Japan: Upscale Shopping's Downbeat Outlook

The nation's luxury department stores are grander than ever, but the glitz isn't bringing back profits

The red-carpet opening this month of a new 13-story annex in downtown Tokyo by Mitsukoshi Ltd., one of Japan's swankiest department-store chains, attracted hundreds of patiently queuing customers. That followed rival Takashimaya Co.'s tony refurbishment of its own Tokyo store in April. But for all the glitz, Japan's upscale retailers are struggling to reverse a decade-long decline, despite an upturn in the Japanese economy. "Although consumer spending is considered to be recovering, we have not benefited from it," says Takashimaya CEO Koji Suzuki.

In the 1980s and early 1990s, multistoried Japanese department stores in city centers were at the top of the retail pyramid. But by the mid-1990s, with Japan in a decade-long slump, these pricey emporiums filled with brand-name goods lost much of their luster. Luxury goods makers began siphoning off well-heeled customers by opening their own stores, while penny-pinching middle-class shoppers headed to discounters. Deregulation of the retail industry and deflationary pressure have helped hypercompetitive superstores and specialty stores at the expense of traditional retailers.

That has led to a steady slide in sales and a flood of red ink at department stores. In September, Mitsukoshi announced that it was cutting its 2004 sales forecast from $8.4 billion to $8.3 billion and that it expects to lose $22 million in the year to February, 2005. That would make four unprofitable years in the last eight. A few days later, Takashimaya reported sales were down 3.7% for the six months ended in August, though it says it will eke out a profit this year. Trendier stores such as Isetan have done better, but overall the 98 members of the Japan Department Stores Assn. have seen sales decline 13% since 1999.

The grandes dames of retailing insist they can grow their way out of the slump with new facilities and by streamlining procurement. But analysts say a fresh product strategy focusing on clearly defined buyers is what's needed. "Department stores in Japan are trapped by a lack of innovation," says David Marra, a retail analyst at consultant A.T. Kearney Inc. in Tokyo. Until Japan's traditional stores find a new formula, their bottom line will too often be as red as their carpets.

By Ian Rowley in Tokyo

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