Lex in a recent note on Luxury in Japan:

What is really spooking the industry though – in a country that has accounted for over half of Louis Vuitton’s sales – are fears that buyers will stay away when the economy recovers.

The column refers to an interesting recent McKinsey report on the Japanese Luxury market.

I think anyone who’s been to Japan will agree it’s the world’s most sophisticated consumerist society. The report attempts to assess the potential long-term impacts of the current downturn that has seen year to date sales decreases of 10% – 20% in Japan. The Japanese consumer base remains the No. 1 consumer for the luxury goods sector and so the market’s developments are vital to the sector.
The long-term question is also vital in terms of Japan perhaps being a harbinger for luxury trends globally (it could of course also be a very specific exception but I’d hedge with the universality approach though with potential for significant time lags in trends coalescing).

Japan’s luxury market has grown so fast and fragmented so far and extended to the middle class consumer with such fervor that one wonders if there’s a certain saturation point beyond which luxury loses its credibility. Part of luxury’s original allure after all was scarcity.

The report highlights some recent trends from Japan:

Decline of conformity and the rise of individuality
This I think is a growing trend all over the world. The question is when does this happen in luxury’s fastest growing markets – China and the Middle East. Will they develop along the familiar arcs of Japan and Europe or will they leap-ahead, catching up with the developed markets in the ways they have in other markets such as tech / mobile? My limited experience of China leads me to think that China will get there before the Middle East as contemporary Chinese culture leaders are already localizing style trends (last month’s Wallpaper* magazine Made In China special was a nice look into that world). The Middle East seems to still look primarily at the US and Europe for its fashion and cultural reference points. Still, it’s just a matter of time.

Increasing preference for luxury experiences rather than luxury goods.
I sense that this trend might take a little longer to play out in China, The Middle East and India where luxury still seems to play an important role as a visible status symbol. Here though, the Middle East may beat China and India to the experience as the saturation point of luxury will be reached far sooner meaning standing out from the crowd may need to move on to other areas like holidays, spa treatments, etc.

Fragmentation of the luxury wallet.
This is partially due to competition from other luxury expenditure (experiences vs goods – so airlines, hotels, spas, restaurants etc) and partially due to the proliferation of goods targeting the luxury consumer (these now include fast fashion brands, sportswear brands and increasing numbers of luxury or premium brands).

Luxury bubble.
McKinsey also claim that part of the growth of luxury in Japan was an unsustainable bubble driven by a rising Euro, an influx of foreign brands entering the market and massive store expansions all around. These trends are now all reversing or plateauing.

Diminishing importance of the department store.
The report also notes that department store sales have been decreasing and see the potential for this trend to continue unless the department stores make strategic changes (that McKinsey would no doubt happily consult on!).
I question how much of this trend is linked to the massive expansions of mono-branded retail even for niche brands. The report also notes that the number of department store doors have fallen consistently over recent years which will have contributed to the trend. If there’s a retrenchment of mono-branded businesses there may even be an additional opportunity for department stores to claw back market share.

What does it all really mean?
The report claims, unsurprisingly that consumers are trading down due to economic factors. However, about one-third claim their buying habits have changed for good and this is what is worrying the industry. I imagine it is also quite likely that minds will be changed again once confidence returns, but that may be a painful wait and it may leave a permanently altered and possibly smaller luxury landscape.

McKinsey make a few recommendations:

Consolidating brands and reviewing under-performing brands.
This runs counter to the consumer desire for individual – which would imply more niche brands.

Extending brands. Armani, Missoni, Bugatti have already begun doing so with their moves into hotels, restaurants etc.

Over-invest in CRM. Customer experience is forecast to be a major differentiating factor in the success of certain brands and retailers over others. Data-mining is also singled out as an area for improvement, especially for department stores. The report notes that the best customers account for anywhere between 20% to 45% of sales – this is where the focus needs to be.

Online sales are expected to grow. Samantha Thavasa is held up as an example of what can be done. Some Japanese department stores are already seeing online stores amongst their top 5 performing stores.

Luxury in the Gulf.
What if anything does this all mean for the industry in the Gulf (one of only two markets expected to grow this year)?
There was probably an element of over-expansion of luxury there too by both retailers and developers (although based on better short-term fundamentals than China’s phantom luxury mall projects). I still sense that the sophistication of the GCC consumer lags most other markets which should play into the big luxury groups’ strengths; advertising and location will continue to drive the consumer habits. Department stores were also late to the game and are probably better placed to perform solidly in the region.
There will doubtless be a shake-out with lesser performing brands being dropped as retailers focus on their winners but the industry faces far fewer of the existential concerns confronting the land of the rising sun.