Cheap handbags bring all the tourists to Japan. But there's a dark side for luxury brands.
It feels like a year where every influencer and their mother has made a trip to Japan.
There’s no shortage of good reasons: Tokyo not only has the most Michelin-starred restaurants, it is also home to a four-billion dollar luxury vintage market. And thanks to the weak Japanese yen, the prices of high-end fashion items at luxury boutiques are pretty attractive.
Ashley Bell, who lives in New York, was amazed when she visited Tokyo in January.
“There were luxury resale shops that — depending on the neighborhood — could be like every other corner, and they were filled with Birkin bags, Kelly bags, huge walls of Chanel,” she said.
In boutique stores that sell new luxury goods, she noticed that prices were about 10 to 20% cheaper than retail tags in the US. For an Hermès bag that would have cost over $4,000 at home, she paid $3,100 in Japan with the lower prices and exchange rates.
The Japanese yen hit its lowest level since the 1990s earlier this year. That led tourists to flock to Japan and take advantage of the cheaper prices there, especially on premium brands. In June, the country estimated that it hosted over three million international travelers, a 51.2% increase compared to a year ago, an all-time high that surpassed pre-pandemic levels.
From Chinese consumers to Chinese market
For many luxury brands that reported overall decline in Asian sales, Japan was the only bright spot. But even within the Japan story, one buzzword was repeatedly mentioned by fashion executives: China.
For years, China has been the cash cow for luxury brands. From 2017 to 2021, its luxury market tripled in size, according to Bain. But the post-pandemic economic slowdown made Chinese consumers cut down their spending, especially on high-end luxury products. Consumer confidence in the country dropped to historic lows. While the luxury market rebounded in 2023, Bain analysts said that it is unlikely to reach the 2021 high, partially due to overseas shopping.
“The market is fueled by strong tourism spending, notably from China and other Asian countries,” said Armelle Poulou, CFO of Kering (parent company of the likes of Gucci and Yves Saint Laurent), during the company’s latest earnings call.
That trend casts the definition of Chinese consumers in a fresh light. During its July earnings call, LVMH’s CFO Jean-Facques Guinoy said that it was difficult to analyze the Chinese customer because the Mainland Chinese consumption “takes place partially inside China, partially outside of China.”
Kering, for its part, added that 30% of spending by Chinese nationals was outside of China, but close to 80% of their overseas spending remained in Asia, including Japan. The two biggest destinations for Chinese consumers are Japan and Thailand, reports show.
The pricing dilemma
When foreign shoppers rush into luxury boutiques, it may actually crowd out local customers from shopping and leave them with a sour taste in their mouths.
“At the end of the day, it’s about looking at your own backyard, where you have these local customers who are loyal to you, the ones that will always be here and they are not going anywhere,” said Scott Kerr, the founder of luxury branding firm Silvertone Consulting. “If they feel less wanted, they might not go shopping at your brand.”
How to balance local demand and the influx of tourism has become a challenge for luxury brands, especially when it comes to the industry’s favorite strategic maneuver at times of declining sales momentum: price hikes.
LVMH, for one, said that they implemented "numerous price increases" over the last few quarters, even as sales declined in each of the first two quarters of 2024. And Kering made comments about "introducing new products that are more expensive" at Gucci while sales dropped 19% in the second quarter.
It’s no secret that brands tend to raise prices in order to grow revenue. According to HSBC, the average prices of the most iconic handbags in Europe has risen a whopping 52% since 2019, and analysts called it a “main driver of sales growth between 2021 and 2023.”
That’s happening in Japan, too: Bell, the shopper from New York, in January saw a sign outside of an Hermès boutique that warned customers about price increases across the board starting the following month.
But if the brands raise prices when the yen is weak in order to take advantage of tourists’ spending, local customers would end up with a case of sticker shock.
“The magnitude and velocity of the yen weakness make it difficult to offset the impact through price increases,” LVMH’s Guinoy said. “We are reluctant to unduly penalize local demand in Japan. This means a significant portion of the growth is currently taking place at the lower price index.”
If recent trends in the foreign exchange market continue, however, this less than ideal state of affairs for brands (and the boon for traveling consumers) may be on the way out. The Japanese yen has posted sharp gains versus the US dollar and Chinese yuan since early January as investors ready themselves for a rate-cutting cycle from the Federal Reserve.
