TOKYO -- Japanese department store earnings are beginning to bottom out thanks to spending by foreign visitors, but such a model is not sustainable, casting doubt over the recovery's longevity.
Both J. Front Retailing and Takashimaya announced profit increases Tuesday for the half ended August after originally forecasting declines.
Visitors come to spend
"Inbound consumption rallied more than expected, and sales to wealthy customers were firm," said J. Front President Ryoichi Yamamoto, explaining the earnings recovery on Tuesday. Tax-free sales spiked 52% on the year and exceeded 2 billion yen ($17.8 million) for the half. About 30% of sales at the company's main Daimaru location in the Shinsaibashi district of Osaka were from overseas guests.
Tax-free sales also jumped 50% at Takashimaya. With low-cost carriers chartering flights from Asia to the Kansai region, sales at Osaka and Kyoto locations grew even faster at 80% and 70% respectively. Sales of jewelry to wealthy customers also rose 6%, while art sales surged 25%.
"We have seen striking growth since the Nikkei Stock Average hit 20,000 in June," said Takashimaya President Shigeru Kimoto, although 90% of the 8.1 billion yen in domestic revenue growth has come from tax-free sales.
Domestic consumption by the broader population, meanwhile, has yet to bottom out. Sales for Takashimaya customers spending at least 1 million yen with a store credit card grew 4%, while sales for those spending less than that fell 4%. Excluding the tax-free sales as well as transactions with large institutional and affluent buyers, revenue actually edged lower 0.8%.
Japan's department store earnings deteriorated across the board in fiscal 2016 as China imposed higher tariffs on privately imported goods and the yen strengthened, slamming the brakes on consumption by overseas guests. The current recovery is partially a reaction to the previous year's slump.
Uneven recovery
The sector's reliance on tourist spending is made clear by the struggles in regional locations that see fewer travelers. Half of Takashimaya's 16 locations nationwide, mainly those found in regional areas, saw revenue drop for the half. J. Front experienced a similar pattern, with eight out of 15 stores logging lower revenue.
Department store sales have slid 40% since their peak in 1991. Solid earnings right now indicate less a revival of the old business model than a temporary tailwind. Despite the growth, spending by overseas guests to Japan accounts for only 6% to 7% of total sales at both J. Front and Takashimaya. E-commerce companies like Amazon, meanwhile, have rapidly widened their reach.
"The impact of online sales is not small," Yamamoto acknowledged. But he also emphasized that Ginza Six, the Tokyo shopping complex opened in April that J. Front helped develop, is "one way to demonstrate the value of brick-and-mortar stores."
During the three-day weekend on Monday, few people at Ginza Six were seen with shopping bags and many seemed to be there just to check out the new complex. "There are a lot of expensive stores," said one couple in their 50s visiting for the first time. "We will just eat and go home."
J. Front and Takashimaya are shifting toward real estate projects like Ginza Six for their adaptability to changes in demand and stable revenue through rents. The Ginza Six model, however, will not necessarily work nationwide.
Although visits to Japan are likely to continue increasing, shopping is easily affected by exchange rates and weather. Department stores will be hard-pressed to find a new business model before the tailwinds from overseas stop blowing their way.
(Nikkei)
