Japan's department stores shift focus to cheaper goods

Once symbols of the excesses of a nation's heady rise, Japan's glitzy department stores are now in retreat as they grapple with a shift in consumer tastes toward cheaper goods.

Government data last week showed that sales at large-scale Japanese retailers fell 4% in February from a year earlier, the 23rd-straight monthly fall. Takashimaya Co., Japan's third-largest department-store chain by sales, said in March it is withdrawing its namesake stores from the U.S. market and shuttering its landmark shop on Fifth Avenue in Manhattan.

The decline of Japan's high-end retailing flagships is particularly visible in Tokyo's tony Ginza shopping district. In their heyday of the late eighties, white-gloved uniformed women were hired for the sole purpose of punching in elevator numbers, while rows of impeccably groomed employees bowed deeply to the first customers of the day. Expensive products were rarely discounted.

But nearly a decade of pernicious deflation has pushed consumers toward cheap, fast fashion, and Ginza is following. Seibu department store, owned by Seven & i Holdings, is set to close by the end of the year. Next month, Forever 21, the affordable U.S. fast fashion retailer, is moving into Matsuzakaya department store, in a space that was previously occupied by Gucci. Uniqlo, Japan's leading clothing retailer, which sells T-shirts for 990 yen, or about $11, has recently expanded its Ginza flagship store due in part to long lines that would snake around its cash registers on weekends.

"Japanese department stores are facing a continuous reduction in demand and they are losing market share to specialty retailers," says Hidehiko Aoki, retail analyst with Bank of America Merrill Lynch in Tokyo. "They have higher costs and much less of a focus on merchandise."

Some are looking to faster-growing parts of Asia for answers. Takashimaya is focusing on the Asian market, said spokesman Takeo Yasukawa. It has stores in Singapore and Taipei and is constructing one in Shanghai that will open in 2012. Mr. Yasukawa added that it is working on remodelling its shop floors in its Osaka store, and that it plans to renovate its store in Tokyo's Nihonbashi district.

Isetan Mitsukoshi Holdings Ltd. Japan's largest department-store company by sales is also strengthening its presence in China and is currently building its second store there in Tianjin. Last year, Mitsukoshi closed its stores in D sseldorf, Madrid and Paris. A spokeswoman said the company was also remodeling its stores in a bid to boost sales.

Analysts say that Japan's staid department stores most of which are frequented by women in their 50s and 60s aren't evolving quickly enough to cater to the changing spending patterns of Japanese consumers, who have embraced cheaper, more disposable fashions.

Despite some consolidation in the industry, the proud culture behind some stores has made mergers difficult. Takashimaya and H2O Retailing Corp. in March said they had scrapped their plans to merge, due to an inability to bridge a rift that developed over how the merged entity would be managed. A merger would have created the nation's second-biggest department-store company by sales.

For decades, Tokyo's upscale department stores were seen as mini-Disneylands a one-stop shop for shopping, entertainment and eating. Most department stores even now house art galleries, an entire floor or two dedicated to restaurants, while some boast kiddie rides on their roofs.

But it is a model that doesn't appeal to Japanese consumers anymore. Nationwide department-store sales, adjusted for changes in the number of stores, fell 10% in 2009 to 6.584 trillion yen, the 13th consecutive year of decline, according to the Japan Department Store Association. It was the first time in 24 years sales fell short of 7 trillion yen.

Isetan Mitsukoshi forecasts a net loss of 65 billion yen for the business year ending March 31. By comparison, Fast Retailing Co., the operator of Uniqlo, reported a net profit for the year ended in August of 49.7 billion yen, up 14% from the year before, while sales rose 17% to 685 billion yen.

Tadashi Yanai, the CEO of Fast Retailing, says that Japanese retailers didn't have "the fire under their butts" until recently. "It's obvious now that the domestic market is on the decline, and people in the retail sector are finally beginning to realize that they are in serious trouble," said Mr. Yanai in a recent interview. "As for us, we have long expected this and have done enough preparation."