Saturday, September 24, 2011

Japan’s Premium Pricing Problem

                                          Coach Kristin Leather Hobo Bag | Source: Coach
TOKYO, Japan — In the United States, the Coach Kristin Leather Hobo bag retails for $298. In Japan, the same bag costs $711 (¥59,850).
This disparity in pricing is not unique to Coach. Premium and luxury fashion brands based outside Japan have long charged Japanese consumers a significantly higher price than in other markets for the same goods. But today, due to a strong yen and greater visibility of global pricing thanks to the internet, Japanese consumers are growing weary of this systematic markup.
As Mariko Sanchanta notes in a recent Wall Street Journal piece entitled “Web-Bargain Luxury Comes to Japan,” Japanese consumers are becoming accustomed to “discounts” at outlet malls and online sales, which, ironically, make prices equivalent to what much of the world pays at standard retail.
So why is it that premium and luxury brands have been able to charge nearly double for their products in Japan — a practice which on the face of it looks like price gouging?
While industry observers were highly sceptical about Abercrombie & Fitch’s overall strategy for Japan entry, CEO Mike Jeffries is right when he says: “We are premium brands, and we get premium prices in these markets.” It just so happens that premium prices are very high in Japan, because standard prices are very high.
Even with a relatively low consumption tax, the Japanese spend 13.4 percent of their income of food alone, compared to 9.9 percent in the United States. A five kilogram bag of rice — the Japanese staple — is often priced at around ¥2000 ($24), while CDs are priced at ¥3000 ($36).
The high prices are mostly a direct product of government policy. Protectionist tariffs not only increase the costs of imports, but keep domestic producers insulated from having to compete on price. Informal cartels are also at work in setting high prices.
In the fashion and accessories market, retailers like Beams, Ships and United Arrows maintain pricing for basics at around the same level — and in the process, set what consumers perceive to be standard price levels.
Usually, when foreign brands enter the Japanese market, they position themselves as “premium,” which usually means pricing at a higher level than the Japanese price for standard goods. For example, the price of a T-shirt by skate culture apparel brand Supreme, which costs about $25 in New York, was set at approximately $60 in Japan.
The rationale for this is simple: companies set prices as high as the market allows — and since the Japanese market sets prices higher than elsewhere, brands were able to indulge.
This worked when Japanese incomes were high and steadily growing, as they were from the 1960s to the 1990s. But when incomes peaked in 1998 and then started to steadily fall, the situation became less tenable, creating major opportunity for a clothing brand like Uniqlo, which set up production in China and was able to deliver high-quality goods at standard Western pricing levels seen overseas at Gap or H&M.
Today, the notion of undercutting standard Japanese pricing has spawned an entirely new strategy for entering the Japanese market. H&M and Forever21 have both generated significant revenue by offering product at a much lower price than what has traditionally been considered low. Indeed, nothing has scared domestic Japanese apparel brands more than the challenge to the psychological perception of what constitutes standard cost.
Beams and United Arrows, which have weathered the recession relatively well, responded to the recent fast fashion boom by creating their own lines of lower-priced Chinese-made apparel. Even designer brand Comme des Garçons has launched lower-priced lines like PLAY, alongside Chinese-made basics.
But as the rest of the fashion industry reorients itself and becomes much more competitive on price, Western luxury brands find themselves in a difficult position. Today’s Japanese consumers are less wealthy, pessimistic about their economic future and becoming accustomed to paying less. They no longer understand the 1990s-era logic of saving or going into debt in order to buy a luxury handbag. And thanks to Yahoo Auction, grey market arbitragers and a giant network of resale shops across Japan, there are much cheaper places to buy new or near-perfect luxury items than flagship stores. Indeed, consumers are also turning to industry offerings like outlet malls and sale sites like Gilt Groupe and Yoox.
Chinese tourists will help bolster demand, but as middle-class Japanese consumers flee the luxury market, brands may not be able to continue to keep charging artificially high prices. But for luxury brands, simply slashing prices is not an option either, as their pricing has been an important part of their strategy for communicating value and importance to customers. The question going forward is whether they can surf on the deflationary swells to slowly readjust pricing in a more stealth manner.
The U.S. price of $298 for a Coach handbag may actually be perfect for today’s Japan.
A version of this article first appeared on Néojaponisme, founded by W. David Marx, a contributing editor at The Business of Fashion.

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