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By: Dominic Carter

In the past decade, Japanese retail has undergone a series of developments that have seen it come closer into line with the retail landscape in other advanced countries. Important changes have included, of course, the popularization of the Internet as a sales channel, but also the continued decline of the traditional Japanese department store format that had held sway for most of the 20th century. At the high end, recent years have seen an erosion in the position held by foreign luxury brands, which heretofore had counted on Japan as one of their key sales drivers and pioneered the notion of “mass-luxury”.

In addition to this, one of the more market-shaping trends has been the growth of the “big-box” shopping centre in the suburbs and countryside. Whilst strict planning regulations have served as a handbrake on the proliferation of shopping centers, their numbers have continued to increase. The shopping center format lends itself particularly well to the specialty apparel chain-store sector, which for a long time was quite underdeveloped in Japan.

With the exception of trailblazer Fast Retailing’s Uniqlo, the most significant influencers in the specialty apparel market have been foreign firms which started to enter in the late nineties and have continued their progress unabated. Although Gap, which launched in 1995 and Inditex of Spain’s Zara in 1998, had seen success in Japan, the tipping point in the market seems to have been the successful launch of Swedish fast-fashion brand H&M. While fast-fashion and luxury are clearly not direct substitutes for one another, the progress of H&M in Japan has occurred alongside tough times for traditional luxury retail.

H&M came to the market in 2008 with a younger focus than Zara, and with a great deal of buzz driven by its collaboration with celebrities and celebrity designers such as Madonna and Stella McCartney. Its value platform of super-current fashion combined with rock-bottom prices was something Japan had not seen before, and was perfectly timed to capture a stagnating consumer wallet whose bubblicious days of frivolous extravagance were well behind it. Not only does H&M hit on a good value formula, but its fashion stretch and quick stock turnover also creates an experience of shopping there that delivers some fun and is inherently repeatable.

H&M was soon followed by Forever 21 in 2009, by Inditex’s Bershka last year, and in April this year by American Eagle Outfitters and Old Navy. Old Navy is Gap Inc. of the U.S.’s least costly brand and sits at the bottom of a pyramid comprised of Banana Republic at the (mass) high end and Gap in the middle. Banana Republic launched in Japan in 2005, and was the brand’s first foray out outside of North America. Old Navy in Japan is following in the footsteps of its sibling in that it is also the first location outside of North America.

Old Navy has ramped up the fun aspect of shopping and is aimed a clearly more family-oriented and less fashion conscious market than H&M. Its launch store, in Tokyo’s Odaiba DiverCity complex (a play on the location Daiba and “diversity”), is a colorful, energetic and, for the time being at least, extremely popular place to shop. The retail environment in Old Navy is conspicuously American and quite unlike anything seen in Japan to date in its sector. Perhaps taking a note out of Ikea’s book, it even features a play area for kids allowing mums and dads to spend as much times as they like in the store.

So, where to from here for specialty apparel and fast fashion in Japan? According to Nikkei’s Consumer Diffusion Index, in July 2012 consumers’ willingness to spend has dropped significantly year on year, and this is blowing a headwind for established businesses such as Uniqlo that has seen a drop in sales year on year. In the context of a long-term stagnant market and well-entrenched domestic players, there are only so many new entrants that can be successful. Uniqlo, although a clear success story, does seem to be under pressure to find sources of new growth. Excelling as it does on basic fashion items, their current largely suburban and provincial customer base would probably not respond well to a fundamental change in their established product strategy in order to meet foreign entrants head on. Uniqlo’s response has been to take the fight to the competition in their home markets, but this is a long-term proposition for Fast Retailing and doesn’t really address the issues in its home market.

At the end of the day foreign specialty apparel chain-stores are dwarfed by Fast Retailing and overall make a tiny fraction of Japan’s 9 trillion yen apparel business. Nevertheless, these new entrants are setting the agenda and it is up to domestic firms to respond. Future years are likely to see consumers even more spoiled for choice as we see even more entrants from overseas, as well as creative responses from domestic firms.

21st August 2012

CarterJMRN is a strategic market research agency that has been helping clients with consumers and businesses in Japan and beyond since 1989.

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