Market Snapshot: Japan

Japan's economy is faced with several challenges, including the effects of Covid-19, a declining population, and a drop in tourism levels. As the country prepares for to host the next Summer Olympics in Tokyo, Retail Gazette talks to an expert to find out how the nation's retail sector is faring.

Japan retail Tokyo Olympics snapshot in-depth profile Japanese Uniqlo Fast Retailing

Japan is recognised as the second-largest market in Asia and arguably holds a retail scene as complex as that of China.

The Tokyo 2020 Summer Olympics – which was postponed to this year in the wake of the Covid-19 pandemic – propelled many retailers to invest in Japan as a flagship destination. The Japanese retail market has long been recognised as a key global city. Before the pandemic in 2019, retail sales totalled $1.35 trillion (£95 billion).

As of this year, Japan’s ecommerce market is set to be worth $150.1 billion (£105.7 billion), with a compound annual growth rate of 6.2 per cent, according to a 2020 report by JP Morgan.

Meanwhile, overall Japanese retail sales rose at the fastest pace – by 5.2 per cent – in five months in March this year as consumer demand recovered from the huge hit it took from the pandemic.

Japan’s consumer behaviour is influenced by its culture and society, and purchasing habits and merchandise differ greatly from neighbouring Asian markets. With a high density of neighborhood shops, the Japanese consumer still enjoys the physical experience, especially niche and specialised boutiques as a source of leisure and entertainment.

Japan’s economy has arguably emerged from last year’s slump on the back of recovering on its exports, although a glacial vaccine rollout and a resurgence in Covid-19 infections are threatening household demand.

While retail spending returned to pre-pandemic levels in the fourth quarter of 2020, spending subsequently eased amid Covid-19 restrictions in the first quarter of this year. The state of emergency declarations are also expected to weigh on consumption in the immediate term.

According to Statista, retail trade and wholesale are among the largest industries in Japan, with a steady contribution of more than 10 per cent to the GDP.

Some of the biggest retailers in Japan in terms of trade include multinational retail group Aeon, 7-Eleven owner Seven & I, Family Mart, Uniqlo parent company Fast Retailing, electronics retailer Yamada Denki, and retail group Pan Pacific International. This is according to Tokyo-based retail specialist, Heidi Salmela, at business management consultancy Intralink.

Deloitte’s annual Global Powers of Retailing 2021 report, which ranks the world’s top 250 companies, saw Aeon come in at number 14, Seven & I at number 18, and Fast Retailing at number 51.

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Salmela told Retail Gazette that some of the biggest challenges currently facing the Japanese retail sector includes “demographic shifts” and “showrooming”.

“The retail sector is witnessing Japan’s declining population; the difficulty of keeping younger consumers coming back to physical stores; and conversely the challenge of getting the country’s ageing population to buy online,” she explained.

“Showrooming is also a challenge as consumers are visiting stores only to see products before buying them online for less.”

Some of the other challenges include TV advertising and the increased demand for personalisation.

“TV advertising is still regarded as important for brand awareness, with a new store opening often needing to be featured on TV to get a long line-up at the tills, while the sector also faces the challenge of consumer demands for personalised products,” Salmela said.

“Having a good product or service is not enough anymore. They’re expected to be highly customisable – a big challenge and opportunity.”

Japanese retail sales fell for the third straight month in February this year amid a wave of uncertainty from the resurgence of new Covid infections.

Retail sales lost 1.5 per cent in value during the month from a year earlier. This marked the third straight month of declines following January’s 2.4 per cent fall and a 0.2 per cent drop in December.

The broader decline in retail sales was driven by falls in spending on items such as clothing, toiletries and general merchandise.

Even though the number of retail stores has been on a steady decline in recent decades, brick-and-mortar stores continue to be the main points of sale for daily goods and grocery in Japan.

At the centre of the retail market are convenience stores, commonly referred to as konbini.

While the small corner shops are limited in their range of products, the dense store network caters to the busy lifestyle in the country, allowing for spontaneous and fast shopping trips near one’s home.

On the other side of the spectrum are large retail establishments such as shopping centres, department stores, and large specialty retailers, which predominantly specialise in the distribution of non-food products.

Salmela said that because of the pandemic, people in Japan have been spending considerably less.

“Department stores have been closed or partially closed during the country’s three states of emergencies, and trading hours cut short across the board,” she said.

“So, it’s no surprise retail sales in February were 1.5 per cent down on the previous year – the third consecutive month of decline.”

With large ecommerce enterprises such as Rakuten and Yahoo broadening the product and service availability in their respective marketplaces, traditional retailers are struggling to defend their market share against the convenience of shopping around the clock.

While the high disposable income of consumers offers an attractive market with high potential, foreign retailers are struggling to enter the Japanese retail market.

As successful domestic brands are enjoying the trust of consumers and the efficiency of tightly woven supplier networks, large foreign entrants such as Walmart or Tesco have reported their failed attempts to penetrate the rigid retail structure.

Among retailers successful in garnering consumers’ attention are online platforms gaining traction. Amazon has successfully expanded to the Japanese market, competing against domestic enterprises for the position as the leading ecommerce site in Japan.

Salmela also told Retail Gazette that the luxury retail industry was hit hard by the pandemic and the Japanese market shrank by 23 per cent – the first decline since 2009.

“Japanese consumers tend to buy such items in stores, and non-essential retailers have been closed for much of the last year, with few sales moving online,” she said.

“But luxury retailers generally trade well because Japanese consumers value quality and regard such purchases as long-term investments, so the market should recover well post-pandemic.

“Consumers are also increasingly expecting high-end brands to demonstrate a clear commitment to diversity and sustainability.”

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