"Payments with China UnionPay cards are down 30% since December at the Shinjuku branch," said one drugstore executive, referring to the popular payment method used by Chinese tourists. Sales of some products are down by as much as half.
Duty-free sales and traffic at drugstore chain Tomod's both fell 6% in the first half of the Lunar New Year shopping season. Chinese restrictions on online reselling of goods bought in Japan apparently had an effect.
The impact can also be seen in department stores. Isetan Mitsukoshi Holdings said that in January duty-free sales dropped at its Tokyo stores and fell 6.6% overall. Rival Takashimaya reported a 15.1% plunge in sales and 7% decrease in traffic for the same month. Spending per purchase also declined 7.5%.
Shopping sprees by Chinese visitors catapulted Japan's cosmetics market to record size in 2016 and 2017. It is estimated that 70% to 80% of Chinese visitors to Japan purchase cosmetics. Foreign visitors account for 10% to 20% of Japanese cosmetics makers' domestic sales.
But China's new e-commerce law, which took effect last month, has put a dent in this boom. The legislation requires online retailers, even those operated by individuals, to register and pay taxes. It also restricts certain activities, including advertising.
Particularly affected are daigou, the individuals who purchase goods overseas for resale in China and are thought to account for 30% of this trade with Japan. A downturn in purchases by these middlemen has slammed the brakes on Japanese cosmetics sales.
China's slowing economy has also clouded consumer sentiment. Purchases by overseas visitors to Japan in 2018 fell 4.5% to 1.57 trillion yen ($14.1 billion) despite topping 30 million people for the first time. Shiseido's sales to foreign visitors grew just 5% in the second half, compared with 39% in the first half.
In light of these trends, Japanese cosmetics makers are selling their products directly to consumers within China.
Shiseido will this spring open a center in Hangzhou with Alibaba Group Holding to develop products and cooperate on digital promotions, stationing a dedicated team of 20 workers there.
The goal is to strengthen online sales. In China, it is estimated that half of luxury cosmetics purchases are made online. Although e-commerce likely comprises around 10% of Shiseido's global sales, it accounts for 20% to 30% of Chinese revenue. That percentage is expected to climb to 40% in 2020 thanks to visitors that buy products online after returning home.
Chinese sales accounted for 17.4% of Shiseido's sales in 2018, but Chinese customers generate a quarter of total revenue when purchases made online and by visitors to Japan are taken into account. The cosmetics maker expects that will rise to 30% in 2020. The company plans to open a new factory for Asia-bound exports in Fukuoka Prefecture.
And the strategy seems to be working. Shiseido's brick-and-mortar sales of luxury cosmetics rose 40% in China last month. "Even though Chinese sales fell because of the e-commerce law, that does not mean demand from Chinese consumers disappeared," said President and CEO Masahiko Uotani.
Kao, meanwhile, plans to open at least 2,000 stores in China by 2020 for its mainstay Freeplus brand -- double the tally from 2018. Freeplus will be the face of Kao's campaign to become the top-selling skin care brand in the Chinese market. The company is seeking growth in China after operating profit growth slowed to 1% in 2018 from 10% the year before.
At the same time, Kao will also step up its marketing efforts in China. The company will promote its "made in Japan" reputation on social medial sites, rather than rely on word of mouth by visitors and resellers.
Its Kate makeup brand began its first Chinese marketing campaign in December with a popular actress who has about 30 million followers on Weibo, China's Twitter-like microblogging platform. Information about its products has been widely posted on the web.
"We will debut our latest products in China starting in 2019," President and CEO Michitaka Sawada said in expounding on his "China first" strategy. "We will revise our previous strategy of launching products in Japan before bringing them to China," he added.
While the largest cosmetics makers are using their size to expand Chinese sales, smaller Japanese competitors have found it difficult to devote the resources to adapt. The blow has been devastating for these retailers, including department stores and drugstores.
China's new rules are also set to impact how goods travel into the country. Small businesses and individuals involved in reselling did not pay the 8.4% import tariff or value-added tax on those goods, taking the products through customs as luggage. This allowed resellers to turn a profit while pricing their goods below officially imported items.
The tariff on consumer items was lowered to 2.9% last summer, however, shrinking the gap between reselling and proper trade channels.
The e-commerce law has further reduced the incentive to resell items, and therefore go on overseas shopping sprees, by levying a 20% to 25% corporate tax on individuals and businesses that previously paid no tax for online sales. China-bound exports of Japanese cosmetics and similar products are only expected to increase in such an environment.