Vuitton to Tiffany Seen Pressured in Japan by Weaker Yen
In Shinzo Abe’s Japan, diamond rings and logo handbags will cost more -- to buy and to sell.
Tiffany & Co. (TIF) and Harry Winston stores will follow Louis Vuitton in raising some prices to offset the yen’s 11 percent slide since Prime Minister Abe took office Dec. 26 with a promise to tame the currency’s strength and revive Japan’s exporters.
The increases, including the biggest ever at Vuitton Japan, may curb demand in the second-biggest market for personal luxury goods. Brands that don’t have Vuitton’s star wattage face a decision: Boosting prices may dent sales, while leaving them unchanged will cut millions of dollars out of profit.
“People who can afford to pay 500,000 yen ($5,200) for a Bulgari watch won’t care if the price is raised to 520,000 yen,” said Mikihiko Yamato, deputy head of research for JI Asia in Tokyo. “But if a lower-end brand bag had a price hike of, say, 5,000 yen, some people might give up on buying it.” The Roman jeweler is one of about 60 brands owned by Paris-based LVMH Moet Hennessy Louis Vuitton SA (MC), the world’s biggest luxury goods maker.
Japan’s economy has been mired in deflation for the last 15 years, prompting luxury goods makers to divert their attention to emerging markets offering rapid growth, such as China. Still, close to 10 percent of all personal luxury goods sold in the world were taken home by Japan’s shoppers in 2012, according to consultancy Bain & Co. Sales rose 8 percent to about 20 billion euros ($26 billion) last year and were little changed in yen terms, according to the consultancy.
“Japan is still a very profitable region,” said Erwan Rambourg, a Hong Kong-based consumer analyst with HSBC Holdings Plc (HSBA). “Staff costs and rents are not increasing much whilst sales productivity in Tokyo is still very high.”
Some window-shoppers strolling by luxury stores on the capital’s Omotesando avenue last week, an area that attracts many fashion fans, said price increases might change their plans. Misako Takanashi, a 20-year-old sociology student, said she owns items from Coach Inc (COH). and Chanel bought for her by her parents.
‘I promised to myself I will buy some brand name bag for myself when I start working,’’ Takanashi said. “I could pay as much as 100,000 yen. I don’t want them to raise prices, I woudn’t be able to buy those bags.”
Others were less concerned about not being able to buy in the future. “I want what I want no matter what, so I would still buy even if they raise prices,” said Noe Serizawa, a 19- year-old music college student who owns bags from Louis Vuitton and Prada. “I love Tiffany. I might as well go buy something before they raise prices.”
The yen fell 0.2 percent to 96.51 per dollar as of 2:21 p.m. in Tokyo after earlier touching 96.71, the weakest since August 2009.
Many global luxury companies have strategies in place to hedge against forward currency risks, yet the speed and scale of the yen’s descent to its lowest level in 3 1/2 years has prompted action.
“One percentage point of sales lost at the global level is probably twice lost at the EBIT level,” said HSBC’s Rambourg, referring to earnings before interest and tax. “Let’s say Japan is 20 percent of your sales and the yen goes down 10 percent, you’re losing 2 percent of your sales. You should factor in losing maybe 4-5 percent of your EBIT, that’s the rule of thumb.”
LVMH raised prices at the Japan unit of Louis Vuitton by an average of 12 percent on Feb. 15. Tiffany (TIF) plans to lift prices on some jewelry and other products in Japan April 10. Harry Winston said it will apply price increases to jewelry in Japan March 22, without specifying the size of the raise.
“I suspect every company will look to tweak prices upwards,” said Rambourg. “But not increasing by 12 percent, I think that’s a bold move. The risk is Japanese consumers who’ve known Vuitton for ages will continue to look for alternative brands.”
Harry Winston, Coach, Tiffany and Hermes International SCA are most likely to be affected by a weakening yen, according to Bloomberg Industries analyst Deborah Aitken.
Coach Japan spokeswoman Atsuko Ishida said in an e-mail that the company’s pricing policy hasn’t changed. Coach charges less for its leather bags than heritage European brands such as Prada.
Prime Minister Abe’s supporters say his policies are already working: Last week, Japan reported its economy returned to growth in the fourth quarter as the yen extended the drop that began when Abe’s election campaign kicked off mid-November.
Foreign exchange is likely to continue to be a distraction for Bernard Arnault, the billionaire CEO of LVMH, and his peers in what’s otherwise set to be another year of growth for the global luxury goods business.
“There’s a risk of a currency battle, competitive devaluation, which is likely to lead to a situation in 2013 in which a number of currencies, dollar, yen -- that’s already happened -- and other currency in which French exporters are involved, will decline.”
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