Demand for luxury products is strong in Japan. The company is one of the world’s leading markets for luxury goods, and most producers of luxury goods have enjoyed tremendous success when entering the market (Prasso and Brady, 2003). The Japanese economy is the 3rd largest in the world and the country enjoys a GDP per capita of $32,700, roughly on a part with that of France (CIA World Factbook, 2010). Japanese consumers first became attracted to luxury brands during the 1980s, and have maintained demand for luxury brand products even through the country’s prolonged recession. The Japanese market is of critical importance to most luxury brand producers, representing between 20-36% of total revenue for major luxury brand firms, and the country consumes as much as 41% of the world’s luxury goods (JETRO, 2010).
Growth in Japan, however, has been declining in recent years. A survey of the global luxury market in 2008 saw spending in Japan decline 7%, one of the few regions to see such a decline, although this decline is attributed mainly to the high level of Japanese spending on luxury goods — they remain the world’s biggest market for luxury brands and the highest per capita spenders. Japanese consumers have maintained their focus on conspicuous consumption in the pursuit of social esteem (Degen, 2009). The market is expected to remain strong, even if sales continue to slump, and some in the industry believe Japan may see a surprise rebound (Kirby, 2010).
Competition in the Japanese market is intense. All of the world’s major luxury brands are in that market, and each major shopping district will have a number of competing brands. There are no major entry barriers to the Japanese market, however. In addition, consumers are price takers, as are suppliers, allowing luxury goods companies to enjoy considerable profitability in the Japanese market despite the competition.
In general, the government does not involve itself in the luxury goods industry in Japan. Even to the extent such products are subject to duties, there is almost no price elasticity of demand so the company can pass any duties on to the customer. Taxes in Japan can be high, as are general operating costs but again, Japanese luxury goods stores tend to be exceptional profitable due to the high per capita spending on luxury goods by Japanese consumers.
The Japanese market should be able to meet Coach’s needs for salespeople. Japanese culture can be very service-oriented and many Japanese have great respect for luxury brands. As the leather goods will be transported from their place of manufacture to Japan, there are no known major supply chain or resource issues with entering the Japanese market. Transportation and marketing infrastructure is adequate, as Japan has many good ports, a good road network, a good rail network and a number of airports. Many luxury goods providers use courier services, such FedEx, and these services have a strong presence in the Japanese market, including hubs at Narita Airport.
There are ample locations in Japan — typically in high end shopping districts or malls, with other luxury brands. There are dozens of such locations throughout the country, with an emphasis on the Tokyo market. Examples of some major shopping districts worth considering are Ginza, Omotesando, Shinjuku and Shibuya. Online is also another option, one that is becoming increasingly popular with Japanese shoppers, who are showing signs of eschewing the traditional shopping districts and flagship stores in favor of lower-cost shopping experiences (Sanchanta, 2010).
There is little political risk associated with Japan. The country has a stable democracy and a strongly functioning judiciary (CIA World Factbook, 2010). There is little political risk at the local level either. No luxury company has ever had its assets seized by the Japanese government and there are no unreasonable legal or regulatory impediments to doing business in Japan. The rate of corruption in Japan is relatively low, at the same level as that of the United States (Japan Today, 2008). Given the popularity of luxury goods in Japan, there is a disincentive for politicians to treat luxury goods in a way that would make them more expensive or less accessible.
There is some degree of economic risk. While the luxury goods market in Japan has thrived throughout much of that nation’s prolonged economic slowdown, recent declines in the Japanese luxury goods market indicate that the sector’s historic robustness may be under threat (Kirby, 2009; Degen, 2010). The outlook for the Japanese economy remains relatively poor for the coming years. With a low interest rate of 0.1%, there is little room for monetary expansion, so it may be years before Japan’s economy picks up significantly with strong external purchases of Japanese goods (Ujikane & Otsuma, 2010). This could have an impact on luxury brand sales.
Another economic risk comes in the form of currency risk. The Japanese market has the potential to be a significant one for Coach, so the company must consider the currency impact of the yen. When the value of the yen falls against the U.S. dollar, this devalues profits that come from Japan. As such, entering this market introduces an element of financial risk to the organization, which will necessitate either currency hedging or operational hedging (i.e. sourcing goods in Japan).
There is little competitive risk in the Japanese market. In many cases, luxury brands complement each other — Coach focuses on handbags and leather goods while other brands focus on different products. This specialization results in a low intensity of rivalry, especially when consumers are price takers. Luxury brands tend to strategize globally as well, so when one market falters they focus on other markets. At present, mainland China is the market most luxury brands are focusing on (Kirby, 2010). The behavior of luxury brands is relatively unique as well — they will not escalate competition by lowering their prices as this would devalue their brands. As such, there is not expected to be a strong competitive response directed at Coach if it enters the Japanese market.
Japan represents only moderate operational risk. Day-to-day operations will not vary much in the Japanese market when compared with the rest of the world. The company may find that costs are higher in Japan, but spending is also higher. Operational risks such as theft are minimal in Japan. Entering the Japanese market is not expected to introduce any significant new risks to Coach.
Therefore, it is recommended that Coach enter the Japanese market. There is likely to be a large pent-up demand for Coach products in Japan. There are no significant risks, save that once a market share is established, it may not grow.
Prasso, S. & Brady, D. (2003). Can the high end hold its own? Business Week. Retrieved November 2, 2010 from http://www.businessweek.com/magazine/content/03_26/b3839107_mz033.htm
CIA World Factbook: Japan. (2010). Retrieved November 2, 2010 from https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html
Japan Today. (2008). Japan ranked 18th in int’l survey on gov’t corruption. Japan Today. Retrieved November 2, 2010 from http://www.japantoday.com/category/crime/view/japan-ranked-18th-in-international-survey-on-govt-corruption
JETRO. (2010). Japan is the world’s most concentrated source of revenue for luxury brands. Japan External Trade Organization. Retrieved November 2, 2010 from http://www.jetro.org/content/361
Degen, R. (2009). The success of luxury brands in Japan and their uncertain future. IPL Working Paper. Retrieved November 2, 2010 from http://www.globadvantage.ipleiria.pt/wp-content/uploads/2010/01/working_paper-52_globadvantage.pdf
Kirby, N. (2010). Luxury brand’s growth miracle. Articles Alive. Retrieved November 2, 2010 from http://www.articlesalive.net/Art/55030/117/Luxury-brand-s-growth-miracle.html
Ujikane, K. & Otsuma, M. (2010). Japan policy tinkering leaves huge risk to growth. Bloomberg. Retrieved November 2, 2010 from http://www.bloomberg.com/news/2010-08-30/japan-policy-tinkering-leaves-economic-outlook-with-huge-downside-risks-.html
Sanchanta, M. (2010). Fierce pricing: A luxury store turn-off. Wall Street Journal. Retrieved November 2, 2010 from http://blogs.wsj.com/japanrealtime/2010/09/08/fierce-pricing-a-luxury-store-turn-off/
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