June 2011

McKinsey Consumer and Shopper Insights

No seismic shift for luxury in postquake Japan

Special Report: Japan Luxury Goods Survey 2011

Brian Salsberg Naomi Yamakawa

Dealt an earthquake and a nuclear crisis, Japans luxury consumers still could not be stopped for long. With travel during the May break known as Golden Week down 30 percent, shoppers took to the streets closer to home and once again opened their wallets at crowded luxury boutiques. They did so with caution, however: continuing a two-year trend, consumers are increasingly looking for a deal or other specific reason to purchase, and planned buys are far outweighing impulse buys. With a continued focus on quality, service, and marketing, Japans luxury market should recover to pre-March 11 levels.

Japan remains one of the worlds most important markets for luxury goods. Based on publicly available data, it accounts for about 18 percent of global sales for Tiffany, Herms, Coach, and Bulgari; 14 percent for Gucci; 9 percent for LVMH; and 8 percent for Burberry.1 As a result of the global recession, 2008 and 2009 were difficult years for the industry. But in 2010, there were signs of improvement and 2011 began with promise. Then came the terrible natural and nuclear disasters of March 11. Rocked by these crises, Japanese consumers, and especially those in eastern Japan, including Tokyo, lost their shopping mojo, adopting a spirit of jishuku or voluntary restraint. Will they recover their taste for luxury? Or will jishuku reign? McKinsey & Company Japan set out to try and answer these questions in May 2011 by meeting with, and also conducting a survey of, senior executives from more than two dozen of the worlds most renowned luxury-goods

companies, representing leather goods and accessories; apparel; jewelry and watches; and the skincare and cosmetics sectors. We also talked to officials of three premium automakers. The picture that emerges, while not definitive, is that the desire to own luxury goods has not waned in the wake of what has been called the nations worst crisis since World War II. Besides the most powerful earthquake on record in Japan, the devastating tsunami that followed, and a lingering nuclear crisis, the country has had to deal with collateral damage related to a general state of anxiety, a crippled economy due largely to supply chain disruptions, a sharp drop in tourism, and the looming threat of disruptive power outages in July and August. Despite this gloomy backdrop, just 10 weeks after the disaster the situation is not nearly as bleak as many had predicted. In particular, most companies report no meaningful changes in shopping behavior in the west of Japan (which

includes Osaka and Nagoya). Many luxury consumers agree, for instance, that active consumption is important today precisely because of the crisis. Purchases of watches and jewelry have held up well, largely for two related reasons: in the aftermath of the earthquake and continuing aftershocks, consumers are afraid to be alone, leading to a flurry of engagements and weddings, and jewelry and watches are among the few items of value that are easy to bring along in case of evacuation. Even in categories that are seeing a slip in purchases, such as premium skincare, the drop is just as likely to reflect normal, cyclical downturns as changing consumer behaviors post-March 11 (including, for example, consumers who are too anxious to sit for facials or makeovers due to fears of aftershocks). Even before March 11, McKinsey and others had identified a trend toward nestingthat is, spending more time at home.2 In the aftermath of the disasters, some consumers are staying even closer to home, with shopping patterns changing accordingly. This

1 2

Based on publicly available information, and not independently verified by McKinsey. See, for example The New Japanese Consumer, McKinsey Quarterly, March 2010.

Among luxury consumers who have changed their shopping behavior, those in their 20s appear more resilient than others
How have your luxury shopping activities in category X changed over the last 24 months? by age group Percent who answered Yes, current category luxury purchasers by age group1; n = 1,028 I am purchasing luxury goods ... Less often More often 20s n = 259 30s n = 214 40s n = 215 50s+ n = 220
20 20 16 1 2 14 13 4 11 0 6 9 9 1 3

Exhibit 1:

I have switched to buying ... Cheaper Higherbrands end brands

4

to confirm that the heady days of the 1990s are not back and probably never will be. But when it comes to luxury, Japans consumers remain ready to buy as their economic circumstances permit. March 11 shook their behavior, but only temporarily. As long as luxury retailers continue to promote the value of luxury and help them justify their purchase, the industry will almost certainly withstand the recent tragedy and any subsequent aftershocks, in much the same way that it achieved a modest recovery after the Lehman collapse. The one wild card, of course, is power outages. If stores are forced to shut their doors early, or open late, a complete recovery will be more challenging. Here are some of the other highlights of our research: Ups and downs: Until March 11, sales in the luxury sector were higher across the board compared to 2010. Indeed, for many luxury-goods companies, 2011 was shaping up to be the best year since 2007. After the earthquake, not surprisingly, sales slumped. Almost half of the companies surveyed reported a 10 percent to 20 percent decline; one in five reported a drop of more than

1 Have purchased luxury good in defined category within last 24 months SOURCE: McKinsey Japan Luxury Consumer Survey 2011

seems to be particularly true in eastern Japan (including Tokyo), where at least anecdotally, some have been refraining from shopping in the center of Tokyo, and would rather shop closer to home. Of course, Japan is not, and will not, be a growth story for luxury, but rather a share game. A meaningful proportion of consumers (between 13-20 percent, depending on age group) are buying less frequently now than they were in the past 12-24 months [Exhibit 1] , and specify two main reasons, their income is less than it has been in the past, and, as many responded in our survey, they have fewer needs or occasions to use luxury goods. We have also seen the highest percentage of people (25) agreeing with the statement, I dont feel the need to buy luxury brands, since more affordable (non-luxury) brands also offer good style since we started the survey three years ago. This is particularly true among fashion and apparel buyers, where there is continued trading down to less expensive alternatives, especially among consumers who are aged 40 and over. Finally, value is still king: for the third year in a row, 20 percent of respondents say that they will only buy luxury goods if they are discounted. Online luxury retailers are benefiting

from all of these trends, and continue to see strong growth, albeit off a stillsmall base, as consumers learn to value the convenience of shopping by the click and the ability to compare prices. Moreover, online retailers are steadily earning the trust of Japans famously finicky consumers. In the 2011 survey, the percentage of those concerned about after-sales service, including the ability to return goods, declined more than five percentage points, to 41 percent and 46 percent of consumers in Tokyo and rural areas, respectively [Exhibit 2] . In a sense, our findings simply help
Exhibit 2:

Online purchase attitudes show no meaningful difference by region

How strongly do you agree with the below statements? Percent; respondents who answered agree or strongly agree (top 2 on scale of 6); n = 1,378 Tokyo 23 I am worried that some products may not fit me (e.g., apparel, shoes) I do not feel comfortable buying a highticket luxury items online without seeing and touching the product I am worried that I will buy a fake product if I purchase through an online channel I am concerned about after-sales service for goods purchased online (e.g., difficulty to return) The upscale service that I get from landbased stores when I purchase a luxury product is important for me 65 Regional mega 65 Pref capitals 68

-5% from 2010 +5% from 2010

Rural areas 68

56

60

59

54

53

54

56

52

41

49

45

46

28

26

26

24

SOURCE: McKinsey Japan Luxury Consumer Survey 2011

20 percent [Exhibit 3]. Coach, for example, publicly reported losing $20 million in quarterly sales directly due to the catastrophe in Japan. Forecastpartly sunny: While 40 percent of executives surveyed believe that the events of March 11 and their aftermath (including likely power cuts) will result in lower sales compared to 2010, 60 percent still predict the same or higher sales [Exhibit 4] . And 85 percent maintain a bullish outlook on Japan in the long term as an important luxury market. The looming talent gap: Most leading luxury companies are European; they need their best and brightest to work in Japan as expatriates. But when we spoke to them in May, two months after the earthquake, many were worried about their ability to bring fresh talent to Japan, given the ongoing perception that Tokyo could be vulnerable either to nuclear or seismic events.

March sales in Japan declined by 10 percent or more for most luxury goods players
How did the Earthquake impact your March sales for 2011 as compared with 2010? Percent; n = 20 Better than Same 2010 as 2010 5 5

Exhibit 3:

20

Over 20% drop from 2010

Under 10% drop 25 from 2010

45 10-20% drop from 2010

Note: Based on Japan revenues SOURCE: McKinsey Luxury Goods Executive Survey 2011

Among senior luxury executives, 60 percent still believe 2011 will be as good or better than 2010
What is your overall outlook for 2011 performance (sales) vs. 2010? Percent; n = 19

Exhibit 4:

Significantly worse
10

Significantly better 15

Somewhat 30 worse

20

Somewhat better

The consumer perspective

For the third year in a row, McKinsey also surveyed more than 1,300 Japanese luxury consumers, defined as those who have purchased any one of 60 brands across four categories (accessories and leather goods; apparel; shoes; and watches and jewelry) in the past 24 months. We conducted the online survey in April from a sample across the country, excluding people from the tsunami-hit areas. Here is what they told us: The March 11 effect: Almost 20 percent of respondents said that, in the wake of the disasters, they were less interested in buying luxury goods. In addition, there was a sharp increase in the percentage of those who agreed that showing off luxury goods is in bad taste from 24 percent in 2010 to 49 percent in 2011 [Exhibit 5] . But
31 24

25 Same

SOURCE: McKinsey Luxury Goods Executive Survey 2011

There has been a material increase in the number of consumers wishing to avoid conspicuous consumption
I feel that showing off luxury goods is in bad taste Percent who selected agree or strongly agree (top 2 on scale of 6)
49

Exhibit 5:

2009

2010 (n = 750)

2011 (n = 1,028)

SOURCE: McKinsey Japan Luxury Consumer Survey 2009/2010/2011

this self-restraint appears to be both temporary and selective: only 4 percent of respondents thought that people should cut back on luxury consumption because of the disasters, while 38 percent agreed that Consumption/ shopping should continue, as it is important to keep Japans economic activity going. Still, there is a broad sense that all cannot be business as usual. Almost 30 percent said that luxury-goods companies have an obligation to use some of their profits to support ongoing quake relief efforts [Exhibit 6]. And many players report seeing younger buyers coming back, including to department stores, much more quickly than those age 50 and up. Finally, there appear to be some differences in behavior between eastern and western Japan (Osaka, Nagoya), which shows a richer degree of consumer confidence [Exhibit 7]. Justifying luxury: A new question in this years consumer survey attempted to test the hypothesis that consumers need a reason to buy luxury beyond the simple satisfaction of ownership. We asked: What was the main reason you decided to make your last luxury purchase? About 28 percent said they just wanted to or liked to treat themselves on occasion. But 61 percent went further, citing quality or durability as their reason [Exhibit 8] . And retailers tell us that they increasingly hear their customers looking for reassurances that their major purchases are rational or justified, and ask more questions about sustainability and charitable giving. While such concerns tied to making luxury purchases are universal, those we spoke with told us that, in the wake of the March 11 disasters, consumers are applying these reasons at unprecedented levels in making their purchase decisions. Share of wallet: Another new question in this years survey probed respondents on what they

Nearly 40 percent of luxury shoppers believe that active consumption is necessary in this time of crisis
In the context of the earthquake and tsunami of March 11, please tell us how much you agree/disagree with the following statements Percent who selected agree or strongly agree (top 2 on scale of 6); n = 1,378

Exhibit 6:

People should refrain from spending money on luxury goods at this difficult time I feel peer pressure to save because of todays environment Luxury goods companies doing business in Japan have an obligation to use some of their profits to support quake relief efforts Consumption/shopping should continue as usual, as it is important to keep Japans economic activity going

15

29

38

SOURCE: McKinsey Japan Luxury Consumer Survey 2011

5 Exhibit 7:

Our survey identified meaningful differences in attitudes between eastern and western Japan
In the context of the earthquake and tsunami of March 11, please tell us how much you agree with the following statement Percent of those who strongly agree and agree on a scale of 1-6 East (including Kanto/Koshinetsu) n = 719 Im significantly/somewhat less interested in shopping for luxury goods since the earthquake and tsunami" "I feel pressure to save because of today's environment"
24

West (including Kansai/Chubu) n = 607

19

Difference

+5

18

13

+5

31

"Luxury goods companies doing business in Japan have an obligation to use some of their profits to support quake relief efforts"

25

+6

SOURCE: McKinsey Japan Luxury Consumer Survey 2011

More than half of todays luxury purchasers appear to need a justification to buy
Why did you make your last luxury purchase? Percent; n = 1,372

Exhibit 8:

Other "No reason I just really want it" 7

11

If it will last a long time, 41 I dont think its expensive

I like to buy something nice for myself a few times a year

21

20 The quality (i.e., materials, skill) is worth the money

SOURCE: McKinsey Japan Luxury Consumer Survey 2011

would do if they won 300,000 yen (about $3,800). The breakdown among the 1,408 consumers was as follows: 25 percent of the sum would go to luxury purchases; 29 percent for travel; 9 percent for hobbies; 7 percent for living expenses; and 28 percent for savings.3 The responses were remarkably consistent across age groups, with the only significant difference being that the 50-and-overs spent more on travel (37 percent) and allocated less to savings (20 percent). Tightening the purse strings: Our survey considered only people who have previously bought luxury products; even among this select group, though, caution is the norm. Among the 15 percent to 20 percent of those reporting a change in their luxury spending patterns over the past 24 months, most say they are buying fewer luxury products and cheaper brands. Accelerating shift to online: Across the board, luxury consumers say they are buying and spending more online. For example, 62 percent said they bought more fashion online and 54 percent said the same of leather goods. Only 13 percent and 7 percent said they bought less in these categories [Exhibit 9] . This represents good news for pure plays such as Glamour Sales, Brands4friends.jp, and market leader Gilt Groupe; it also means that there is opportunity left for those who have been late to the virtual party. Shiseido, for example, announced the impending launch of a new website to promote and sell the skincare brands products (although how and whether the site will offer

Online luxury purchasing behavior continues to accelerate

Exhibit 9:

How has your online purchasing behavior changed over the past 24 months? Percent of respondents who purchased online within last 24 months More
62 25 54 25 49 49 39 57 2

2011 2010

Same
25 58

Less
13 17 7 18

Fashion goods

Leather goods

Shoes

N/A
39 20

N/A
51 57

N/A
10 23

Watches/ jewelry

SOURCE: McKinsey Japan Luxury Consumer Survey 2010/2011

Compared with last year, luxury sales been stable in Korea and increased in North America
Where did you buy it? a comparison of 2010 and 2011 Percent of respondents who bought luxury fashion products abroad within last 12 months; multiple answer
25 22 21 19 10 12 7 5 5 2 4 9 20 16 17 17 22
2011 2010

Exhibit 10:

Hawaii Korea Europe North America (excluding Hawaii) Hong Kong/Macau Other Asian countries Australia/New Zealand Mainland China Duty free stores within Japan
SOURCE: McKinsey Japan Luxury Consumer Survey 2010/2011

32

pure e-commerce remains to be seen). Have time, will travel: Nearly 25 percent of our respondents purchased luxury goods outside Japan in the past 24 months, largely because theyre much less expensive; indeed, shopping for high-end goods is one of the major reasons Japanese give for travelling overseas. The recent strengthening of the yen has

exacerbated these price differentials, and the ability of consumers to compare prices over the Internet means Japanese retailers cannot hide their higher prices. This year, we saw a jump in duty free purchases within Japan (20 percent of travelers, compared to 9 percent last year), as well as in Korea and North America (excluding Hawaii) [Exhibit 10].

Remaining 2 percent recorded as Other.

Taking overseas sales into account, the Japanese luxury market is likey about 25 percent larger than the headline figure for domestic sales, putting it between $15-20 billion, depending on which categories are included. Car talk: Although cars are not the focus of our survey, we threw in a few questions about luxury automobiles. Perhaps because good performance is taken for granted, we found that todays consumers value comfort, safety, and eco-friendly features most when it comes to luxury autos [Exhibit 11] . As one chief of a major luxury automaker told us, Less than 10 years ago, the first thing a consumer did when they entered our showroom was to open the hood of the car and enquire about the engine. Today, most people care more about service, fuel efficiency, and whether they can connect their iPhone. This is an important insight, considering the rocky recovery among Japans carmakers. While production rose a healthy 21 percent in 2010, it fell in the first three months of 2011, and dropped off the cliff in March (down 57 percent) due to post-earthquake disruptions.

Luxury consumers also seem to need a justification, such as eco-friendliness, to buy high-end autos
Regarding luxury cars, do you agree/disagree to the below statements? Percent who selected agree or strongly agree (top 2 on scale of 6) Luxury cars have characteristics that justify the premium price 20s
37

Exhibit 11:

Its worth the money to buy a luxury car for the superb driving experience
13

Being eco-friendly is as important for luxury cars as design or driving experience

47

30s

30

50

40s

33

11

52

50s +

39

10

44

SOURCE: McKinsey Japan Luxury Consumer Survey 2011

Implications
Our research, among both executives and consumers, suggests that there are four trends luxury executives and manufacturers should bear in mind. We expect to see Japanese consumers continue to seek some justification to buy that extends beyond mere affinity for the luxury label or brand. Whether this is represented by a good deal, a limited edition item, some ties to charity or sustainability, or something more closely related to the products quality or outstanding service, manufacturers must pay attention. In addition, planned purchases continue to trump impulse buys, which underscores the need for strong marketing, including digital marketing. Parallel imports (that is, luxury products meant for markets outside of Japan) are likely to continue to pose challenges, so long as Japan is much more expensive than other places. A surging yen, coupled with overseas shopping and increased comfort with online buying, will make it ever more difficult for luxury goods companies to justify significant price

differences. Luxury brands would10 be wise to begin thinking through the implications of moving toward a standard global pricing model. Rally the younger generation. Conventional wisdom is that Japanese in their 20s and early 30s are the post-luxury generation, eschewing expensive crafted goods in favor of consumer electronics and experiences. This is true to some extentbut not entirely. Of those surveyed who said they were buying more luxury goods than before, most are in their 20s and 30s. Luxury goods companies should notand cannot ignore this future consumer base. Instead, they should nurture it by carefully selecting the messages and tools they use to communicate to this segment, including the use of digital marketing. Naturally, the Internet has to be a crucial component in the mix. It is a sign of the times that on a beautiful weekend in mid-May, an army of women in black t-shirts reading Zozotowna wildly successful highend online fashion malltook to the streets of Omotesando and, standing in front of the worlds most famous luxury retail establishments, handed out 3,000 yen in online coupons to those passing by.

Take a more segmented view of physical channels. Consumers across the country behave differently, and the approach to stores in each region must be customized accordingly (size, assortment, and perhaps even services). Brands will likewise need to be more discerning about which department stores are better to invest in, rather than take a blanket approach to all.

memories. In the three years that we have conducted our luxury survey, we have seen a resilience in Japan that few other markets can match. Yes, consumers are acclimating to online channels. Yes, they are finding a need to justify purchases more than in the past. And yes, they do place a premium on value over brand name. Perhaps most importantly, the Japanese luxury consumer continues to become more sophisticated. Regardless, luxury players can deliver attractive offerings that shape buyer decisions, even as buyer behavior evolves. To tap into what continues to be one of the worlds most robust luxury markets, they simply must.

Brian Salsberg is a partner in McKinsey & Companys Tokyo office and the leader of the Japan Consumer and Shopper Insights center and the Japan Consumer and Retail Practice. Naomi Yamakawa is a consultant in the Marketing practice.

There is no way to downplay the significance of the traumatic events that hit this island nation on March 11, and their impact to consumer behavior continues to evolve. But Japanese consumers often have short

Reimagining Japanese luxury

In the forthcoming book edited by McKinsey, Reimagining Japan: The Quest for a Future That Works (Shogakukan, July 2011), two well-known observers offer contrastingindeed, diametrically opposedviews on the future of the luxury market in Japan. Bernard Arnault, Chairman and CEO of LVMH, argues that Japanese consumers have remained constant in their appreciation of high-quality products and services. He notes that Japan continues to play a global role in setting trends and generating strong followings when new brands and stores are launched. In sum, Arnault points out, Japan is not merely an important luxury market because of consumers high incomes, but because of their exacting standards and sophistication. From Tyler Brl, editor-in-chief of Monocle magazine and a columnist for the Financial Times: What everyone has failed to identify . . . is that Japan has steadily transformed itself into the worlds first post-luxury economyand has become a more interesting place in the process . . . This shift is not an after-effect of the Tohoku disaster; its been going on for the better part of a decade. For the complete text of both essays, plus insights from more than 75 other thinkers, including the leaders of Shiseido, Procter & Gamble, Starbucks, and many others, order or pick up a copy of Reimagining Japan. Visit www. reimaginingjapan.com for more details.

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