With a greying population and an economy in crisis, disputes between neighbours and China looming large, Japan is under pressure despite efforts to bounce back. Its pride also took a blow when last year it lost its ranking as the world’s second-largest economy to China. Once a honeypot for the luxury segment and, by extension, watchmaking, the time has come to “forget Japan,” as Jon Cox, an analyst at Kepler, jokes.
According to Cox, it could be a while before Japan, in decline since the property and financial bubble burst in the early 1990s, returns to former heights. Watch exports to Japan have been contracting since 2006, notes analyst René Weber at Vontobel. Despite a significant upturn in the global economy in 2010, Japan stayed in the red through to September. As a result, it slid from being the number-three importer of Swiss watches in 2008 to seventh place in 2010, losing ground to France, China and Singapore. With market share down to 5% (CHF 806.3 million), Japan has dropped 30% on its pre-crisis level. Only Greece has slipped further down the Federation of the Swiss Watch Industry league table. Even the US, a market supposedly on dripfeed, is posting less of a gap. In six years, watch exports to Japan have fallen by CHF 200 million.
However, Swiss watch brands are blocking their ears to the doomsayers and refusing to give in to defeat. “Yes, Japan is struggling for economic reasons but it remains a well-informed market for watches with a great many connoisseurs,” says Susanne Hurni, spokesperson for Ulysse Nardin. Even after prolonged difficulties, “Japan is a country of knowledgeable collectors and people with a passion for time measurement,” comments Julianne Gauthier for Audemars Piguet.
Just back from Asia, Stefano Macaluso, Chairman of Sowind SA which owns the Girard-Perregaux and JeanRichard brands, observes that “the style of consumerism is clearly changing. Classic branding is no longer enough, which is why we need to find new product strategies that will engage the public. Japanese consumers like legitimate brands; ones whose content, meaning the quality of their products and service, is coherent with their form, i.e. their image, and history.” Alain Spinedi, CEO of Louis Erard, takes a slightly more sceptical view: “I’m not sure we should be burying Japan just yet. My partners tell me the last quarter 2010 was up on previous years. We need to realise that to a certain extent, difficulties are the result of a thriving parallel market.”
This is something only the top brands can afford as high rents make it hard to turn a profit with these points of sale.
Beyond purely cyclical aspects, the Japanese market is also in the process of structural change. The market is saturated, domestic consumption is stagnating, and the Japanese are turning away from big-name brands and latching on to little-known designers: hence the crowds in districts such as Tokyo’s Ura-Harajuku. The department store, traditionally the main outlet for timepieces, is in decline. None of this has escaped brands’ attention, at least the ones with the resources to open their own stores, mainly in the Ginza and Aoyama districts of Tokyo, and in Shinsaibashi and Umeda in Osaka. Tokyo’s Nicolas Hayek Center, which is home to several Swatch Group brands, is a prime example. Although as René Weber points out, “this is something only the top brands can afford as high rents make it hard to turn a profit with these points of sale.”
The importance of women
In Japan, as in most mature markets, brands therefore have to battle it out, customer by customer. “Culturally, the Japanese are extremely receptive to savoir-faire and detail, and they find this in watchmaking,” Susanne Hurni observers. “They are also familiar with developments in watchmaking, thanks in particular to a highly developed retail network but also the country’s many specialist publications.”
Stefano Macaluso points to another stumbling block: “New generations don’t necessarily share the same interests as older ones. Whereas conspicuous consumption used to be important, it no longer matters so much to young Japanese, who favour different experiences.” According to Vincent Bastien, a lecturer at HEC Business School and Dauphine University in Paris, “the Japanese have increasingly “Western” aspirations. They are more individual and therefore less conventional, less inclined to follow the crowd.” The “me too” phenomenon is waning. Japan is also very much a woman’s market which, according to René Weber, is why luxury brands such as Hermès (21%), Bulgari (19%) and LVMH (10%) have a wider geographic breakdown than watch brands such as the Swatch Group (6%) or Richemont (12% thanks to Cartier). Although, as Weber adds, “growth is becoming more of a challenge now that every Japanese woman owns a Louis Vuitton bag.”
Finding a foothold in any mature market is also a challenge for newer brands, as Emmanuel Vuille, managing director at Greubel Forsey, confirms: “Japan is a magnificent and original country, but we haven’t managed to break into the market yet, without knowing exactly why. Obviously, it’s an important market and still one of our priorities.” And in the mid-range? Japan offers strong opportunities for accessible luxury, Alain Spinedi declares.
Rarefy the product
“In Luxury goods in Japan: Momentary sigh or long sayonara”, McKinsey Asia Consumer and Retail gives its diagnosis of luxury in Japan, and prescribes solutions to shake the country from its slumber. None are really radical and have already been tried, from cost cutting to multiplying channels, boosting brand equity and overinvesting in CRM. McKinsey advocates clearly defining target consumers with a specific approach per segment: connoisseurs, collectors, followers and trendsetters. Brands also need to cultivate exclusivity, or at least the self-proclaimed “exclusive” brands that have flooded the market.
Indeed, another point to note is that brands maintain dense retail networks in Japan: the major luxury players have twice as many points of sale in Japan as in the US, two comparable markets for the luxury sector. Targeting products to customer segments is one option; closing POS is another. Certain economists have dubbed Japan “the land of the setting sun” in reference to its deflationist spiral, and while the country is certainly no longer the driving force it used to be for the watch industry, brands have no plans to write it off yet.