In May, we saw Japanese retail sales gained 8.2 percent year-on-year, the third month in a row to witness growth, as the nation continues to see improvement in national consumer sentiment post-pandemic lockdown.
Retail in Asia had the pleasure to interview Nobuko Kobayashi, EY Asia-Pacific Strategy Execution Leader, on Japan’s retail sector.
Nobuko co-leads the EY-Parthenon Consumer practice in Japan, advising C-suite clients in consumer industry both from Japanese and multinational companies. Her consulting topics include growth strategy, organisational strategy and corporate development (M&A).
Given her background as an activist fund analyst, she provides a shareholder’s perspective. Her cross-border work and educational experience gives her the unique ability to cross the cultural gap which often hinders multinational companies operating in Japan or Japanese companies operating overseas.
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RiA: Based on data, what was the impact of the pandemic on the retail market in Japan?
Nobuko: The retail market was indeed strongly impacted by the pandemic, both in terms of the overall size and shifts within sectors and channels.
Recently we have been trending towards recovery with published May 2021 retail figures at US$109.3 billion indicating 8 percent YoY growth versus the beginning of the pandemic. This is a positive YoY trend over three consecutive months since March, and retail only dipped slightly by 0.1 percent in June 2021. The vaccination roll-out is gaining momentum. All who want to be vaccinated will be by October or November, so we expect to see pent-up demand with individual savings of up to US$328 billion aggregate (7 percent of GNP) during the pandemic.
However, we are not out of the woods yet. With the delta variant driving COVID to peak case counts, consumer surveys in August have found that only 20 percent of consumers expect an increase in spending versus previous months.
RiA: What type of consequences does it have on the local retail landscape?
Nobuko: The structural shifts in the shape of the retail market in Japan may be more meaningful than the impact on the market size.
For the first time, a significant portion of workers will be working from home in the long-term. 19 percent of male workers, typically the population of urban office centres, want to fully work from home, according to a Bank of America Japan consumer survey published in August 2021. Only 26 percent intend to resume full office work patterns with the remainder of respondents opting for a hybrid model. This shift away from the office has had a profound impact on historical retail models.
Suddenly, convenience stores located near offices do not look attractive anymore, and a local neighbourhood strategy must become central to any sales plan. The pandemic also strongly shifted channels in Japan. A largely analog pre-COVID economy has been forcefully thrown into the digital age. An EY consumer survey conducted in February 2021 found that 58 percent of consumers are visiting physical stores less. Brands are exploring direct-to-consumer (D2C) and models, and retailers are expanding their digital exposure and offering home delivery though offline-to-online (O2O) retail.
RiA: How is the role of department stores changing?
Nobuko: Department stores have been hit especially hard by the pandemic and sales performance remains consistently and substantially below pre-pandemic levels. Under the repeated state of emergency, department stores were forced to operate under shorter hours, closing at 8PM.
Most recently, figures from May 2021 show that department stores sales were 43 percent lower than in May 2019.
In the short term, department stores have shifted to a sort of “premium delivery” option. Famous retailers such as Isetan Mitsukoshi and Matsuya Ginza have put great effort into building their e-commerce and online-to-offline (O2O) services, including offering remote shopping, and both domestic and international shipping options.
However, as digital access to such retailers increases, the marginal value of a – potentially risky– in-store visit will decrease in the long term. There remains a question of how department stores can transform to provide in-store visitors with enough added value to justify an in-store visit.
A shift towards an experience-based shopping experience that enables greater opportunity to touch and try products is certainly one option. Alternatively, current mass-market department stores could return to their core – catering to the wealthy. This decision, however, would mean cutting down on the number of outlets, which could risk shrinking the topline.
RiA: What are the resilient categories?
Nobuko: It is certainly true that some categories have proved resilient or even benefited from the pandemic as consumer behaviour changed. The shift to in-home consumption has been dramatic with the majority of consumers spending more time at home in Japan (61 percent), Asia (58 percent) and globally (64 percent) compared to pre-pandemic.
Staples and “enjoy-at-home” options have been extremely resilient. One example is in the packaged foods category, with 60 percent of consumers surveyed in China, Japan, and Indonesia having purchased packaged food in the last six months. Frozen food has been especially strong. In Japan, most of the major convenience store chains have introduced new frozen food offerings.
There are also intra-regional differences across Asia Pacific. Alcohol has also remained a top-five category in Australia and Japan with 61 percent and 58 percent of consumers having purchased in the last six months respectively. However, in China, alcohol fell out of the top five most-purchased categories, landing in eighth spot at 46 percent.
Some categories, such as luxury goods – watches, jewellery and sports cars – have also been unexpectedly resilient in Japan. Mass market consumers are spending less on luxury items in Japan with 50 percent of overall Japanese consumers saying they will spend less. However, older, cash-rich and high-net-worth consumers have released some of their pent-up demand through purchases of luxury items, as other opportunities to spend, e.g. luxury trips, have dwindled under pandemic restrictions. The net effect has been an increase in luxury goods spending.
RiA: In terms of digitalisation, at which stage of maturity is Japan?
Nobuko: The pandemic has proven the resilience of e-commerce and digital marketing in Japan and globally. However, Japan is proportionally behind other developed economies when it comes to digitalisation. The Japan e-commerce market was in the early growth phase with YoY growth rates near 10 percent pre-COVID, according to Euromonitor. However, COVID has pushed e-commerce into mass-market consciousness and Japanese companies are now urgently responding to catch up.
The disintermediation of a physical retail layer will continue as consumers increasingly adopt click-and-order or click-and-collect. While Japan’s slow pace of digitisation pre-COVID can be partly attributed to the convenience of ubiquitous convenience stores, supermarkets and in-station outlets, the new normal under which people commute much less will accelerate the trend of disintermediation.
RiA: Are concepts such as sustainability relevant to consumers or still working towards educating on the topic?
Nobuko: A key emerging trend among consumers is the prioritisation of sustainability. More consumers globally expect corporations to take a lead in sustainability while 51 percent surveyed for the EY Future Consumer Index say they are willing to change their own shopping behaviour to be more sustainability conscious. Consumers realised they can live with less and therefore will spend less in the future or be more selective about what they decide to spend money on.
In Japan, 76 percent say that in the longer term they would not buy products they do not need while 45 percent will save more, according to the same EY Future Consumer Index. 53 percent say they will pay more attention to the environmental impact of what they purchase. Japan is somewhat unique in that although consumers will sacrifice time by scrupulously sorting and cleaning their recyclable waste, they remain highly sensitive to price increases – likely driven by many years of deflation.
Our survey found that consumers point to a sustainability education gap. Around 60 percent globally and across Asia Pacific say they need more information to make better choices when shopping. This reveals an increased reliance and need for transparency from consumer products companies and retailers to help lead and guide consumers in making sustainable choices.
RiA: In terms of consumer behaviour, are there any major changes?
Nobuko: We expect a lingering effect from the pandemic even as the vaccine roll-out picks steam. For fear of infection, consumers will remain cautious when in crowd settings. This means a shift in demand in service industries such as restaurants and tourism.
For fast food restaurants, mobile ordering which reduces wait time – and inevitably being in close contact with strangers – is gaining momentum. On the contrary, consumers have shunned traditional izakayas (Japanese bars) where rubbing shoulders with strangers is the norm and in fact considered a part of the charm.
In the absence of international trips, consumers are still travelling domestically in small group of friends and family. Not having to bear the cost of international flight fares means that consumers can instead spend on upgrades to domestic accommodation. Therefore, high-end ryokans or traditional inns have become popular destinations for domestic travellers.
RiA: Was Japanese market also seeing “revenge spending” in moments when COVID was under control?
Nobuko: As the number of vaccinations pick up, we will certainly see a rebound in consumer spending begin and pent-up demand resulting in so-called “revenge consumption”. Over the course of the pandemic, Japanese consumers have saved US$328 billion (~7 percent of Japan’s GNP), so consumption has certainly been suppressed. There are already signs of a strong rebound in the wealthier segment of Japan.
However, the desire to “revenge spend” may not be as strong as some other countries due to the fact that Japanese tend to have a more conservative and risk-averse outlook, which may dampen the speed of the rebound vis-à-vis other nations. This is compounded by the fact that Japan’s periods of state emergencies, only softly imposed, are not strongly correlated with consumer spending – except for in the case of department stores. Therefore, the impact of “revenge spending” may be relatively less pronounced.
This contrasts with other parts of Asia Pacific, which may experience a quick consumer
recovery spurred by more dramatic “revenge spending”, for example, consumer sentiment in China recently rose above pre-COVID levels and also hit a three-year high in Korea.
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RiA: We have seen some government incentives for domestic travel, does it have any contribution to retail business? If yes, in which area and how?
Nobuko: In the case of Japan, the government’s “Go To Travel” campaign boosted domestic travel for a time and was expected to generate US$27.3 billion in direct benefits. We certainly see correlated spikes in consumption after the implementation of the policy in July 2020 until it was suspended in December. However, it is likely that the positive impact of such government initiatives will be seen as premature since the economic benefit was quickly overshadowed by a peak in the number of COVID cases rising above 7,000 in January 2021.
According to a Bank of America survey published in August 2021, domestic travel is still the most popular category for Japanese consumers to spend on. This demand can certainly provide strong support to retail businesses. An increase in travel spend will support those sectors most badly hit by the pandemic, for example, restaurants, bars and hospitality-related businesses.
However, encouraging travel must be balanced against the potential risk to public health and safety. Government initiatives in Asia Pacific should likely focus more on encouraging and enabling safe travel and consumption, rather than on simply attempting to provide quick relief to the retail sector.