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Luxury Slowdown

Big brands down
14 July 2008
Introduction
Between economic uncertainty and taste changes, Western luxury hits a rough spot amongst the Japanese middle class
The Japanese luxury market has hit a rough patch this year, with sales at Louis Vuitton and other European brands down for the first quarter of 2008. Sales for products over Y1,000,000 have not been affected, but aspirational customers – at least 50% of sales for most luxury brands in Japan – are shying away from extravagant purchases during this period of economic uncertainty.

LVMH Japan's revenue was down 4% for the first quarter of 2008. Richemont's Japan revnues  were down 8% in the first quarter. On July 6, Yomiuri Online reported that Hermès Birkin bags – which normally have a two-to-three year wait list – are piling up in stores unsold. Most brands have resorted to radical steps to make up for the hostile environment. Chanel will be having an unprecedented one-month sale in July at department stores. Salvatore Ferragamo, Gucci, and Bally have all announced price reductions.

The explanations for reduced revenues so far have centered on short-term economic factors, such as:

 • Higher food costs and daily expenses cutting into discretionary income
 • Stagnant incomes for most non-executive workers
 • Lower stock prices making the nouveau riche feel less wealthy
 • A consumer credit crunch impeding non-wealthy consumers' luxury buys

Let us consider, however, a few mid-term structural factors in consumer tastes that may continue to impact luxury sales once the global economic situation rebounds:

1) A Generational Obsession with Saving


There are currently more than 10 million full-time workers in Japan who make less than Y2 million a year – and they are mostly in their 20s. On top of having very little discretionary income, anyone younger than 25 has no direct memory of the Bubble Era (1985-1993)’s over-inflated consumerism. The economic news has been generally bad since the Bubble burst, and even when economic growth rates returned to positive around 2003, stagnant wages did not inspire a more optimistic narrative. This means the current youth generation’s normal predisposition to buying luxury goods is weaker than previous generations.

In the economic climate forged by the last two decades, youth have made  saving money into a top priority. Without a huge economic up-tick or some proof of long-term growth for Japan, youth will probably continue to live austerely rather than indulge in luxuries they can’t actually afford.
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