Japan’s department stores: What’s left when the tourism tide goes out?

Japan’s storied department stores are riding a wave of overseas tourists, and although there is no sign yet of a wipeout, the cautious pronouncements of company executives indicate that it’s a wave they can’t ride on indefinitely.

For sustained revenue and profitability growth, they know that the fashion segment needs to be kept relevant for domestic middle-class customers, and that diversification into other complementary businesses is an important engine of growth. Their high-net worth customers are still very much a key target group, but it would be dangerous for department stores to put all their eggs in that one basket.

On the surface of it, department stores still have their mojo: sales in October rose by 5.3 per cent over October 2022 according to the Ministry of Economy, Trade and Industry (METI). This represented a deceleration from the 8.8 per cent growth in the third quarter and given that inflation has been running above 3 per cent it is a good result without being overwhelming.

However, the leading department store companies, which have since reported their individual sales for November, are showing either a stabilisation or re-acceleration as the year nears its close.

Part of the continuing strength in department stores sales is inbound tourism, and by September the numbers had virtually caught up with 2019, with 2.2 million visitors coming to Japan, bringing the total year to date to 17.4 million. But the composition of those tourists has changed: visitors from China were still down more than 60 per cent in September compared to the same month in 2019. Koreans made up much of the shortfall, with their numbers almost trebling. Luckily for the department stores, Koreans like to spend part of their holidays buying luxury goods every bit as much as the Chinese do.

The weak yen that is helping bring the tourists is also driving an increase in their average spending: they are buying up big-ticket items at department stores, particularly jewelry, watches and designer bags. Cosmetics and winter apparel are also popular among both domestic customers as well as tourists. So duty-free sales numbers at the big flagships in major tourist destinations are strong.

However, since tourism is to some extent a one-off growth driver (recall that Japan was still closed through much of 2022), department store executives are not getting carried with it. It was to be expected and didn’t just fall from the sky. Once growth from that source is anniversaried in 2024, the numbers will be harder to beat.

Regional stores are still scrapping

Another reason for some sobriety is that the big sales growth is still concentrated at the Tokyo stores and the other large centers like Osaka and Kyoto. In contrast, the stores in outlying regions are still struggling to get their pre-pandemic footfall back. For example, Takashimaya’s sales for November at its stores in Tokyo (Shinjuku and Nihombashi) were up in double-digits, while the Osaka and Kyoto units both enjoyed sales growth pushing 20 per cent. Isetan reported a similar experience with its five Tokyo metro area stores (+12 per cent) strongly outperforming those in the regions (+4.3 per cent). 

J. Front Retailing is another important department store company. It owns 15 units under the Daimaru and Matsuzakaya banners, and also operates 17 PARCO shopping malls. Its department stores saw year-on-year sales up 11.0 per cent in November. The Shinsaibashi store (downtown Osaka) was up 25.2 per cent, Daimaru Sapporo was up 23.4 per cent  and the other leading stores in the portfolio were in Tokyo and Kyoto. 

Tenants at J. Front’s PARCO malls enjoyed growth of 14.1 per cent, with womenswear, accessories, jewellery, cosmetics and restaurants were the leading categories. But the company’s president, Yashimoto Tatsuya, observed that the rural stores were recovering more slowly than those in the big downtowns, partly, he believes, because customers have gotten used to both digital and shopping more locally as a result of the pandemic and are less willing to travel longer distances to visit the urban stores.

Department store growth engines

J. Front also underlined the importance of high-value customers (meaning, typically, customers of high net worth) and the huge and growing importance of so-called ‘gaisho’ sales, when a sales representative from the department store goes to the customer rather than the other way about. J. Front estimates that while its sales this year will be 2.6 per cent higher than fiscal 2019, the gaisho sales component will grow by 19 per cent and amount to approximately 200 billion yen (US$1.4 billion). 

There is a natural tendency when visualising these kinds of wealthy department store customers to have a picture of people in their mature years. Certainly, many are, but there is also a growing legion of younger ‘new money’ customers that department stores are cultivating with great interest. 

The other growth engine for the Japan department store companies is diversification of commercial activities, for example Takashimaya’s commercial development subsidiary Toshin, which is involved in shopping mall and mixed-use development in Japan, Singapore and Vietnam. Takashimaya also has a subsidiary called ‘Space Create’ that makes interior design solutions for hotels, offices and other venues.

Japan department stores also see themselves as community purveyors of art and culture, a model they are now embellishing on with frequent major exhibitions and events. This model is not unique to Japan, of course, and has been part of the boom in ‘experiential’ retailing over the last decade, for example as it is embodied in New World Development’s K11 art malls in China and Hong Kong. However, in the case of the Japan department stores, it has a special poignancy since the stores themselves and the buildings that house them are often part of the national heritage.

Sales slowed in October for the others too

The METI report for October that showed sales growth for department stores decelerating after a stellar third quarter is also showing a slowdown at other types of retailers. Top-line growth for the retail industry was 4.2 per cent in October, after 6.7 per cent growth in the third quarter. Supermarkets (+3.5 per cent), convenience stores (+2.2 per cent), specialty electrical appliances (-3.4 per cent), and home improvement (-1.6 per cent) all squeezed on the brakes. The exception were drug stores, which gained 10.3 per cent and maintained their momentum.

November industry sales, which will be released by METI at the end of this month,  will be eagerly anticipated for signs of an across-the-board re-acceleration or further slump in sales. Fortunately, the leading department stores all suggest that the October line will be at least held, possibly bettered.

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