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PACIFIC PARADOX

Japan’s retail development has surged despite recession

By Susan Thorne

It’s the best of times or the worst of times in Japan, depending on your point of view.

The bad news about Japan has filled the headlines for the past several years: declining stock market and real property values; the world’s biggest budget deficits; a dysfunctional banking system; a steep drop in the value of the yen. Japan was declared to be in recession last spring when the economy shrank by 1.2 percent for the second successive quarter. Unemployment, previously almost unheard-of in this prosperous country, has risen to an unprecedented 5 percent, according to data from the not-for-profit, publicly funded research agency Shop System Study Society (SSSS) in Tokyo. Retail sales are slumping, and some stores are closing; for example, The Daiei and Mycal Corp., two debt-plagued mass merchants previously ranked among the country’s top five retailers, have closed 30 and 50 branches, respectively, and are close to extinction — Mycal filed for bankruptcy in September and was reported to be in talks with Wal-Mart.

Yet, paradoxically, Japan has also seen some rampant shopping center development. Indeed, 2000 was one of the biggest years in Japan’s history for such development, with 133 centers measuring more than 1,500 square meters (16,146 square feet) constructed, compared with only 87 in 1999 and 100 in 1998, according to outlet mall developer Chelsea Japan Co., Tokyo. That record has been matched only once before — in 1993. Though 2001 growth was slower, a further 36 centers in the same size range were added during the first eight months of the year.

Moreover, the average size of a shopping center is increasing, pointed out Heidi Oishi, Chelsea Japan’s general manager of marketing, and now stands at about 161,430 square feet.

The reason for this building boom? Falling land costs are making new development a more profitable prospect. Compared with 1991 prices, when they were at their peak, land values are down by as much as 58 percent today in Tokyo’s commercial district — lower than 20 years ago, according to Tokyo property consulting firm Ikoma/CB Richard Ellis. This means that developers, including foreign companies attracted by the cheap yen, can now afford to buy land that was too expensive before.

Did someone say recession? Chelsea Japan Co. recently opened Rinku Premium outlets in Japan’s Kansai region and plans up to 10 more.

“It’s a very exciting time, despite all the troubles. There are definitely more opportunities than there used to be,” said Seth Sulkin, president of the Pacifica Corp., a Washington, D.C.-based shopping center developer. Sulkin explained that land is not only cheaper but more readily available today, as distressed and cash-needy companies sell off properties.

“It’s become easier to buy in the last few years because there’s a lot more movement, more transactions of land and store sales,” he said. “It’s a very good trend.”

Changes five years ago to Japan’s ground lease law also makes it possible to lease sites for shopping centers. This is often the best approach for suburban shopping centers, Sulkin said, because land in the suburbs can be so expensive that it might be impossible to realize a profit from a center built on purchased land. A growing proportion of new centers in Japan are located in suburban locations.

Pacifica has taken advantage of the current climate by opening four regional shopping centers throughout Japan in the past five years and is developing an additional 60,000-square-meter (645,840-square-foot) mall on the island of Okinawa. Chelsea Japan, which is partly owned by U.S.-based developer Chelsea Property Group, has opened two outlet malls recently — Gotemba Premium Outlets near Mount Fuji, and Rinku Premium Outlets in the Kansai area — and plans as many as eight to 10 additional such centers in the next few years.

Yet, while conditions have improved for developers, the financial and economic shake-up in Japan has eroded consumer spending and harmed many retailers. Unemployment and stagnating salaries are depressing many individuals’ spending power, pointed out Reiko Takayama, managing director with SSSS, so that prices have actually decreased for some apparel and food-service purchases. A McDonald’s hamburger for instance, is currently ¥65 (50 cents), half the previous price, while budget eatery chain Yoshinoya has slashed the price of a bowl of rice to ¥288, also half the previous price, she said. New, lower-priced Japanese retail specialty concepts such as Uniqlo (apparel), Don Quijote (discount stores) and Daiso (general merchandise) have been replacing department store shopping for many shoppers over the past couple of years, Takayama reported, and the number of outlet malls is increasing.

There is still considerable upper-end spending on luxury items, however (pashmina shawls are very popular at the moment), and on expensive cars like the Toyota Celsior and Nissan Cima. Shoppers mobbed a new Hermès store in the Ginza, Tokyo’s premier shopping district, on opening day.

This new mixed-spending pattern does not represent a separation between rich and poor shoppers, but rather a new tendency among Japanese shoppers to be thrifty when buying necessary items while continuing to buy premium-priced luxury goods, said Takashi Saito, director of the retail services department at Ikoma/CB Richard Ellis.

“This can be seen, for example, in the consumption style of women who have expensive Louis Vuitton handbags and Cartier watches, but wear cheap Uniqlo T-shirts and trousers; or [in] having lunch at McDonald’s and Yoshinoya on weekdays and deluxe dinner at hotels during the weekend,” he said.

Despite this partial trading-down in price, Japan’s retail sales per capita remain “very, very high — still among the highest in the world,” according to Pacifica’s Sulkin.

With many indigenous players weakened, foreign retailers are discovering opportunities in the Japanese market. The hypermarket and discount warehouse have arrived most recently: Costco Wholesale Corp., which entered Japan in 1999, has three stores in the Tokyo suburbs; and Carrefour, which arrived in December 2000, has three nationwide. German hypermarket retailer Metro plans five Japanese stores in the near future, and rumors are rife that Wal-Mart will follow. Malls are eager for new foreign entrants, particularly in fashion, according to Sulkin.

“So many shopping centers have opened that Japanese developers want to differentiate themselves, so they are desperate for foreign retailers who will bring something new,” he said. Foreign retailers may prove to be stronger tenants, too. Masahiri Hioki, general manager with Osaka-based real estate developer Takenaka Corp., said that foreign retailers have been showing generally higher growth than the domestic competition; sales by French apparel retailer Louis Vuitton more than doubled from 1995 through 2000, for example. Yet, entering the Japanese market can still be a precarious business for foreign retailers, as demonstrated by the recent pullout of British drugstore concern The Boots Co.

Caution may be in order for shopping center developers, too. Although it has become easier to start new projects, the proliferation of centers could result in retail overcapacity, Sulkin warned, particularly if retail sales continue to decline.

“With decreasing consumption and increasing construction, you obviously have to lose somewhere,” he said. In fact, deflation has continued at a rate of around 2 percent per year since the mid-1990s, Saito said. Price deflation — the lowering of purchase prices for retail merchandise — is preventing the recovery of retail sales, and he thinks the trend will continue. “Ordinary prices will gradually come closer to special [sale] prices,” he said, “and then there will be a tendency to shift to everyday special prices.”

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