Amid sinking sales in China, German luxury goods makers are discovering a sparkling new market in neighboring Japan. A crackdown on corruption in China has meant that party members are discouraged from public displays of wealth, which has impacted on sales of items like expensive watches and cars.
Meanwhile in Japan, the expansive policies of Prime Minister Shinzo Abe – often called “Abenomics” – are lifting Japan from the depths of its financial crisis and the affects of the tsunami catastrophe in 2011. The depreciating yen is driving up company profits and the booming stock market has fueled consumer confidence among wealthy residents. According to a new study by management consultant McKinsey, Japan, despite its rapidly aging population, is now one of the healthiest markets in the world for luxury goods.
German jewelry maker Wellendorff is sparing no expense to establish its brand in the consciousness of wealthy Japanese consumers. The company, based in the southwestern German city of Pforzheim, is marketing its new high-end jewelry boutique in Tokyo with a complimentary cocktail at the five-star Ritz Carlton. Guests sip the swanky “Wellendorff” cocktail from a champagne glass – with gold dust and sugar shimmering on the rim – looking out over the Japanese capital from the 45th floor hotel bar.
Wellendorff’s jewelry boutique officially opened on the hotel’s ground floor in October. Rings from the collection are named for key ingredients in the cocktail: hibiscus, lavender and vanilla. “We want to make a big difference with small, personal things,” said Peter Kesselmann, the chief executive of the company’s Japan subsidiary.
The new Wellendorff store is part of a changing trend for German luxury manufacturers. Fine cars, cameras, writing utensils or bags made in Germany are celebrating record sales in Japan as the island nation awakes for its long economic slumber.
Boston-based consulting firm Bain predicts that currency-adjusted sales of luxury goods will increase 9 to 11 percent in Japan this year, more than any other region in the world.
Early 2014 was especially lucrative, with some brands more than doubling their sales in the months before Japan hiked its consumption tax in April. The dip in sales that followed has already been reversed.
“We have had a record year in Japan,” said Jérôme Lambert, chief executive of Hamburg-based Montblanc, known for its fine watches, pens and leather goods.
The brighter things look in Japan, the clearer it is to luxury goods manufacturers that rapid growth in China is over. In 2011, industry sales in China shot up 20 percent. Consumers bought quickly and paid high prices. But that started to change two years ago when President Xi Jinping came to power.
“For these customers, it’s not just about the product – they are looking for a special experience.”
He launched a huge anti-corruption campaign, ostensibly to temper discontent among the general population over the ostentatious wealth exhibited by many bureaucrats and party officials. Chinese government officials must cut back on the bling or risk falling out of favor or even losing their jobs. Officially, they can no longer accept opulent gifts and must renounce bribes.
Sales of Swiss watches, Bordeaux wines and Italian fashions have collapsed partly as a result. Dior, Cartier and others are holding special sales for chosen customers in order to empty their stores. Luxury sales, adjusted for inflation, stagnated in China from 2012 to 2013, and more of the same is expected this year.
The unexpected deep hit reminded the industry that after the United States, Japan is the world’s largest luxury market. “To ignore the Japanese market would be wrong, especially since we see further potential,” said Mr. Lambert of Montblanc. He added that the Japanese customer is a connoisseur who values collector’s items and customized products.
However, luxury goods makers should not expect to simply offset the lack of growth in China by doing more business in Japan. It is true that Japanese consumers on average spend twice as much on luxury items as Europeans do. But they don’t part with their money as easily as the Chinese, requiring businesses to make more of an effort.
Many international vendors don’t have a presence in fine department stores like Mitsukoshi, or they don’t have flagship stores in high-end shopping districts. Leica has led the way for other businesses in changing that. The German camera maker tested having its own stores in Japan in 2006 and then exported the concept throughout the world. Today the company makes two-thirds of its sales in eight boutiques and sales outlets in electronic stores in Japan.
In a mature market like Japan, many people already own luxury goods, said Kazunori Fuke, chief executive at Leica Camera Japan. “For these customers it’s not just about the product itself,” he said. “They are looking for a special experience through the purchase.”
The Japanese customer is a connoisseur who values collector’s items and customized products.
In Japan, Leica uses elaborate marketing to attract these sophisticated consumers. The company, which is based in the southwestern German city of Wetzlar, presents its cameras in Japanese stores as individual items, as if they were in a museum. It then narrates the company’s history using models, to help customers understand the soul of the company.
For their newest store in Kyoto, Leica renovated a 100-year-old wooden building, where they also offer photography courses at the Leica Academy studio in-store. “There is still a lot of room for growth for Leica in Japan,” said Mr. Fuke, who came from the French luxury goods company Hermès, which owns nearly half of the Japanese Leica subsidiary.
Wellendorff is also pursuing growth in Japan, by taking control of the sale of its precious jewelry. Until now, the family-owned business has relied on Japanese partners to handle that.
Japanese consumers are less fixated on brand names, and constantly looking for something new and high-quality, making this the right time for the company to open its own branch in Japan, said Christoph Wellendorff. He and his brothers are the fourth generation of the family to lead the business.
“The Japanese can understand our company’s culture better than many others,” said Mr. Wellendorff. The “true value” from the company’s motto, as well as understatement, perfection, craftsmanship and family are cherished in Japan, he said. The company is training its salespeople in Japan along those lines.
“Customers, for example, should know that new pieces only come into our collection after the women in the Wellendorff family have worn them and found them to be perfect,” said Mr. Kesselmann.
By targeting Japan, German luxury manufacturers can still reach Chinese consumers – the country’s 50 million luxury consumers now make two-thirds of their high-end purchases abroad. And with prices in Japan lower than in China, it has become a favorite destination for lavish shopping sprees.
Martin Fritz is WirtschafsWoche’s Japan correspondent, based in Tokyo. To contact the author: firstname.lastname@example.org.