentage of people (25) agreeing with

the statement, I dont feel the need to

buy luxury brands, since more affordable

(non-luxury) brands also offer good

style since we started the survey three

years ago. This is particularly true among

fashion and apparel buyers, where there

is continued trading down to less

expensive alternatives, especially among

consumers who are aged 40 and over.

Finally, value is still king: for the thirdyear in a row, 20 percent of respondents

say that they will only buy luxury goods if

they are discounted.

Online luxury retailers are benefiting

from all of these trends, and continue

to see strong growth, albeit off a still-

small base, as consumers learn to value

the convenience of shopping by theclick and the ability to compare prices.

Moreover, online retailers are steadily

earning the trust of Japans famously

finicky consumers. In the 2011 survey,

the percentage of those concerned about

after-sales service, including the ability

to return goods, declined more than five

percentage points, to 41 percent and 46

percent of consumers in Tokyo and rural

areas, respectively [Exhibit 2] .

In a sense, our findings simply help

to confirm that the heady days of the

1990s are not back and probably never

will be. But when it comes to luxury,

Japans consumers remain ready to buy

as their economic circumstances permit.

March 11 shook their behavior, but only

temporarily. As long as luxury retailers

continue to promote the value of luxury

and help them justify their purchase, theindustry will almost certainly withstand

the recent tragedy and any subsequent

aftershocks, in much the same way that

it achieved a modest recovery after the

Lehman collapse.

The one wild card, of course, is power

outages. If stores are forced to shut their

doors early, or open late, a complete

recovery will be more challenging.

Here are some of the other highlights of

our research:

Ups and downs: Until March 11,

sales in the luxury sector were higher

across the board compared to 2010.

Indeed, for many luxury-goods

companies, 2011 was shaping up to

be the best year since 2007. After

the earthquake, not surprisingly,

sales slumped. Almost half of the

companies surveyed reported a 10

percent to 20 percent decline; one

in five reported a drop of more than

1 Have purchased luxury good in defined category within last 24 months

SOURCE: McKinsey Japan Luxury Consumer Survey 2011

Exhibit 1:

Among luxury consumers who have changed their shopping behavior, those in their 20s appearmore resilient than others

How have your luxury shopping activities in category X changed over the last 24 months? by age group

Percent who answered Yes, current category luxury purchasers by age group1; n = 1,028

I am purchasing luxury g oods . .. I have switched to buying ...

20sn = 259

30sn = 214

40sn = 215

50s+n = 220

16

20

20

13

14

11

9

9

2

1

4

6

0

1

3

4

Less often More oftenCheaper

brandsHigher-end brands


Exhibit 2:

Online purchase attitudes show no meaningful difference by region

How strongly do you agree with the below statements?Percent; respondents who answered agree or strongly agree (top 2 on scale of 6); n = 1,378

28

65

56

53

41 49

26

65

60

54 56

45

26

68

59

68

24

46

52

54

Tokyo 23Regionalmega Rural areasPref capitals

I am worried that some products may not fitme (e.g., apparel, shoes)

I do not feel comfortable buying a high-ticket luxury items online without seeingand touching the product

I am worried that I will buy a fake product ifI purchase through an online channel

I am concerned about after-sales service

for goods purchased online (e.g., difficultyto return)

The upscale service that I get from land-based stores when I purchase a luxuryproduct is important for me

-5% from 2010

+5% from 2010


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20 percent [Exhibit 3]. Coach, for

example, publicly reported losing $20

million in quarterly sales directly due

to the catastrophe in Japan.

Forecastpartly sunny:While

40 percent of executives surveyed

believe that the events of March 11

and their aftermath (including likely

power cuts) will result in lower salescompared to 2010, 60 percent still

predict the same or higher sales

[Exhibit 4] . And 85 percent maintain

a bullish outlook on Japan in the long

term as an important luxury market.

The looming talent gap: Most

leading luxury companies are

European; they need their best

and brightest to work in Japan as

expatriates. But when we spoke to

them in May, two months after the

earthquake, many were worried about

their ability to bring fresh talent to

Japan, given the ongoing perception

that Tokyo could be vulnerable either

to nuclear or seismic events.

The consumer perspective

For the third year in a row, McKinsey also

surveyed more than 1,300 Japanese luxury

consumers, defined as those who have

purchased any one of 60 brands across four

categories (accessories and leather goods;apparel; shoes; and watches and jewelry)

in the past 24 months. We conducted the

online survey in April from a sample across

the country, excluding people from the

tsunami-hit areas.

Here is what they told us:

The March 11 effect: Almost 20

percent of respondents said that, in the

wake of the disasters, they were less

interested in buying luxury goods. In

addition, there was a sharp increase

in the percentage of those who agreed

that showing off luxury goods is in

bad taste from 24 percent in 2010

to 49 percent in 2011 [Exhibit 5] . But

10

30Somewhatworse

Significantly

worseSignificantlybetter

20Somewhatbetter

25

Same

15

SOURCE: McKinsey Luxury Goods Executive Survey 2011

Exhibit 4:

Among senior luxury executives, 60 percent still believe 2011 will be as good or better than 2010

What is your overall outlook for 2011 performance (sales) vs. 2010?

Percent; n = 19

49

24

31

2009 2011 (n = 1,028)2010 (n = 750)

SOURCE: McKinsey Japan Luxury Consumer Survey 2009/2010/2011

Exhibit 5:

There has been a material increase in the number of consumers wishing to avoid conspicuousconsumption

I feel that showing off luxury goods is in bad tastePercent who selected agree or strongly agree (top 2 on scale of 6)

SOURCE: McKinsey Luxury Goods Executive Survey 2011

Exhibit 3:

March sales in Japan declined by 10 percent or more for most luxury goods players

How did the Earthquake impact your March sales for 2011 as compared with 2010?Percent; n = 20

55

25

Better than2010Same

as 2010

Under 10% dropfrom 2010

10-20% dropfrom 2010

45

Over 20% dropfrom 2010

20

Note: Based on Japan revenues


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this self-restraint appears to be both

temporary and selective: only 4 percent

of respondents thought that people

should cut back on luxury consumption

because of the disasters, while 38

percent agreed that Consumption/

shopping should continue, as it is

important to keep Japans economic

activity going. Still, there is a broad

sense that all cannot be business as

usual. Almost 30 percent said that

luxury-goods companies have an

obligation to use some of their profits

to support ongoing quake relief efforts

[Exhibit 6]. And many players report

seeing younger buyers coming back,

including to department stores, much

more quickly than those age 50 and

up. Finally, there appear to be some

differences in behavior between

eastern and western Japan (Osaka,

Nagoya), which shows a richer degreeof consumer confidence [Exhibit 7].

Justifying luxury: A new question

in this years consumer survey

attempted to test the hypothesis

that consumers need a reason to buy

luxury beyond the simple satisfaction

of ownership. We asked: What was

the main reason you decided to make

your last luxury purchase? About

28 percent said they just wanted

to or liked to treat themselves on

occasion. But 61 percent went further,

citing quality or durability as their

reason [Exhibit 8] . And retailers tell

us that they increasingly hear their

customers looking for reassurances

that their major purchases are

rational or justified, and ask more

questions about sustainability

and charitable giving. While such

concerns tied to making luxury

purchases are universal, those we

spoke with told us that, in the wake

of the March 11 disasters, consumers

are applying these reasons atunprecedented levels in making their

purchase decisions.

Share of wallet:Another new

question in this years survey

probed respondents on what they


Exhibit 6:

Nearly 40 percent of luxury shoppers believe that active consumption is necessary in this timeof crisis

In the context of the earthquake and tsunami of March 11, please tell us how much you agree/disagree with thefollowing statements

Percent who selected agree or strongly agree (top 2 on scale of 6); n = 1,378

38

29

15

4

Consumption/shopping should continue as usual, as it

is important to keep Japans economic activity going

People should refrain from spending money on luxurygoods at this difficult time

I feel peer pressure to save because of todays

environment

Luxury goods companies doing business in Japan

have an obligation to use some of their profits tosupport quake relief efforts

Exhibit 7:

Our survey identified meaningful differences in attitudes between eastern and western Japan

In the context of the earthquake and tsunami of March 11, please tell us how much you agree with thefollowing statement

Percent of those who strongly agree and agreeon a scale of 1-6


Im significantly/somewhat less interested in

shopping for luxury goods since the

earthquake and tsunami"

"I feel pressure to save because of today'senvironment"

"Luxury goods companies doing business in

Japan have an obligation to use some of theirprofits to support quake relief efforts"

1924

1318

2531

East (including

Kanto/Koshinetsu)

n = 719

West (including

Kansai/Chubu)

n = 607

Difference

+5

+5

+6

11

41

7

The quality (i.e., materials,skill) is worth the money

20

21

Other

I like to buy somethingnice for myself a fewtimes a year

If it will last a long time,I dont think its expensive

"No reason I just really want it"


Exhibit 8:

More than half of todays luxury purchasers appear to need a justification to buy

Why did you make your last luxury purchase?Percent; n = 1,372


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would do if they won 300,000 yen

(about $3,800). The breakdown

among the 1,408 consumers was as

follows: 25 percent of the sum would

go to luxury purchases; 29 percent

for travel; 9 percent for hobbies; 7

percent for living expenses; and 28

percent for savings.3 The responses

were remarkably consistent

across age groups, with the only

significant dif ference being that the

50-and-overs spent more on travel

(37 percent) and allocated less to

savings (20 percent).

Tightening the purse strings:

Our survey considered only people

who have previously bought luxury

products; even among this select

group, though, caution is the norm.

Among the 15 percent to 20 percent

of those reporting a change in theirluxury spending patterns over the

past 24 months, most say they are

buying fewer luxury products and

cheaper brands.

Accelerating shift to online:

Across the board, luxury consumers

say they are buying and spending

more online. For example, 62 percent

said they bought more fashion online

and 54 percent said the same of

leather goods. Only 13 percent and 7

percent said they bought less in thesecategories [Exhibit 9] . This represents

good news for pure plays such as

Glamour Sales, Brands4friends.jp,

and market leader Gilt Groupe; it also

means that there is opportunity left

for those who have been late to the

virtual party. Shiseido, for example,

announced the impending launch of

a new website to promote and sell the

skincare brands products (although

how and whether the site will offer

pure e-commerce remains to be seen).

Have time, will travel: Nearly 25

percent of our respondents purchased

luxury goods outside Japan in the

past 24 months, largely because

theyre much less expensive; indeed,

shopping for high-end goods is

one of the major reasons Japanese

give for travelling overseas. The

recent strengthening of the yen has

exacerbated these price differentials,

and the ability of consumers to

compare prices over the Internet

means Japanese retailers cannot

hide their higher prices. This year,

we saw a jump in duty free purchases

within Japan (20 percent of travelers,

compared to 9 percent last year), as

well as in Korea and North America

(excluding Hawaii) [Exhibit 10].

SOURCE: McKinsey Japan Luxury Consumer Survey 2010/2011

Exhibit 9:

Online luxury purchasing behavior continues to accelerate

How has your online purchasing behavior changed over the past 24 months?

Percent of respondents who purchased online within last 24 months

39

49

54

62

25

20

25Leather goods

Shoes

Fashion goods

Watches/jewelry

N/A

51

49

39

25

58

57

57

N/A

10

2

7

13

23

18

17

N/A

More Same Less

2011

2010

SOURCE: McKinsey Japan Luxury Consumer Survey 2010/2011

Exhibit 10:

Compared with last year, luxury sales been stable in Korea and increased in North America

Where did you buy it? a comparison of 2010 and 2011

Percent of respondents who bought luxury fashion products abroad within last 12 months; multiple answer

20

5

12

19

2

7

17

22

25

5

10

21

32

9

4

16

17

22

Korea

Hawaii

Europe

Other Asian countries

Hong Kong/Macau

North America (excluding Hawaii)

Australia/New Zealand

Duty free stores within Japan

Mainland China

2011

2010

3 Remaining 2 percent recorded as Other.


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Taking overseas sales into account, the

Japanese luxury market is likey about

25 percent larger than the headline

figure for domestic sales, putting it

between $15-20 billion, depending

on which categories are included.

Car talk: Although cars are not the

focus of our survey, we threw in a few

questions about luxury automobiles.

Perhaps because good performance

is taken for granted, we found that

todays consumers value comfort,

safety, and eco-friendly features

most when it comes to luxury autos

[Exhibit 11] . As one chief of a major

luxury automaker told us, Less

than 10 years ago, the first thing a

consumer did when they entered our

showroom was to open the hood of

the car and enquire about the engine.

Today, most people care more about

service, fuel efficiency, and whether

they can connect their iPhone. This

is an important insight, considering

the rocky recovery among Japans

carmakers. While production rose a

healthy 21 percent in 2010, it fell in

the first three months of 2011, and

dropped off the cliff in March (down

57 percent) due to post-earthquake

disruptions.

Implications

Our research, among both executives

and consumers, suggests that there

are four trends luxury executives andmanufacturers should bear in mind.

We expect to see Japanese

consumers continue to seek

some justification to buy that

extends beyond mere affinity

for the luxury label or brand.

Whether this is represented by a good

deal, a limited edition item, some

ties to charity or sustainability, or

something more closely related to

the products quality or outstanding

service, manufacturers must pay

attention. In addition, planned

purchases continue to trump

impulse buys, which underscores

the need for strong marketing,

including digital marketing.

Parallel imports (that is, luxury

products meant for markets

outside of Japan) are likely to

continue to pose challenges,

so long as Japan is much more

expensive than other places.Asurging yen, coupled with overseas

shopping and increased comfort

with online buying, will make it

ever more difficult for luxury goods

companies to justify significant price

differences. Luxury brands would

be wise to begin thinking through

the implications of moving toward a

standard global pricing model.

Rally the younger generation.

Conventional wisdom is that

Japanese in their 20s and early 30s

are the post-luxury generation,

eschewing expensive crafted goods

in favor of consumer electronics and

experiences. This is true to some

extentbut not entirely. Of those

surveyed who said they were buying

more luxury goods than before, most

are in their 20s and 30s. Luxury goods

companies should notand cannot

ignore this future consumer base.

Instead, they should nurture it by

carefully selecting the messages and

tools they use to communicate to this

segment, including the use of digital

marketing. Naturally, the Internet has

to be a crucial component in the mix. It

is a sign of the times that on a beautiful

weekend in mid-May, an army of

women in black t-shirts reading

Zozotowna wildly successful high-

end online fashion malltook to the

streets of Omotesando and, standing

in front of the worlds most famous

luxury retail establishments, handed

out 3,000 yen in online coupons to

those passing by.


Exhibit 11:

Luxury consumers also seem to need a justification, such as eco-friendliness, to buyhigh-end autos

Regarding luxury cars, do you agree/disagree to the below statements?

Percent who selected agree or strongly agree (top 2 on scale of 6)

39

33

30

37

50s +

40s

30s

20s

11

13

10

9 50

47

44

52

Luxury cars have characteristics

that justify the premium price

Its worth the money to buy a

luxury car for the superb driving

experience

Being eco-friendly is as

important for luxury cars as

design or driving experience


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Reimagining Japanese luxury

In the forthcoming book edited by

McKinsey,Reimagining Japan:

The Quest for a Future That Works

(Shogakukan, July 2011), two well-known

observers offer contrastingindeed,

diametrically opposedviews on the

future of the luxury market in Japan.

Bernard Arnault, Chairman and CEO of

LVMH, argues that Japanese consumers

have remained constant in their

appreciation of high-quality products and

services. He notes that Japan continues

to play a global role in setting trends

and generating strong followings when

new brands and stores are launched. In

sum, Arnault points out, Japan is notmerely an important luxury market

because of consumers high incomes, but

because of their exacting standards and

sophistication.

From Tyler Brl, editor-in-chief of

Monocle magazine and a columnist for

the Financial Times: What everyone

has failed to identify . . . is that Japan has

steadily transformed itself into the worlds

first post-luxury economyand has

become a more interesting place in the

process . . . This shift is not an after-effect

of the Tohoku disaster; its been going on

for the better part of a decade.

For the complete text of both essays,

plus insights from more than 75 other

thinkers, including the leaders of

Shiseido, Procter & Gamble, Starbucks,

and many others, order or pick up a

copy ofReimaginingJapan. Visit www.reimaginingjapan.com for more details.

Take a more segmented view of

physical channels. Consumers

across the country behave differently,

and the approach to stores in

each region must be customized

accordingly (size, assortment, and

perhaps even services). Brands will

likewise need to be more discerning

about which department stores arebetter to invest in, rather than take a

blanket approach to all.

There is no way to downplay the

significance of the traumatic events

that hit this island nation on March

11, and their impact to consumer

behavior continues to evolve. But

Japanese consumers often have short

memories. In the three years that we have

conducted our luxury survey, we have

seen a resilience in Japan that few other

markets can match. Yes, consumers are

acclimating to online channels. Yes, they

are finding a need to justify purchases

more than in the past. And yes, they do

place a premium on value over brand

name. Perhaps most importantly, theJapanese luxury consumer continues

to become more sophisticated.

Regardless, luxury players can deliver

attractive offerings that shape buyer

decisions, even as buyer behavior evolves.

To tap into what continues to be one of the

worlds most robust luxury markets, they

simply must.

Brian Salsberg is a partner in McKinsey

& Companys Tokyo office and the leader

of the Japan Consumer and Shopper

Insights center and the Japan Consumer

and Retail Practice.

Naomi Yamakawa is a consultant in the

Marketing practice.


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McKinsey Consumer and Shopper Insights

June 2011

Copyright McKinsey & Company

csi.mckinsey.com

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