TOKYO -- Japan's consumption tax hike is just around the corner and inflation is in the air. But many of the country's retailers are confident they can maintain their recoveries and avoid another post-hike hangover.
Consumer electronics stores have been packed with people doing a bit of last-minute shopping before April 1, when the tax rate will rise to 8% from the current 5%. Demand is growing so strong that supply cannot keep pace. At one shop in Tokyo, a customer who had just bought a laptop computer was told it would not be delivered for at least three months.
Yamada Denki saw monthly sales jump 27% on the year in February, driven by consumers rushing to replace refrigerators and other home appliances before the tax increase. K's Holdings also benefited from last-minute demand, which pushed its February sales up by 23%. "Sales are continuing to grow through this month too and are at a year-on-year increase of 60%," said Shuichi Kato, chairman of K's Holdings.
Japan experienced a similar surge in demand, followed by a steep drop off, when the consumption tax was raised in 1997 from 3% to the current 5%. Supermarkets suffered year-on-year declines in same-store sales for the entire year following the tax hike.
Better this time
While there is the possibility that history may repeat itself, retailers are not so worried this time around. "We will no longer be feeling the impact of the tax hike by around August at the latest," said Noboru Yamada, president of Yamada Denki. He did not reveal specific numbers, but indicated improvements in per-customer spending are behind his confidence. He projects the consumer appliance industry will soon move out of any forthcoming sales slump.
Department store operators, who have been some of the biggest beneficiaries of Prime Minister Shinzo Abe's economic stimulus measures, are on the same page. Isetan Mitsukoshi Holdings earlier estimated an earnings decline of up to 4% after the tax hike based on its experience in 1997, but has recently revised the forecast to around 2-3%.
"Consumers now are willing to pay if something is worth their money, so I'm confident we won't slide back to deflation again," said Hiroshi Onishi, president of the department store chain.
Value up, costs down
Nevertheless, retailers will face an uphill battle to keep consumption going. Value will be key, but the situation facing consumers remains harsh. Taro Saito, head of the economic research group at the NLI Research Institute, warns that though many companies are announcing wage increases, the change in actual pay, which factors in inflation rates, remains in negative territory. This will likely make consumers even more selective in their spending down the road.
Kazunori Tsuda, chief analyst at Daiwa Securities, predicts investors will bet more on retailers that offer quality products at reasonable prices. Convenience stores are among those expected to stay competitive after the tax hike, as they are already rolling out quality, in-house products at lower prices. The market foresees Seven & i Holdings, Lawson and FamilyMart logging record operating profits for fiscal 2014, according to a Nikkei Quick survey of stock analysts.
Retailers are also expected to continue their cost-cutting efforts to stay brisk through fiscal 2014. Department store operator Takashimaya last year acquired flagship store properties, a move it estimates will save around 10 billion yen ($97 million) in rent and other costs in fiscal 2014. Isetan Mitsukoshi is working to switch its in-store lighting to LED by the end of the current fiscal year, hoping to reduce electricity bills in fiscal 2014 and onward.
Coping with the weak yen will also be key for some retailers. Furniture supplier Nitori Holdings, which has pushed up its bottom line for the 15th straight year, will face the challenge of holding down costs in the coming fiscal year.