TOKYO -- Laox, a Japan-based operator of duty-free stores, is on track to reap a record profit this year. But since the company's fortunes are tied to tourism from China, where the economy is slowing, management is determined to diversify.
Sales rocketed 120% on the year to 45.1 billion yen ($368 million) in the January-June half, according to figures released in mid-August. The company upgraded its full-year sales estimate from 70 billion yen to 90 billion yen -- up 79% over last year.
Net profit rose by a factor of 79 to 4.6 billion yen for the first half, shattering Laox's initial full-year projection of 4.2 billion yen. New estimates put net profit for the year at 8.3 billion yen, some 570% above the 2014 figure and the highest since the company went public.
In Tokyo's Akihabara district, visitors from abroad swarm Laox's flagship store. Tour buses are a constant sight, and the company has trouble keeping its most popular goods in stock. Stainless steel water bottles and other souvenirs fly off the shelves as tourists purchase them by the bunch for family and friends.
Booming Chinese tourism is at the heart of Laox's unprecedented earnings and largely responsible for bringing the company out of a yearslong slump.
Laox began life as a home appliance retailer. Duty-free shopping became a mainstay only after Chinese electronics retailer Suning Commerce Group acquired the company in 2009. The 2011 earthquake and tsunami in northeastern Japan, coupled with territorial disputes, pushed down sales to just 10 billion yen in 2011. Laox continued bleeding red ink before finally swinging to an operating profit in 2014.
Today, about 80% of Laox's customers are Chinese -- most of them from the 100 million- to 200 million-strong middle class, defined as people earning the equivalent of about $24,000 to $80,000 a year.
Despite troubling signs of a Chinese economic slowdown, "the growth of the middle class -- our core customers -- is strong and will continue," Laox President Luo Yiwen told a news conference Aug. 13. Triple-digit year-on-year growth in customer traffic is expected to continue in August.
Knowing all too well that "inbound business can often fall flat," Luo aims to use the last half's success as a springboard. Laox has snapped up a midsize shoemaker and will embark on a joint clothing venture with apparel company Onward Holdings. The retailer hopes that developing proprietary Japanese-made goods will make it more competitive.
Laox will also step up its advertising presence in October, when it plans to start sending coupons -- with the help of NTT Docomo -- to mobile phones of tourists entering the country. And the company hopes to boost traffic to its e-commerce operations in China by keeping in touch with tourists after they return home. Laox opened an e-store in August on Tmall.com -- part of Alibaba Group Holding -- and sells sought-after Japanese goods.
"Demand for Japanese products by e-commerce customers in China will become a force to be reckoned with," said Taketo Yamate of Credit Suisse Securities (Japan).
Laox "needs to start getting its name out there now," Yamate said.
Shoring up the base
Laox is also building up its store network in Japan. The company added eight locations in the first half for a total of 24 nationwide. More store openings are in the works for the latter half of the year.
"Our system for pulling in [travelers to Japan] is still inadequate," Luo said. Laox plans to cast a wider net for tourists by opening more locations in popular areas.