On location in changing times for Japanese travel retail

I’m just returning from a fascinating trip to Japan, where the travel retail market is evolving due to new business dynamics, changing consumer habits and a continued surge in visitor growth led by China. In advance of our full report in Moodie Davitt Print & Interactive editions for May, here are five takeaways from a memorable week.

Room to grow: One of ANA Trading’s three arrivals duty free stores at Kansai International Airport

Arrivals duty free – a slow burn: Better awareness among returning Japanese travellers will surely boost this new channel in time, but for now sales are relatively small in the few stores that have opened, and these rely almost entirely on tobacco. When the government legislated for arrivals duty free, it permitted liquor, tobacco and international confectionery brands.

A strong domestic discount trade means that spirits are no better priced than on the local market, though some brands have supported arrivals duty free with heavy investment in merchandising. Confectionery meanwhile has a tiny presence.

That leaves tobacco, led by the boom in sales of IQOS, the Philip Morris brand that has taken the Japanese market by storm. Expect the 80-90% sales contribution of tobacco to remain high, certainly until airports and retailers can convince government to relax the rules and allow beauty, and cosmetics in particular, to take its place in the arrivals channel.

Clé de Peau: One of the power brands leading cosmetics sales at the ANA-Shilla-Takashimaya store in Shinjuku, Tokyo

Downtown duty free – many miles to travel: This time last year we reported on the slow start for Tokyo’s two downtown duty free stores, which became three with the opening of the ANA-Shilla-Takashimaya store in Shinjuku in late April 2017.

The Shinjuku store has performed to expectations, say ANA and Shilla, after placing the focus firmly on the hottest of categories in Japanese duty free, Japanese cosmetics. And while the downtown duty free market in Tokyo has picked up – both Lotte Duty Free and Japan Duty Free Ginza report double-digit sales growth in the past year – the business is still well shy of hoped-for projections when they opened. Awareness is a factor, and much more marketing in the key Chinese market is needed.

The competition with off-airport tax free stores is considerable, especially as these offer Japanese-made goods, which are currently driving the business. In duty free the product offer is gradually being skewed towards Japan-made goods and tweaked to include more tax free items and mid-priced luxury. None of these changes are happening very fast, which doesn’t help the retailers who are paying hefty rent on prime property. As with arrivals duty free, downtown duty free will be a long-term game.

With senior management from the ANA-Shilla-Takashimaya venture in Tokyo on Friday; full story soon

A changing cast: After many years of little or no change, expect the list of leading retailers in Japanese travel retail to look quite different in the next five years. As the inbound tourism market grows rapidly, with strong spends among Chinese, Taiwanese, Koreans and Hong Kong visitors, the potential of the market has not gone unnoticed among the major international travel retailers.

Kansai Airports’ recent tender for three speciality retail boutiques (results to be announced soon) attracted strong interest not only from local companies, but also heavyweights from other parts of Asia (notably Korea) and Europe (including Dufry and Lagardère Travel Retail). DFS of course entered the airport last year after capturing a contract for fashion boutiques relinquished by JATCo.

There’s a long-term play here: at Kansai the airport is examining its business model with an eye on creating more efficient duty free space, less product duplication plus larger speciality spaces, all probably to be run by fewer retailers than today. That process will take years yet, but the jostling for position among travel retailers has begun. The continuing airport privatisation drive (with Kansai the biggest example) is likely to throw up more opportunities as the grip of the local duty free players on this market is slowly loosened.

Booming business: Inbound tourism to Japan is surging, led by Chinese visitors. This is a snapshot of the vast crowd we witnessed at the weekend at the Golden Pavilion, one of the ancient capital Kyoto’s most popular attractions

Over-reliance on China? The primacy of the Chinese traveller, so apparent in other major markets in Asia, is mirrored in Japan. The surging growth in inbound travel is being fuelled by the Chinese consumer, buoyed since 2014 by liberalised via rules, though the focus in most stores, and certainly in downtown duty free, is on attracting FITs rather than group tours. The repeat visitor rates are also high, well above 50% among most nationalities, including the Chinese, which suggests there is a robustness to the growth we are seeing. Yet as the industry in Korea has found, the Chinese government can actively and effectively discourage travel to certain destinations in the event of a dispute or tensions with its neighbours. Japan benefited from diversion of some South Korea-bound Chinese travel in 2017. Yet for China, tensions with its old rival Japan are never far from the surface. The risk is especially acute given that Japanese travellers contribute only a small percentage of sales today. For now at least, travel retailers have placed their faith in China, and to a lesser extent, inbound Taiwanese, Hong Kongers and Koreans, with south-east Asia eyed as a potential market of the future.

Japanese goods – where next? The runaway success of Japanese cosmetics – led by Shiseido group brands – and confectionery – led by brands such as Royce and Tokyo Banana continues. It’s a powerful sight to see a long line of shoppers heaving baskets full of both categories to the checkouts, a sight repeated at every airport we visited last week in peak times. The question is just how sustainable is this phenomenon? The perception of quality associated with ‘Made in Japan’ products suggests there is room to grow, but evolution may be needed. The destination merchandise trend could potentially include more specific regional or city products – certainly in confectionery. In other categories, there is a place for more Japanese luxury, not only cosmetics. There will always be demand for the leading international luxury brands, but in future this could be balanced by more Japanese flavour to the high-end offer in fashion & accessories.

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