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GINZA'S LUXE BRANDS RISE TO THE OCCASION

HIGH LAND PRICES IN TOKYO'S GINZA AREA ARE PROMPTING EUROPEAN BRANDS TO BUILD UPWARD RATHER THAN OUTWARD

By Ryan Chittum

Tokyo's Ginza district has long epitomized luxury shopping. But some retailers there are taking things up a notch by building their own flagship towers.

In November Giorgio Armani opened a 12-story tower with five floors of retail, an Armani-Casa showroom, a spa, four floors of offices for Armani's Japanese headquarters, a VIP lounge and a restaurant. Bulgari followed three weeks later with a 10-story building that contains its biggest store in the world. And these two follow the earlier towers of Christian Dior, Gucci, Hermès, Louis Vuitton and others.

What is driving all this? Sky-high real estate prices for one thing, and the decline of department stores is another. But the primary factors are the immensity of the Japanese luxury market and the signs of a re-emergence in consumer spending. These are combining to change the face of one of the most famous shopping areas in the world.

Each year Japan accounts for an incredible 40 percent of all luxury sales worldwide, according to the Japan External Trade Organization. And this despite an economic slump that lingered through the 1990s, squashed land prices and depressed the stock market.

Of late, though, Japan is stirring economically. “There's some signs of inflation, wage growth and certainly some signs of consumer confidence returning,” said Mark Grinis, a global real estate partner at Ernst & Young.

Retailers are trying to get ahead of the wave of spending many are anticipating, should the economy continue on its present course. For decades foreign luxury goods were sold primarily in Japan's department stores. Now that department stores have to some degree fallen out of favor, luxury brands are scrambling to build their own stores in prominent areas. Many are coming to the Ginza for the first time as stand-alone stores.

“Because Ginza is the primary shopping district, setting up a flagship store means improved market presence,” said Wataru Furudate, an international business consultant at Yano Research Institute, a Tokyo-based marketing and research firm.

Hermès was one of the first to build high, with its 2001 Renzo Piano tower. But Louis Vuitton has led the charge, having built several large stores around Tokyo in recent years, including a tower in the Ginza.

“What you're seeing now as Japan comes out into full economic recovery [is that] luxury brands are starting to be very bullish,” said Matt Creagh, senior associate for retail services in Japan at CB Richard Ellis. “That's why they're spending huge amounts of money to build these huge stores.”

Hermès paid about $140 million to build its Ginza tower. And in 2004 Chanel put up a 10-story project that cost over $300 million.

Ginza real estate remains among the most expensive in the world, even following the crash, bringing in rents of about $700 per square foot last year, according to Cushman & Wakefield. That is the fifth-highest rate in the world. Creagh says top rents in the Ginza can reach $1,000 a square foot; land prices have jumped by more than a third since early 2006.

High rents translate into tiny plot sizes in the Ginza. The floor plates at Gucci's tower measure just over 5,000 square feet. Multilevel retail is essential, therefore, if development in the Ginza is to make economic sense — more so here than in the rest of Tokyo.

At the same time, the Ginza is not much of an office district, in part because of height restrictions, and slack demand makes office space more affordable than elsewhere. As a result, retailers are placing their regional headquarters on the towers' higher floors, space that becomes less valuable in retail terms with each successive floor, as drawing shoppers up gets progressively harder.

“Most retailers love to have their offices above their stores,” Creagh said. “But on Fifth Avenue, you've got office space going for top dollar on the top floors. In the Ginza it's pretty cheap.”

One proven way to get shoppers to the top of the building is to put a restaurant there, as many of the new-style towers have done. Chanel's tower boasts an Alain Ducasse restaurant called Beige in its penthouse. The Armani building's swank Privé lounge is just above the Armani Ristorante, the first of its kind for the brand. And Il Ristorante and a lounge with a hanging garden occupy the Bulgari building's top three floors.

The synergies of a luxury-branded restaurant win over the Japanese clientele. “A Japanese guy will go and pay $300 in the Chanel restaurant just because his wife wears Chanel,” Creagh said.

For anyone thinking a $300 meal an insufficient luxury, that spa on the fifth floor of the Armani tower offers a body scrub and massage for $600.

Most of the towers reserve space — sometimes as much as an entire floor — for their ritziest customers. Here retailers invite their biggest spenders to private showings of some of their finer pieces, such as limited-edition handbags, to give them first crack at a purchase. Cultivating this sense of exclusivity helps retailers hold onto these customers by keeping them spending, Furudate says.

In a country known for providing the best customer service in the world, these luxury lounges are important to any retailer trying to stand out. “This is really building on something that's already ingrained in the culture,” Grinis said.

Most of the retailers lease the buildings instead of owning, though some, frustrated with the lack of retail opportunities, have built their own towers and then completed sale-leasebacks. Others have worked with developers to tailor buildings to their needs. “Japanese landlords have been pretty conservative,” Creagh said. “Chanel purchased its site, then sold it on leaseback.”

Still, some analysts wonder whether it makes sense to put so much money into stores in Japan. Growth is likely to be slower than in developing markets like Russia or China. “For some powerful brands who have the capability to attract customers to these flagship stores, it is well worth building their own flagship towers,” Furudate said. “For others, it is part of their branding strategy.”

Offsetting the expense of retailing in the Ginza is tourism's welcoming embrace. “In the Ginza district they now accept the China UnionPay card [China's most popular bank card] throughout most of the shops,” Grinis said.

Not only do retailers want to sell to these tourists, they want to impress them with their brands. “Any Korean or Chinese tourists go straight to the Ginza,” Creagh said. “They pile into these stores and buy up everything.”

Not every luxury retailer opening stores in the Ginza is building a tower, though. Cartier opened a three-floor store in 2003, and Coach has a 5,000-square-foot store.

And even some nonluxury brands are building in the Ginza. Swatch has a tower there, and both Abercrombie & Fitch and H&M are constructing towers rising more than 10 stories.

One thing they all have in common, though, is eye-catching design. “These are real architectural statements,” Grinis said. “It's a commitment to the marketplace, the recognition of its significance to the company and a brand statement.”