Thrift trumps Abenomics as Japan shoppers stick to bargains

Thrift trumps Abenomics as Japan shoppers stick to bargains

5:42am EDT

By Sophie Knight

TOKYO (Reuters) – Japanese apparel firm Fast Retailing Co Ltd (9983.T: QuoteProfileResearchStock Buzz) has a problem: sales are surging, full-year net profits are expected to rise nearly 28 percent but the customers thronging the stores of its popular Uniqlo brand are far too frugal for its liking.

Prime Minister Shinzo Abe would also disapprove. Abe’s aggressive economic stimulus measures, aimed at lifting Japan out of two decades of deflation, hinge on a pick-up in consumer spending, but eight months after its launch, “Abenomics” has yet to convince many Japanese to part with their thrifty ways.“Customers are clever – they want the more expensive items but they hang on to see if they get discounted,” Fast Retailing Chief Financial Officer Ken Okazaki said.

“Shoppers are buying at the cheaper end of our product lines, so spending per customer has fallen,” he said after the company maintained its sales and operating profit forecasts for the year, knocking its shares 6 percent lower on Friday.

Abe’s policies have boosted Japan’s benchmark Nikkei average .N225 by two-thirds since mid-November, cheering stock market investors who used their new-found wealth to splurge on luxury goods such as handbags from LVMH-owned (LVMH.PA: QuoteProfileResearchStock Buzz) Louis Vuitton and jewelry from Tiffany & Co (TIF.N: QuoteProfileResearchStock Buzz).

But wages have yet to show any real gains and overall consumer sentiment remains lackluster. Consumer confidence weakened in June for the first time in six months, government data shows, and total cash earnings for Japanese employees were flat in May and April from a year earlier.

Even the monthly pocket money Japanese wives traditionally give their husbands has fallen 3.3 percent from a year ago to 38,457 yen ($390), or just half of its 1990 peak, the latest survey by Shinsei Bank Ltd (8303.T:QuoteProfileResearchStock Buzz) shows.

“They keep saying the economy is getting better but so far I haven’t seen it reflected at all in my day-to-day life,” said Ayano Sakuma, 33, a housewife who was shopping in central Tokyo with her son.

“I’ve heard that things are supposed to be getting more expensive but as far as I can see goods are still cheap.”

FALSE POSITIVES

Abenomics has boosted revenues for luxury department store operators such as Takashimaya and Co Ltd (8007.T: QuoteProfileResearchStock Buzz) and J.Front Retailing Co Ltd (3086.T: QuoteProfileResearch,Stock Buzz), but even they admit there is little evidence of a pick-up across the board.

“Luxury brands, watches and jewelry have seen double-digit sales growth and have pulled up overall department store revenues,” Shigeru Kimoto, managing director of corporate planning at Takashimaya told an earnings briefing last month.

“But we can’t see any strength in other parts of the consumer sector.”

Like Fast Retailing, the latest earnings reports by Japan’s biggest retailers have been riddled with healthy figures that suggest stronger demand but which actually show weak consumer sentiment and entrenched deflation.

Supermarket operator Aeon Co Ltd (8267.T: QuoteProfileResearchStock Buzz) and convenience store owner Seven and I Holdings Co Ltd (3382.T: QuoteProfileResearchStock Buzz) reported record high net profits in the March-May quarter, but growth was largely due to strong sales of their own-label goods which are often cheaper than branded items but carry larger margins.

At 7-Eleven stores, the flagship chain of Seven & I, sales of its own-label items rose 30 percent for the quarter. Spending per customer, however, dropped 0.6 percent for the month of May.

To avoid losing customers, Aeon said it would accept smaller profit margins on its house-brands and absorb the higher costs a weaker yen is wreaking on imports such as bread and ham.

“We’ll try to avoid passing higher costs on to retail prices,” Aeon’s Senior Executive Vice President Yoshiki Mori told an earnings briefing this week. The company’s 9.8 percent profit increase was driven largely by its consumer credit operations and not its supermarkets.

To boost the economy, the Bank of Japan has set a 2 percent inflation target to be reached within the next two years, but prices are still falling at a rate of 0.4 percent a year.

Ironically, the prices of flat-screen TVs, long a symbol of Japan’s deflation, are bucking the downtrend. Prices, however, are rising because manufacturers are willing to sell less to maintain their margins.

Flat-screen TV prices fell more than 40 percent from late 2010 to 2012 after manufacturers such as Sony Corp (6758.T: QuoteProfileResearchStock Buzz) and Panasonic Corp (6752.T: QuoteProfileResearch,Stock Buzz) offered huge discounts to staunch a slide in sales caused by the drying up of government incentives.

Demand remains weak, and with sales volumes now at less than one-tenth of their peak in November 2010, manufacturers have little to gain by cutting prices further.

“We haven’t seen any effects from Abenomics yet,” said Hisashi Yamada, the executive in charge of corporate planning at Yamada Denki Co Ltd (9831.T: QuoteProfileResearchStock Buzz), Japan’s biggest electronics retailer. ($1 = 98.7400 Japanese yen)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: