Wall Street Journal: Web-Bargain Luxury Comes to Japan (September 6, 2010)

This indeed sounds damning: The Coach Kristin Leather Hobo bag retails for $298 in the U.S. but $711 (¥59,850) in Japan. And this isn’t a rare example. Foreign premium and luxury apparel brands have always charged consumers in Japan a significantly higher price for the same goods. But now with the super-strong yen and the ability of shoppers to casually view global pricing on the Internet, the Japanese population is growing more weary of having to automatically part with their consumer surplus.

So as the WSJ notes, Japanese consumers are becoming accustomed to “discounts” — ironically making prices equivalent to the what everyone else places at standard retail — at outlet malls and online sales. Or in this era of relaxed fashion standards and falling wages, they are just kicking their Euro luxury habits cold turkey.

For years I too have raised many an eyebrow at foreign companies’ eagerness to charge nearly double for their products in Japan. Yet there is a valid logic at work in this behavior that goes beyond mere price gouging. Earlier this year, I was highly skeptical about Abercrombie & Fitch’s overall Japan entry strategy, but A&F CEO Mike Jeffries is correct when he says, “We are premium brands, and we get premium prices in these markets.” And it just happens that “premium prices” are very high in Japan due to the already high level of “standard prices.”

Before we even consider prices of luxury goods, think about the normal prices paid by Japanese consumers for everything else. Even with a relatively low consumption tax, the Japanese normally dish out 13.4% of their incomes just on food, compared to 9.9% in the U.S. (And in terms of calories, the Japanese are eating much less quantity than similarly rich countries.) A 5kg bag of rice — the staple grain of the Japanese diet — is often ¥2000 if not more. Meanwhile in the culture market, CDs are price-protected at ¥3000, which is a bargain compared to the ¥1800 vinyl albums once cost back in the 1970s (about 2.3% of the monthly salary in 1970 compared to ¥3000 being less than 1% now).

High prices in Japan are mostly a direct product of governmental policy. Protectionist tariffs not only increase the costs of imports but keep domestic producers insulated from having to compete on price. The government also protects a large number of uncompetitive, unproductive industries who keep average prices high. And there is often an informal cartel pricing where everyone in a certain industry agrees to generally keep prices at the same level. When it comes to the fashion and accessories market, mass apparel retailers like Beams, Ships, and United Arrows — despite having no central planning — keep their prices for “basics” around the same level, and in the process, set the “standard” price level in many consumers’ heads.

So when foreign brands come into the Japanese market, the most obvious brand positioning has been to go “above” the domestic makers and be “premium.” This almost necessarily means pricing at a higher level than the standard Japanese price, which as we know, was already very high. When Brooks Brothers came to Japan in 1979, for example, they logically needed to set prices above the Japanese copies of their items like oxford cloth button-down shirts and ties. More recently, the standard $25 T-shirt at Supreme in New York was set at around $60 in Japan. Companies generally want to set prices as high as the market allows anyway, and since the Japanese market has always had a structural need to set prices higher, brands were able to indulge. Conversely, when Japanese electronics or automobile brands went to the U.S., they would often charge much lower prices to match the American price level. (This was often criticized as “dumping.”) In both circumstances, Japanese consumers have always had to bear the cross of the global production system on their backs — using more of their (often lower) salaries in order to essentially subsidize lower prices in the rest of the world.

Now this all worked well when Japanese consumers’ incomes grew at a steady rate from the 1960s to the 1990s. Being gouged doesn’t hurt that much when your income keeps getting a big jump. But when incomes peaked in 1998 and started to fall steadily, the idea that Japanese have to pay more than other populations started to become less tenable. This, of course, opened the door for a clothing brand like Uniqlo, who set up a production system based in China that could deliver high-quality goods at the standard Western pricing level seen overseas at the Gap or H&M. Now in the recession, McDonald’s Japan and Sukiya have followed the same model in the food sector, and at least for McDonald’s, their low-price strategy has delivered record profits.

This idea of undercutting the previous Japanese price level has created an entire new rationale for entering the Japanese market. H&M and Forever21 have seen massive revenues thanks to offering product at a much, much lower price than what used to be considered “low.” Nothing has scared Japanese domestic apparel brands more than a challenge to their previous monopoly on controlling the psychological perception of what is the “normal” cost. Select shops Beams and United Arrows, who have weathered the recession relatively well, responded to the “fast fashion boom” by creating their own lines of lower-priced Chinese-made apparel at prices that Japanese consumers in 2010 can actually pay. Even designer brand Comme des Garçons created lines such as the PLAY casual collection and other Chinese-made basics to offer younger consumers (and Asian tourists) something to buy at a realistic price level.

So as the rest of the fashion industry becomes highly competitive on price, this leaves the Western brands in a difficult position. They cannot quickly drop prices because their pricing is an important part of communicating value and importance to customers. (They did, however, use the strengthening yen a few years ago as a stealth way to cut prices in the recession by 5-10%.) Meanwhile, Japanese consumers, who are growing less wealthy, are pessimistic about their economic future, and are accustomed to paying less for everything, no longer understand the 1990s-era logic of saving/going into debt just to buy a single handbag. And thanks to Yahoo Auction, grey market arbitragers, and a giant network of resale shops across Japan, there are much cheaper ways to buy new or near-perfect luxury items than the fancy flagship stores.

Of course, the broad middle-classes aren’t supposed to be buying luxury goods, and it was only a historical fluke that brought us to the strange situation we are in today, where there are multiple places within a half-dozen Tokyo neighborhoods where you can buy Louis Vuitton and Gucci. For those who are desperate to cling on to a consumer culture that made more sense during the heady days of the early 1990s, many have gone towards the alternatives offered by the industry itself: namely outlet malls and sale sites like Gilt and Yoox. The incoming Chinese travelers will help keep the industry a bit buoyant while middle-class Japanese consumers flee the market, but they may not be able to completely allow brands to keep charging artificially high prices in a deflating market.

The question for luxury brands going forward in Japan is whether they can surf on the deflationary swells to slowly readjust their “premium” pricing. In the thrifty yet wealthy U.S., spending $298 on a Coach handbag may seem like a splurge, and since Japanese incomes are falling to a mere fraction of American incomes, it makes sense that that very same price level may actually be perfect for a more impoverished Japan. Maybe the Japanese will not have to be such outliers — and scorned cash cows — any longer.