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Almost every luxury company that reported its second-quarter earnings shared the same standout market: Japan. Amid a broader luxury slowdown, Japan was, in some cases, the only market that posted positive sales growth while key markets such as China, the US and Europe declined.
Japan witnessed strong results regardless of whether the company in question was bucking the luxury slowdown or not. Prada and Hermès, who emerged as winners with overall sales growth of 18 per cent and 13.3 per cent respectively, reported overperformances in Japan, with 65 per cent and 19.5 per cent growth, respectively.
Companies that were hit hardest by the downturn still posted gains in Japan. Ferragamo’s sales dipped 12.8 per cent in Q2 but Japan grew 9.8 per cent (compared to a 14.9 per cent drop in the rest of APAC, -3.2 per cent in the US and -2.9 per cent in EMEA). Kering, which posted an 11 per cent decline in Q2, said sales in Japan grew 27 per cent (compared to a 8 per cent slump in Western Europe, -11 per cent in North America and -25 per cent in rest of APAC).
Why the big spike? The short answer is tourism. “For the time, we still see a lot of Chinese travellers in Japan, which basically says something about the appetite of Mainlanders for our brands: it shows no sign of fading away,” LVMH CFO Jean-Jacques Guiony told analysts during the company’s second-quarter earnings call. Similarly, Moncler, Ferragamo and Prada all cited tourism in Japan as the reason for strong sales growth in the region.
Much of the spike is currency driven: the weak yen has attracted those tourists, particularly from the rest of Asia, as Japan is more convenient to travel to than North America or Europe for example. “The purchases by Chinese customers, still remaining mostly in Asia Pacific countries, shifted more into Japan lately,” said Ferragamo CEO Marco Gobbetti on the company’s Q2 earnings call.
Most companies are reluctant to become overly reliant on Japan because of how big a role currency fluctuations have played. “Any disruptions in international travel or economic downturns in key tourist-origin countries could adversely affect the market. General economic uncertainties and potential geopolitical issues pose risks to sustained growth in the luxury sector,” says Federica Levato, senior partner at consultancy Bain. According to Euromonitor, Japan’s personal luxury goods market grew from $23.8 billion (the same as pre-pandemic levels) in 2022 to $27.1 billion in 2023, but is predicted to dip slightly to $26.2 billion in 2024.
That Japan is growing at China’s expense is weighing on the industry, a region that is usually luxury’s growth horse and bellwether. “This situation of Japan attracting most of the growth is creating a bit of deflationary pressure in China itself because if you can’t buy at Japanese prices, you don’t buy and wait until you go to Japan,” said LVMH’s Guiony on the call. “It’s quite complicated to anticipate what will happen in the second half. We have no reason to be pessimistic, but being optimistic would be quite bold at this point in time.”
The question now is which factors might extend the good streak in Japan — and how luxury companies can make the most of the market’s spike in growth right now, however short-lived it may be.
Winning strategies for Japan
Curing the luxury slowdown won’t be as simple as relying on Japan to boost sales. The country — which is the world’s 10th largest by population — makes up about 10 per cent of global luxury sales, according to Mario Ortelli, analyst and managing partner at luxury advisory firm Ortelli Co. Japan still makes up a relatively small market share for most luxury companies, so it’s unlikely that any business will become overly reliant on Japan the way some did with China.
What’s the winning strategy? “This growth is due to strategies focused on matching demand with supply — having an assortment that serves well the incoming tourists but also continuing to cater to the interest of locals — and enhancing the customer experience through personalised services and events,” says Levato.
To mitigate the risk of relying on tourist spending in Japan, one solution is to lean into the local market with tailored activations. This year, Gucci is celebrating 60 years in Japan with a series of events targeted at the local population. Part of the celebration included a new exhibition, hosted last month at the Gucci Ginza Gallery, to showcase its vintage Bamboo 1947 bag, reimagined by traditional Japanese artisans and contemporary artists.
As tourists flock to Japan to capitalise on good deals, experts agree that increasing prices to make up the difference may alienate local customers and weaken brand equity if prices then decrease after the yen stabilises. “Luxury brands did not increase prices to fully recover from the weak yen in order to not retaliate the domestic demand and to not have an excessive price tag if/when the yen increases,” says Ortelli.
The Japanese government may also have an incentive to boost tourism, which could be good news for luxury. Japan’s economy itself is not particularly reliant on inbound tourism right now, says Euromonitor’s Tokyo-based consultant Sachi Kimura. Inbound tourism only consisted of 8 per cent of Japan’s total tourism in 2023, she says, “which means the majority of tourism in Japan is supported by domestic travel”. Due to the higher cost of living and an ageing population, however, domestic travel has begun to stagnate, according to Kimura. “We expect that the government push will help support inbound tourism growth towards the forecast period [since domestic tourism is stagnating],” she says. The difficulty is that a spike in demand requires more young workers to support it.
In addition to tourism, there are a number of other factors that will determine Japan’s sales growth longevity, says Levato.
“Japan’s attractiveness as a shopping destination needs to be maintained. A steady or improving consumer confidence among local buyers will support ongoing market strength. Avoiding significant global economic disruptions will be necessary to maintain the current growth trajectory,” she says. “The future performance will largely hinge on the continuation of these trends and the ability to navigate potential risks associated with economic and geopolitical uncertainties.”
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