Surging yen could change Japan's model for luxury goods sales

For decades, the model for selling luxury imported goods in Japan has been simple: plush surroundings, attentive service and the "Japan premium." Taking advantage of the luxury-goods appetite and high incomes of Japanese consumers, foreign high-end retailers have been able to charge much more than in other markets for the same goods.
But the cozy system may be cracking, thanks in part to a surging yen it hit a fresh 15-year-high against the dollar Tuesday that's encouraging third-party websites to jump in with deep discounts.

Late last month, Yahoo Japan Corp. quietly launched an endaka ("strong yen") sale on its shopping portal, covering imported goods that include shoes, TaylorMade golf clubs and Coach and Gucci handbags. Coach's Heritage striped tote bag, for example, which goes for 63,000 yen (about $747), cost 25,800 yen (about $306). Yahoo says sales of the discounted goods in the week of Aug. 22-28 were five times that of the corresponding week in July.

The discounting may be the latest sign of a significant shift in Japan, long renowned for finicky and sophisticated consumers who accept high prices as a mark of superior quality and craftsmanship. The market for luxury goods first thrived in the heady bubble decade of the 1980s, when owning a branded, European handbag or watch became a symbol of success. And with Japan's vast middle class, these products were within reach for most people. Over the years, luxury-goods retailers such as LVMH's Louis Vuitton and Chanel poured millions of dollars into building striking, massive flagship stores.

But with deflationary pressure, a weak economy and a shift in consumer tastes, sales of luxury goods in Japan have actually been on a decline. The market for imported brand items a rough proxy for luxury goods shrank to $9.94 billion in 2009, down 16% from 2008 and half its 1996 peak, according McKinsey. Coach, the leather-goods maker which is based in New York, said last month that its sales in Japan for fiscal 2010, which ended in July, were essentially flat on a constant-currency basis, which strips out currency fluctuations.

Still the luxury retailers have hung on to the premium and continue to do so even as the yen has climbed to a 15-year high against the dollar and a seven-year high against the euro.

"We do not adjust our pricing due to yen shifts," said Andrea Resnick, Coach's senior vice president of investor relations and corporate communications.

Tariffs on certain categories, such as leather goods and shoes, have contributed to higher prices, but in general the markups in Japan far exceed these extra costs. Coach's Japanese Web site sells its Kristin leather hobo bag for 59,850 yen, or about $710. In the U.S., the same bag sells for $298. A Marc Jacobs Gilda fur and sequin flap bag that sells in Japan for 249,900 yen, or $2,963, is $1,995 in the U.S. The pricing practice continues further down the luxury line, too. Abercrombie & Fitch Co., the Ohio-based purveyor of preppy polos and jeans, opened its first Asian outlet in December in Tokyo; prices in some cases are double those in the U.S. A Celeste sweatshirt, for example, costs 10,800 yen, or around $128, compared with $60 in the U.S.

Abercrombie Chief Executive Mike Jeffries defended the pricing during and earnings conference call earlier this year, calling it "dead-on."

"We are premium brands," he said, "and we get premium prices in these markets."

Online e-commerce sites are pouncing on these pricing differentials. "Thanks to the strong yen, now's your chance to buy foreign brands!" reads Yahoo Japan's strong yen sale site. Coach says Japanese consumers can't be sure they're getting the real thing unless they buy at a Coach store, an authorized retailer or Coach.com. Yahoo Japan said all its goods are legitimate and that it hasn't received any complaints from the brands themselves.

Another way Japanese are getting around higher prices is by going abroad and getting in a little shopping. With the yen so strong, more Japanese are grabbing the chance to travel.

Yoko Chivers, 35, who works in finance in Tokyo, says that she's gotten tired of waiting for retailers at home to adjust prices to reflect the stronger yen, and now puts off her luxury purchases for trips abroad. On a recent trip to Europe she picked up a Ferragamo bag on sale for a third of what it costs in Japan.

"I don't buy big-ticket items in Japan anymore," she said.