Research paper on Japanese business activity
I. Topic Explanation
What is Luxury? To the Rich, it is a privilege. To the masses, it is a goal. To the unfortunate, it is a dream. Luxury can be attained in numerous of ways and in numerous forms. While others associate luxury with the priceless comforts of living, a sad majority sees it as a commodity; a shoe, a bag, or a designer dress. The sudden rise and popularity of the consumer has led most people to believe that luxury will always come with a price tag. But aside from the popularity of these trends, another phenomenon docks to further tolerate this kind of lifestyle. In the years to come, Luxury no longer signifies intangible prestige. In the new world order, Luxury is now attained with the use of Trademarks and Logos. The importance of brands and labels has been a direct effect and cause of the brand conscious masses. (Stuart Ewen, 1992) The status of an individual is no longer measured through intangible effects as it once traditionally was. Today individual status increases as the number of branded things you own increases. And the more well known you brand of clothing is the more elite you become.
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The phenomenon of turning the exclusivity of a product into a global mass market consumable has reinvented the Luxury goods industry. According to Dana Thomas, author of Deluxe: How Luxury Lost its Luster,” the luxury goods industry is $157 billion business that produces and sells everything and anything that equates to the good life – the luxurious life. (Thomas, 2007) But the luxury goods industry has been transformed in more ways than one. First of all, the term coined to goods and services in this industry, Luxury goods, no longer practice the same theory. Luxury goods are differentiated by its high elasticity in demand, so as when income increases the demand for them increases proportionally as opposed to a necessity. (Malkiel, 2003) But even in the 1940’s luxury goods has defied the laws of economics as Coco Chanel admitted that “Luxury is a necessity that begins where necessity ends.’ (Charles-Roux, New York) This is now especially true in the 21st century as certain marketing tools and the current and unexplainable obsession with celebrities have necessitated the ownership of such goods.
Luxury, in its very definition, is something that is hard to obtain, something that although most people desire, only a few possess. This is the defining characteristic of a luxury good, its exclusivity. This brings us to our second evidence; the ‘democratization’ of luxury has led it to as Thomas said, “lose its luster.” (Thomas, 2007) And if there was any market in the world that understands the importance of status it’s the Japanese people. However, as the global recession claims Japan as its most affected victim, how can the Luxury Goods industry maintain their influence in the Japanese luxury goods market? Has commoditizing of luxury brought them to their own demise?
II. Major Problems, Issues, Themes, Group, Issue Background
In the book entitled Japanese management: tradition and transition, it discusses the importance of hierarchy and rank in Japanese corporate society. (Whitehill, 1991) Although the appropriation of symbols of status, reserved parking spaces, corner offices, and the like, is widely seen in US firms, status in Japanese corporations put more emphasis on hierarchy and labels of rank. This clearly transcends to Japanese consumer culture. Yukina Abo, at first glance, is a 22 year old Japanese woman in her prime. But when she starts talking about brands, the name-dropping ensued. Louis Vuitton, Hermes, Prada and Coach, her impressive collection rivals those of heiresses and celebrities. “When we were at high school, having the right brands made us feel like we could present ourselves as adults, but for the people that we now consider fashionable, the look is more important than the logo.” (Hoel, 2008) And this look meant, for Abo and 94% of all Japanese women, having the right bag, the right shoes, and the right everything else. Japan lead the Global Luxury goods industry with a share of 41% with both Europe and US falling far behind at 16 and 17 percent respectively. (Business Standard, 2007) According to David Marx, Japanese Consumer-Market Analyst, “The breadth and diversity of luxury brands here (Japan) is incomparable to anywhere else.”
Dolce and Gabbana, Chanel, Burberry, Gucci, Prada, and Louis Vuitton are just some of the names found in the once xenophobic Japanese society, with Vuitton being the most preferred. “Vuitton knows how to create exclusivity at the top, while simultaneously delivering luxury to the population at large. Pamper the elite, delight the office lady _ elitism and democracy in the same breath, managed harmoniously. (Radha Chadha, 2006)’ This illusion of exclusivity has created an illusion of a status of wealth as well. One of the key drivers to market success is that these products have become the preferred mode to demonstrate wealth, as oppose to more traditional means that are often more expensive and harder to show-off. This probably explains the reason why 94% of Japanese women in their 20s own a Louis Vuitton handbag; 92% own products from Gucci, more than 58% own a Prada item and over 51% possess a product with a Chanel label on it. (Grail Research Survey on Luxury Brands, 2008) These numbers show how the love affair with luxury brands have changed Japanese consumer behavior and buying patterns. Aside from this, these good’s mass acceptance has become a result of perceived notion of social acceptance. In Japanese society, from imperial times up to present, the emphasis have always been on the importance of “wa” or harmony by suppressing individual needs or desires. This has created a culture of “fitting-in” the Japanese way that has, again, seeped in the Japanese’s shopping habits. According to Mukai Noiri, marketing assistant for Desco Luxury, “In Japan, if it’s a bag which everybody loves, maybe 90% of your friends will have that same bag.” (Hoel, 2008) This also drives over 33MM consumers or 25 percent of the population to patronize such Luxury brands. (Grail Research Survey on Luxury Brands, 2008) This illustrates and further justifies the importance and impact of the Japanese market to the Global luxury goods industry. But the Japanese economy hasn’t been enjoying the same economic success it used to have. Different overlapping social, political and economic issues have brought about economic recession in Japan, the worst since WWII. (Agencies, 2009) This has caused serious market decline in Japan disproving the general notion of luxury goods high elasticity. In a recent Grail research survey, as 74 percent of consumers perceive the economy to worsen 54 percent of them expect to decrease their expenses on luxury goods. As Japan’s economy heads toward recession and its stock market hovers around a 5-year-low, shoppers are closing their wallets, and the impact on European fashion houses has been dramatic (Reuters, 2008). Global recession together with the troubling population issues of the country has resulted in decrease sales in major brands. LVMH declined in sales by 6%, (The Daily Yomiuri , 2008)Salvatore Ferragamo and Bally was forced to mark down prices by 20% and by 7%-10% on 42 items respectively. This was a first for Ferragamo since its inception of Japanese operations for the first time since the brand started operations in Japan. (Women’s Wear Daily, 2008) Chanel: held a month long sale of clothes and other items, (The Economist) Osaka, a luxury department store, reported a 9% y-o-y drop in revenue of 7 overseas brand shops. (JapanInc Magazine, 2008) All of these reports occurred in 2008, which to some reports is just the tip of the recession iceberg and is expected to get even worst come 2010.
III. Potential Strategies
In order to prepare themselves for the continuing downturn of the market, Luxury brands should be able to implement strategies that will recapture the industry’s popularity and share in the country. There are four potential strategies to employ by these firms. In fact some of them\are currently implements a combination of the four strategies. Refocusing efforts in emerging markets is one of the most popular choices by firms. To offset the slowdown in sales in Japan, firms such as LVMH, Cartier, Prada to name a few have opened flagship stores, additional outlets, and invested in Brazil, India, Russia, and China. China is currently one of the most sought after markets today due to its rapid urbanization rate, large potential consumer population and increasing advancement in trade. In fact, China, by 2015, is expected to be the 2nd largest market for the industry at 29 percent (KPMG, 2001). India is another market to watch out for. Out of the other BIRCs, India is probably the only one that can match up to china. (India Business Insight, 2007)
Another strategy utilized today is the use of technology as alternative channels. M-commerce and e-commerce has gained popularity in mainstream distribution. As Mark Lee, CEO of Gucci, has emphasized, “I think eventually every company that runs stores will have e-commerce. Whatever the initial fears or reluctance, people are embracing it. It doesn’t harm the brand in any way, and it’s also very profitable.” (Grail Research Survey on Luxury Brands, 2008) Japan’s online community has increased considerably through the years and about 20% of Japanese consumers make purchases for luxury goods using the Internet. (Lux Research, 2008) This has prompted both LVMH and Cartier to embrace the trend and open their online counterparts by the end of 2008.
Outsourcing has also become the most profitable choice for companies. Prada and Burberry have shifted production to China due to its low manufacturing costs. This enables them to meet demands at a lower cost.
Lastly, the shifting of market focus in Japan from the middle class to the ‘New Rich’ has become another go to solution. As consumer spending in the middle class segment decrease, the need to find an alternative source to cope up became necessary. Nowadays, the shift has resulted in bringing back the shine in luxury goods. The ‘New Rich’ segment is believed to provide these firms with the much needed boost in sales. This segment consists of individuals with assets worth Yen 100 MM (~USD 852,100). (The Economist) Armani, Bulgari and Gucci are just some of the names which had opened flagship stores along restaurants and spas in Tokyo. This aims to attract the wealthy from all over Asia because of Tokyo’s booming tourism industry.
IV. Concluding Comments
Although firms have made steps in order to do this, their strategies have failed to address the real issue faced by the industry today. The commercializing of the Luxury goods industry made them less resilient to the recession. In fact the strategies currently being implemented by these companies are similar to firms like Bayer and Coca-Cola, firms with assembly lines longer than Japan’s Harajuku district. Strategies such as outsourcing and e-commerce further prove that the ‘luxury’ in Luxury goods is lost. The use of e-commerce has made them even more accessible than they already are and has stripped the exclusivity of the product by purchasing it on eBay, the same websites which sells everything from used car parts to antique furniture. ([email protected], 2008) Outsourcing is another culprit. The drive to maximize profits had led companies to cut costs wherever and whenever possible. In Thomas’ work, she narrated how they’ve deduce themselves to use Sneakier tactics. One example is “cutting sleeves a half an inch shorter” (“when you get to 1,000, you see the savings,” one employee told the author). (Thomas, 2007)These strategies, although can be beneficial to the firm, has denied the Japanese market of what they demanded from purchasing the product; the Luxury and wealth their products represent.
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