Savills World Research Japan

Spotlight Japan inbound retail October 2018

savills.co.jp/research Spotlight | Japan inbound retail October 2018

Savills World Research Japan

Spotlight Japan inbound retail October 2018 Spotlight Japan inbound retail

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“Japan is evolving as a global travel destination, and the retail market is benefiting from the SUMMARY explosive growth of inbound tourism. The  Shopping expenditure by overseas tourists impact is being felt across various retail sectors. reached JPY1.6 trillion in 2017, accounting for 37% of If the country skilfully targets different tourist their total expenditure. preferences, some of Japan’s retail market could  Food and beverage, as well as entertainment continue to grow even faster than the rapidly spending has shown steady growth, exceeding expanding hospitality industry.” JPY1.0 trillion in 2017.  Convenience stores, drug stores, and department Introduction The number of inbound tourists has stores are frequently used for shopping by overseas increased exponentially from 6.2 tourists, and sales for these categories have been Japan is an enormous retail market growing. with annual retail sales of over JPY140 million in 2011 to 28.7 million in 2017, and total expenditures by overseas trillion, and most global retail brands  Regional tourism should continue to grow have established client bases in tourists amounted to JPY4.4 trillion. The government has set a goal of to the benefit of retail shops and malls in those the country. While domestic retail areas. Inbound tourism might be the last source of 40 million overseas visitors and demand is stable, rapid expansion sustainable growth for some regional economies. of tourism in recent years has jolted JPY8 trillion of spending by 2020. It also aims to significantly increase this mature market with new energy  Although resources are limited in regional Meeting, Incentive, Convention, and and is creating opportunities for a markets, capital has started flowing as many large Exhibition (MICE) related expenditures wide range of retailers who can swiftly players now have 'skin in the game' via the hospitality from about JPY150 billion in 2016 to adapt to new trends. industry. MAP 1  Experience is the essence of travel, and landlords Global luxury chain hotels* in Japan should be able to benefit from mixing tenants who can provide unique and exciting offerings.

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1 JPY800 billion in 2030. The Rugby World Cup 2019, the 2020 Tokyo Olympics, and integrated resort (IR) development could also be a boon for inbound tourism.

With the expansion of inbound tourism,

4 more investments are taking place +5 in regional cities. This can be seen +3 in the increased number of lodgings 17 7 sprouting up around the country. More luxury hotel brands are also opening up in cities that used to be mainly for 1 domestic tourists. In areas where lodgings are not sufficient, peer-to- peer accommodations (minpaku) may fill the void to accommodate # of luxury hotels in the pipeline +2 regional tourism. Capital is also flowing as regional banks are actively lending 2 # of luxury hotels money, and funds to promote tourism are being launched by both the public Source: Smith Travel Research (STR), press releases,, Savills Research & Consultancy and the private sector. Investment * We have counted the number of hotels whose brands are categorised as luxury chains by STR in the 2018 STR Chain Scales list. should continue to increase as many

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large players now have skin in the convenience stores makes them the GRAPH 1 game via the hospitality industry, which most frequented store types where Overseas tourist retail/service previously catered mostly to Japanese tourists spend money. This is followed tourists. by airport duty-free stores, drugstores, expenditures, 2014 – Q2/2018 department stores, and supermarkets, Shopping F&B Entertainment In the face of a dwindling population, where one in two tourists choose to 800 inbound tourism could be the only shop. Additionally, 15% to 17% of 700 immediate chance for retail shops tourists shop at outlet malls, fashion and malls in some regional areas to speciality stores, and urban retail shops, 600 reposition to a sustainable growth which, although small as a percentage 500 trajectory. For popular tourist of the total, accounts for the equivalent destinations, this is likely to be a long- of 4.3 to 4.9 million people. To highlight 400 term growth driver. in particular

how inbound tourism is affecting JPY billion 300 is a clear beneficiary of tourism growth Japan’s retail market, we discuss three with drug stores and department primary shopping venues: convenience 200 stores performing exceptionally well. stores, drugstores, and department The news of an old family-run food stores. Although these are store types 100 stall in Osaka Castle Park earning over that have been significantly benefiting 0 JPY500 million in three years also from inbound tourism, insights obtained Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 shows how wide the spillover effect is. from examining these sectors could

present useful lessons for other store Source: Japan Tourism Agency, Savills Research & Consultancy Since experience is the essence of types as well. travel, Japan’s retail market should GRAPH 2 largely benefit from incorporating Convenience store sales Overseas tourist shopping places, 2017 service elements into the shopping According to the Ministry of experience. Forays into the hospitality Economy, Trade and Industry (METI), industry by luxury fashion brands convenience store sales increased 80% such as Armani, , and Versace from JPY8.1 trillion to JPY11.7 trillion 70% illustrate the compatibility of retail and between 2010 and 2017, an impressive 60% service. Although Japan is known for its 45% increase. While an increase in the service quality, a lack of basic amenities number of stores largely contributed 50% such as multilingual services and WiFi to overall sales, sales per store also 40% grew in all regions between 2010 and spots is leading to dissatisfaction. Usage ratio 30% These are low hanging fruits that could 2017. In 2017, sales per store were 20% potentially give some well-prepared the highest in Kanto at JPY221 million, retailers a competitive advantage. followed by Kyushu/Okinawa, Kinki, 10% and Tohoku, respectively. 0% Overview of inbound tourist spending Although it is not easy to isolate the Although a rapid increase of Chinese impact of inbound tourism on sales tourist spending due to “bakugai” growth, its contribution is assumed (“explosive buying”) virtually ended in to be significant in cities that are popular among tourists. According to 2015, total expenditures by overseas Nikkei’s 2017 retail survey, over 70% of Source: Japan Tourism Agency, Savills Research & Consultancy tourists are steadily growing. In surveyed convenience stores reported 2017, total shopping expenditures GRAPH 3 that inbound tourist customers by overseas tourists reached JPY1.6 increased compared to 2016. And, Convenience store sales per store by trillion, an increase of JPY214 billion or in the same survey, over 50% of 15% YoY over 2016. Although Chinese region, 2010 vs 2017 respondents said that they were tourists account for 25% of overseas actively targeting overseas tourists. 2010 2017 visitors, they are responsible for over 300 50% of the spending. Expenditures For example, FamilyMart announced 250 by tourists from other countries also that it would let Airbnb users pick up rapidly increased by JPY119 billion, keys at stores. The company expects 200 to JPY762 billion, between 2016 and goods sales increases as Airbnb 2017. Furthermore, food and beverage, guests reportedly spent JPY800 on 150 as well as entertainment services are

average at key pickup at its test stores. JPY million contributing to tourists’ total spending. Lawson started accepting Alipay, an 100 Compared to shopping expenditures, online payment platform popular in 50 growth of these categories appears China, in January 2017. In January more stable and should continue in line 2018, Alipay users reportedly paid 0 with increases in visitation. JPY1,500 on average, almost triple the non-user average of JPY540 (as Inbound tourists shop at a wide range of December 2017). Other store types of venues and contribute to sales in might also be able to increase sales by various retail sectors. The ubiquity of applying similar methods. Source: METI, Savills Research & Consultancy

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GRAPH 4 Drugs and toiletries sales Breakdown of sales growth rate in the drug and The popularity of Japanese drugs and toiletry sector by city, 2015 vs 2011 cosmetics among overseas tourists is widely publicised. METI’s data shows Efficiency factor Sales floor factor Confounding Total retail sales that drug store sales increased from 80% JPY4.9 trillion to JPY6.0 trillion between 70% 2014 and 2017. At the city level, sales 60% growth in the drug and toiletry sector 50% outpaced that of overall retail sales in 40% a majority of markets between 2011 30% and 2015. Most notably, in the Chuo 20% Ward of Osaka, where is Growth rate located, drug and toiletry sales grew 10% over 150% during the same period 0% due to explosive increases of overseas -10% shoppers in the area. -20% Drugs and toiletries were added to the duty-free item list in 2014, which appears to have helped sales growth

Source: METI, Savills Research & Consultancy in this sector. According to the Japan Department Store Association (JDSA), GRAPH 5 cosmetics are typically the most popular duty-free category among Duty-free sales, Jan 2017 – May 2018 overseas tourists, followed by high-end brand goods. New rules will simplify General goods Expendable goods Per person the process of claiming duty-free items 35 80,000 by allowing general and expendable 30 70,000 goods to be claimed together. Digitisation of purchase records will 60,000 25 eliminate the hassle of carrying around 50,000 personJPY per passports thickened with receipts. 20 40,000 Unlike the short-lived electronics 15 JPY billion 30,000 and luxury item shopping sprees, the 10 popularity of daily necessities is likely to 20,000 last longer. Drug, toiletry, and cosmetic 5 10,000 products are popular among not only Chinese, but also Taiwanese and 0 0 South Korean tourists, which should also contribute to stable demand for these items. However, one caveat is Source: JDSA, Savills Research & Consultancy that sales growth in this sector was primarily driven by increases in sales GRAPH 6 floor areas rather than improvement in sales efficiency in many cities. If total Comparison of store sales growth of major demand shrinks, competition for larger department store chains, FY2017 vs FY2016 shares will intensify. Department store sales Department stores are another Hankyu beneficiary of inbound tourism. As Hankyu Hanshin discussed in our “Japan Retail May Osaka 2018” report, inbound tourist demand Takashimaya is propelling sales at department Shinsaibashi stores in popular destinations. Such Daimaru properties in Osaka in particular have Seibu been outperforming others. Sogo Seibu

Ginza Mitsukoshi Unlike convenience stores and Isetan Mitsukoshi drugstores, however, overall sales at department stores have been stagnant 1 Chain total in Japan, save for Osaka . The demise -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 1 Osaka appears to be a positive outlier among YoY cities. The underlying cause for this divergence is likely the “Osaka 2011 Problem” where a series of expansions and openings of new stores abruptly increased Source: Company disclosures, Savills Research & Consultancy department store supply.

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GRAPH 7 should also energise regional tourism Department store sales in Japan and major (cover photo: DoubleTree by Hilton submarkets, 2010 – 2017 Okinawa Chatan Resort). In the face of depopulation, regional Japan Tokyo 23W Yokohama Osaka 130 stakeholders have acknowledged that tourism could be the key to the 125 revitalisation of local economies and 120 are ramping up their efforts to attract 115 visitors. For some regional areas where local economies are rapidly shrinking, 110 it may be the last clear and immediate 105 chance to escape from the downward 100 spiral of decreases in population and investment. To effectively promote 95 Sales (2010=100) Sales index regional tourism, the government aims 90 to create 100 registered Destination 85 Marketing/Management Organisations (DMOs) by 2020, and 86 DMOs have 80 2010 2011 2012 2013 2014 2015 2016 2017 been registered as of July 2018.

Source: METI, Savills Research & Consultancy These organisations are consortiums of local stakeholders; it is expected GRAPH 8 that they can implement coherent Department store sales per sq m of sales floor in strategies, which are essential for long-term growth, through effective major submarkets, 2010 – 2017 consensus building. DMOs are also Japan Tokyo 23W Yokohama Osaka Nagoya responsible for collecting data on 125 tourists. Consumer behaviour and 120 preferences of tourists widely differ based on their nationalities and 115 can abruptly change, as with the

110 Chinese tourist “bakugai”. Timely data accumulated by DMOs should assist 105 retailers in capturing emerging trends.

100 Given that tourists’ dissatisfaction comes from basic information needs 95 such as a lack of WiFi spots or Sales (2010=100) Sales index 90 multilingual services, there still seems to be huge untapped potential for 85 sales improvements. Furthermore,

80 the Japan Tourism Agency (JTA) is 2010 2011 2012 2013 2014 2015 2016 2017 sharing detailed survey results on tourist preferences and behaviour Source: METI, Savills Research & Consultancy of department stores is a global space has been declining since 2005. GRAPH 9 phenomenon, and it is hard to imagine Retailers who can leverage growing New supply of large-scale retail that the trend will reverse without the tourism may survive competition and facilities in major cities*, 2005-2017 entire industry going through a massive improve profits by increasing market transformation. Having said that, sales share. 1,600 per sq m of sales floor area showed 1,400 stable growth in major markets in Regional tourism recent years. Specifically, Tokyo’s 23 In Japan, total room nights stayed 1,200 wards improved the figure by 18% by overseas tourists more than between 2010 and 2017. A likely cause quadrupled from 17 million to 72 1,000 for improving performance is reduced million between 2011 and 2017. During competition following a series of this period, while Kanto shrank its 800 closures of underperforming stores. In share from 46% to 37%, Kinki and Thousand Thousand m sq 600 addition to inbound tourism demand, Okinawa increased their shares by 4 surviving department stores appear percentage points (ppts) and 3ppts, 400 to have absorbed displaced demand respectively, indicating increasing from closed stores. popularity of regional cities outside 200 Greater Tokyo. As the number of repeat 0 What is happening in the department tourists increases, more people are 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 store sector could be applicable likely to explore regional destinations. Source: METI, Savills Research & Consultancy to other retail categories. Graph 9 Increases in regular routes of low cost * Retail facilities of over 1,000 sq m of store area in 20 cities designated by indicates that supply of new retail carriers (LCCs) to regional airports ordinance plus Tokyo’s 23 wards.

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GRAPH 10 dining, boutique shopping, and a Total room nights by overseas tourists, 2017 vs 2011 driving simulation. In 2017, Asics, a Japanese footwear and sports 2017 equipment producer, opened Asics 72 mil stays Connection Tokyo along the Sumida River. The facility features cafes and 2011 fitness studios and aims to promote 17 mil stays Kanto active lifestyles to locals, as well as Kinki domestic and overseas tourists. 37% Kyushu Currently, a shortage of multilingual Chubu 46% Okinawa services in Japan is a major source of frustration for overseas tourists. Since 9% Hokuriku Shinetsu Chugoku interaction is usually a key element of 10% Tohoku experience-based products, retailers 21% Shikoku may be able to significantly improve customer satisfaction with better 25% language services. Advancements in translation technology, as well as Source: JTA, Savills Research & Consultancy increases in the number of foreign residents in Japan could help address by nationality, which should assist retailers acknowledge the importance the problem.  formation of effective strategies. of physical stores. Incorporating experience in retail is especially GRAPH 11 Capital is also flowing into various essential to attract tourists as many Daily food and beverage spending per regional cities. The Regional Economy visit Japan for unique and authentic person by country in 2017 Vitalization Corporation of Japan, experiences. established in 2009, has been setting 6,000 up funds for revitalisation of regional Enjoying local cuisine and drinks is economies, and tourism is one of their a popular activity for most tourists. 5,000 major focuses. Furthermore, All-Japan Total food and beverage spending Kanko Rikkoku Fund, a JPY25 billion by overseas tourists was JPY886 4,000 fund, was established in April 2018 by billion in 2017, accounting for 20% a consortium of 60 companies such of their total expenditures. In 2017, 3,000 as MUFG Bank, Sekisui House, JAL, tourists from Hong Kong spent the and regional banks. Combined with most on food and beverage per bank loans, the fund is expected to 2,000 person per day, followed by Singapore JPY/person/day provide a total of JPY100 billion in and South Korea. According to the financing for regional tourism projects. Japan Foodservice Association, 1,000 Organisations like the aforementioned restaurant sales2 in Japan have grown DMOs should also be able to help concurrently with tourism since 2011 0 effective allocation of capital. and recorded about JPY19 trillion in 2016. The story of the Osaka food Overall, the inflow of tourists and stall mentioned in the introduction capital to regions should have a also shows the huge potential of this Source: Japan Tourism Agency, Savills Research & Consultancy positive impact on regional retail category. markets. Some cities may also be GRAPH 12 able to utilise new resources to attract Additionally, entertainment service Restaurant sales in Japan between Japanese tourists, who are still by far expenditures by inbound tourists 2008 and 2017 the largest source of tourism demand. amounted to JPY144 billion in 2017 Considering that depopulation is with western tourists in particular 19,500 severe in some areas, however, spending more per person than the consolidation of stores is likely to 19,000 average. Among Asian tourists, going proceed, which, as with department to a Japanese hair salon, for instance, stores, should create opportunities 18,500 is a popular experience as beauty for surviving stores. Consolidation of ownership could also progress standards in Japan are widely admired 18,000 if J-REITs pick up underperforming in other parts of Asia. properties as high-yield assets. 17,500

Moreover, these experience elements JPY billion Experiential retail are used for brand marketing. For 17,000 The importance of in-store experience instance, Lexus Meets… Hibiya 16,500 has been widely discussed in the opened in Tokyo Midtown Hibiya in March 2018 as a brand experience context of the looming threat of 16,000 e-commerce to brick-and-mortar facility; customers are able to shops. Examples of Amazon Go, LINE experience the Lexus brand through 15,500 FRIENDS stores, and the pop-up 2008 2009 2009 2010 2011 2012 2013 2014 2015 2016 2017 2 Restaurants include various food and beverage Mercari Café indicate that even online functions such as cafes and bars. Source: Japan Foodservice Association, Savills Research & Consultancy

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OUTLOOK The prospects for the market

Overall, the momentum of inbound acknowledged the importance of However, Japan’s heavy reliance on tourism should continue, further tourism for revitalisation of local tourists from Asia could pose a risk. bolstered in the medium-term economies, facilitating the formation As illustrated by the impact from by the Rugby World Cup 2019, of DMOs and providing risk capital. China’s boycott of travels to South the 2020 Tokyo Olympics, and IR Tourism is now a major concern Korea, inbound tourism is susceptible development. Japan’s retail market for many entities as it has attracted to various external factors including should continue to be a beneficiary players from various industries, which political tensions. Natural disasters of this trend, although shifts in the could accelerate further investment are also an inherent risk in the tourism shopping behavior of overseas as exemplified by All-Japan Kanko industry. A potential retreat of the tourists could cause some volatility Rikkoku Fund. global economy might also put a in performance. temporary break on travel volumes in Considering trends in tourist demand Asia. To mitigate the risk, it is essential As Japan’s hospitality industry for leisure activities, it is becoming for the country to diversify source grows larger, it will be increasingly increasingly important for retail stores regions of tourists. Some cities might important to have long-term to offer experiences. Landlords are be able to use resources accumulated strategies to capture the growing likely to benefit from mixing specialty through inbound tourism to attract demand and diversified preferences restaurants and service-oriented domestic tourists for stable demand. of different nationalities. For tenants for added excitement. Having some regional cities, inbound local flairs should also add to the tourism might be the last clear uniqueness and authenticity that and immediate chance to break travellers seek. JTA’s vast and detailed the negative cycle of population disclosures should be helpful for outflows and declines in economic the formation of effective marketing activity. The government has strategies.

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Christian Mancini Tetsuya Kaneko Simon Smith CEO, Asia Pacific Director, Head of Research Senior Director (Ex Greater China) & Consultancy, Japan Asia Pacific +81 3 6777 5150 +81 3 6777 5192 +852 2842 4573 [email protected] [email protected] [email protected]

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