Greater Yen for Japan's Department Stores

Upscale retailers are prospering again due to higher per-customer consumption, a resurgent economy, and store restructuring

The urge to splurge is finally back in Japan. While on a shopping excursion at the Daimaru department store near Tokyo Station in mid-May, Tokiko Matsui, 42, a housewife from West Tokyo, was in full consumption mode. And with good reason: Her husband's salary and benefits have risen by 20% in the last year, which means she feels more comfortable about shopping at high-end outfits such as Daimaru.

Matsui recently bought two sets of luncheon mats and coasters for her mother and mother-in-law as Mother's Day presents for about $65 each. That was double what she spent last year, settling instead for two flower bouquets for about $30 a pop. "I feel the economic climate is getting better," she says. "We're eating out more as well."

With much of corporate Japan posting record profits in recent weeks, improving earnings at upscale retailers are unlikely to have registered on too many investors' radars -- never mind shoppers'. But for department store operators, 2006 could likely be the year that their businesses finally started heading in the right direction after more than a decade of falling sales.


  For visitors and Japanese alike, department stores like Daimaru, Takashimaya, and Mitsukoshi have always been the ultimate destinations for high-end spending. This is where you went to buy a $20,000 kimono or a $10,000 Hina-matsuri doll set to celebrate Japanese holidays such as Girl's Day -- and you paid serious yen for the pleasure.

But for much of the Japanese post-war era, these outlets offered the best in domestic and foreign brands, hired staff aplenty to cater to consumers' every whim, and even staffed store elevators with attractive young women or "elevator ladies." These stores also offered amenities such as diaper-changing stations and kid centers, and maintained gourmet food shops where one could find the best seaweed wrap, sashimi, and sake.

When Japan's economy hit the wall last decade, these high-cost department store chains took a real nosedive in earnings. And investors generally wouldn't touch their shares with a barge pole. However, with Japan now in the midst of one of its longish post-war economic expansions, consumers are returning and profits at these chains are heading up. No, this isn't a reprise of the late-80s bubble era of conspicuous consumption, but high-end retailing is definitely making a comeback in Japan.


  Earnings at Takashimaya, Japan's biggest department store operator, for example, increased 51%, to $192 million in the year through February, while rival Mitsukoshi posted earnings of $182 million, a rise of 18%. It was much the same story at other stores -- Isetan increased profits 48%, to $170 million -- as an improving economy and belated restructuring programs finally started paying off.

"Japan's business pickup is an indisputable fact," Koji Suzuki, president of Takashimaya, said at a press conference on Apr. 13. But whereas 18 months ago it was just beginning to register in the retail sector, today "it has spread to consumer spending and has made for an upswing trend of department stores."

Between January and March, department store sales edged up by 0.7%, according to the Japan Department Stores Assn. That might not sound like much until you consider that between 1993 and 2005, members of the association saw their combined sales decline every year -- and 12.8% overall.


  Why the slump? Japan's ostentatious, multi-floored department stores expanded rapidly during the boom years of the 1980s and were great places to fritter away bonuses -- but as the economy went awry in the early 1990s, Japanese consumers increasingly favored cheaper alternatives to expensive department stores.

During the lean times, entirely new retail categories, such as 100-yen shops, emerged, while other discount retail stores that rolled out affordable private label brands or sourced from China, thrived. Another problem: Grand expansion projects formulated during the boom years left operators with huge debts.

Improving recent results, though, show that Japan's resurgent economy -- the IMF increased its GDP growth projection for Japan from 2%, to 2.8%, on Apr. 19 -- is finally starting to have an impact on department stores. Takashimaya's Suzuki traces the upswing to a rebound in Japan's stock market last summer. As the Nikkei index rose, customers grew more comfortable with spending.


  Since then, good economic news has kept on coming. Land prices in Japan rose for the first time in 15 years in 2005, while summer bonuses paid by Japanese employers are also expected to rise this year, up 1%, to $7,400 -- a record high. And unemployment fell 0.3%, to 4.3%, during the last financial year.

What's more, despite the current global stock market wobble -- the trend looks set to continue. On May 16, the government Cabinet Office noted consumer confidence levels have reached their highest levels since June, 1990, while total department sales are expected to increase this year for the first time since 1993. That's helping increase profitability despite few new customers entering the stores and Japan's shrinking population. "The driving power of recovery [at department stores] is the increase in consumption per customer," says Masafumi Shoda, an analyst at Nomura Securities in Tokyo.

Analysts add that restructuring has also been an important factor in getting department store profits back on track. One example: Store operators feel more willing to leave in-store investment to their tenants -- the brand operators who rent space within the stores. Another is that staffing levels have been cut to more realistic levels.


  "The elevator ladies don't exist any more," adds David Marra, a retail expert at consultant A.T. Kearney in Tokyo. "By rationalizing the cost structure and reducing the number of store clerks, they've become better businesses." Indeed, when rating agency Standard & Poor's raised Takashimaya's credit a notch on May 22, it acknowledged management has gotten a firmer grip on finances.

"[Takashimaya] has improved its profitability by restructuring its business portfolio, focusing its managerial resources, and reducing operating expenses," notes S&P analyst Machiko Amano. That has helped the company slash its debt-to-capital ratio from a peak of 57.7% in 2002, to 41.7% in February.

A.T. Kearney's Marra warns, though, that department store bosses still need to work hard to bring in new, younger customers -- women in their 40s and 50s remain the typical customers -- and fight against growing competition from luxury brands' own stores. Stores also have to keep growing profits.


  Despite the recent improvement, operating margins remain miniscule -- 3.1% at Takashimaya and 1.8% at Mitsukoshi. Stock prices at several stores operators including Takashimaya, Isetan, and Daimaru reached 10-year highs in January but have since dipped

Fresh investment should help. Over the next five years, the Top 5 store operators will spend $2.3 billion sprucing up stores -- three times what they spent over the last five. Takashimaya, for example, will spend $950 million by 2011, while Isetan will overhaul its main store in Shinjuku. For Japan's department store sector, the future looks a whole lot brighter.

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