by Dana Thomas
Tsuzuki’s subjects seem extreme. But in fact they are representative of the Japanese preoccupation with luxury goods. Analysts estimate that 20 percent of all luxury goods are sold in Japan and another 30 percent to Japanese traveling abroad—meaning Japanese buy half of all luxury goods. Today, approximately 40 percent of all Japanese own a Vuitton product. They claim in market studies that they buy luxury goods for a logical reason: durability. Experts believe, however, there is a far deeper sociological meaning. According to polls, the Japanese consider themselves to be a classless society—in one study, 85 percent stated they were middle class. At the same time, in Japan, conformity is prized. By wearing and carrying luxury goods covered with logos, the Japanese are able to identify themselves in socioeconomic terms as well as conform to social mores. It’s as if they are branding themselves.
Their impact on the business is immeasurable. Their tastes influence product and store design. Their travel habits dictate where brands expand, and their exigencies affect how stores are run. “We never make any decision on our worldwide strategy without asking our Japanese colleagues what Japan would think of it,” said Louis Vuitton CEO Yves Carcelle. The Japanese, in other words, homogenized luxury. And by doing so, they prepared it for globalization, which effectively is the homogenization of the world.
THE JAPANESE LOVE of Western luxury goods is a relatively recent phenomenon. In the 1960s and 70s, the Japanese economy flourished, giving birth to a newly flush middle class that wanted to live a more ostentatious life. Grand homes or vast real estate holdings—generally the most blatant way to enjoy as well as exhibit one’s riches—was a near impossibility in the densely populated island-nation of Japan. Instead, the Japanese chose to show their wealth by dressing richly, and for the postwar generation, Western luxury items such as leather goods, silk scarves, furs, and jewels were the ultimate status symbols.
Unfortunately, there was little to be had in Japan; distribution was extremely limited. To satisfy the surge in demand, entrepreneurial Japanese merchants traveled to Europe, bought items at full retail price, shipped them back to Japan, and sold them for three to four times more in shops around Tokyo, creating what is known as a parallel market. The parallel market confounded luxury executives back in Europe: their flagship stores were getting cleaned out of stock, and they had no control over how the product was being sold overseas.
In February 1976, Louis Vuitton’s great-grandson Henry-Louis invited Kyojiro Hata, consultant for the international accounting and consulting firm Peat Marwick, to his office at the avenue Marceau store to discuss the problem. Hata, in Paris on unrelated business, knew nothing of the luxury industry and had never heard of Louis Vuitton. But he was impressed by Henry-Louis Vuitton’s manner—“He was a very shy, sincere person and extremely discreet,” Hata told me—and by the genuine refinement of the store and its products. “The serenity and the high ceilings of Henry Vuitton’s office were worlds away from my experience,” Hata later wrote in his memoir, Louis Vuitton Japan: The Building of Luxury. “The long room had a small window from which to view the sales floor, and the walls were embedded with antique trunks. I felt the long history of Louis Vuitton and the depth of French tradition through my body for the first time. It was an awakening for me.”
Vuitton explained to Hata his exasperation: the Japanese were buying so much that Vuitton had placed a limit on the number of products that could be sold to Japanese customers. Through the small window in Vuitton’s office, Hata watched the frenzied Japanese customers in the avenue Marceau store, buying like they were at a fire sale. Intrigued by the phenomenon, Hata turned to Vuitton and proposed to do a research project assessing the Japanese luxury goods market. Vuitton agreed.
When Hata returned to Tokyo, he found Vuitton monogram bags in shop windows all over town for sale at astounding prices. At the time, there was only one Vuitton wholesale importer in Japan, and one official retailer: the Ann International store in the Akasaka Tokyu Hotel shopping arcade. When Hata visited the store, he recalled, “there was no stock at all and nobody knew when the next shipment would arrive.” Hata wrote up his report for Henry-Louis Vuitton, concluding it was time for the company to embrace the Japanese market and expand properly there. Vuitton concurred and hired Hata to oversee it. Until then, luxury companies had opened stores in a few international capitals, often as franchises, and sold a limited amount of product in department stores; it was a niche retail business. Hata had much bigger ambitions: to conquer a foreign territory by selling not only to Japan’s upper crust but also—and primarily—to its large and increasingly wealthy middle class. Vuitton’s expansion in Japan was luxury’s first bold step toward globalization, and it took an outsider—a businessman—to make it happen.
Hata came up with and implemented a two-pronged business model. First, Louis Vuitton Paris would distribute directly to Japanese retailers rather than through wholesalers—a business move unheard of in the luxury industry at the time. Second, Louis Vuitton would establish a management service contract stipulating that its Japan office would conduct all operations to maintain the brand’s image, protect the trademark, and handle quality control, advertising, and publicity. In return, Vuitton would charge franchise and management service fees to the department stores. Louis Vuitton headquarters in France would dictate everything to the Japan operation, from uniforms to wrapping paper, to create a synergy with the home base. Vuitton’s products would be excluded from department store members-only discounts and gift catalogs, all in an effort to buff up the company’s brand image. “We wanted to accurately communicate not only the name of Louis Vuitton,” Hata explained, “but the brand’s values, which are its history and tradition.”
In March 1978, Vuitton made its official Tokyo debut in five different department stores, followed in September by one in Osaka. Each shop was only seven hundred to one thousand square feet but stocked every size of steamer trunks—“the symbol of Louis Vuitton’s craftsmanship,” Hata told me.
Next, Hata tackled the pricing problem. When Vuitton opened its first Japanese store in 1978, prices were about two and a half times higher than in Paris, due to a difference in currency rates and to government restrictions. To even the playing field a bit and stop parallel trade, Hata implemented a floating-rate system so that prices in Japan would be no more than 1.4 times those in Paris, and would fluctuate with the exchange rate. Prices in Japan immediately dropped by half or more, and Japanese shoppers suddenly saw Louis Vuitton as a good value, especially compared to its competitors. That first year, the six stores sold $5.8 million worth of Vuitton products. “This surprised the whole industry,” Hata remembered. Within two years, sales had doubled to $11 million. Vuitton appointed Hata the Japanese branch manager, and converted the branch into a corporation, called Louis Vuitton Japan. In 1981, Hata opened Vuitton’s first freestanding store, in the posh Ginza district.
Furthermore, the Japanese demonstrated an unparalleled predilection for quality. “Their attention to detail and demand for quality is unmatched and unyielding,” says Chanel Japan’s president Richard Collasse. “The Japanese have zero tolerance for flaws.”
He tells a story to illustrate point. Back in the 1980s, when Collasse worked for another luxury brand, a Japanese woman brought a dress in and said it had a defect. Collasse looked and looked and finally saw a two-inch thread dangling from the hem. It was absolutely unacceptable to her. Collasse exchanged the dress, bowed repeatedly, and sent her a big bouquet of flowers. Then he decided to do a test. He took the dress to a French woman. She tried it on, liked it, saw the thread, and said, “I can cut it.” He took the dress to an American woman. She tried it on, liked it, and never saw the thread.
Vuitton’s Hata ran into the same thing. “During the first ten years, we have often found ourselves having to return products to Paris saying, ‘This level of quality is unacceptable in Japan,’” he recalls. “At first we had a very hard time being understood. If we returned a product because the fastener was attac
hed the wrong way, they argued that we should sell it to a left-handed customer. If we complained that the stitches were not straight, they said it was because of the nature of hand stitching and that they could sell the products in Paris without a problem. On one occasion we returned all the products, saying, ‘Please sell these in Paris.’” Finally, in 1991, Hata opened a Vuitton repair center in Japan; today, there are two.
LOUIS VUITTON’S expansion in Japan led the way; soon its competitors began to expand their presence there, too, selling in major department stores and opening boutiques in Tokyo’s Ginza shopping district and in Osaka. The timing couldn’t have been better. In the early and mid-1980s, the Japanese economy was soaring: it grew by 3.7 percent annually, and Japan’s postwar generation experienced a dramatic increase of disposable income. Some of the investments were dizzying: Mitsubishi forked out $1.4 billion for 80 percent of Rockefeller Center in New York in 1989 and 1990; Sony bought Columbia Pictures in 1989 for $3.4 billion; Matsushita electronics took over MCA, which included Universal Studios, in 1990 for $6.1 billion; Japanese businessman Ryoei Saito spent $82.5 million for Van Gogh’s Portrait of Dr. Gachet in 1990.
But the economic boom also created a new sociological phenomenon in Japan known in banking circles as Parasite Singles: unmarried university-educated women, ages twenty-five to thirty-four, who worked in good-paying jobs—as secretaries, teachers, executives—and lived with their parents. Their economic power was and still is impressive: analysts estimate that Parasite Singles account for nearly one-tenth of Japan’s population of 130 million. With few living expenses, Parasite Singles use their ample disposable income to shop. Their favorite items: luxury brand leather goods, preferably covered with logos. Indeed, 23 percent of all luxury brand sales in Japan today are leather goods such as wallets and handbags.
When they first emerged, Parasite Singles shopped like mad in Japan, driving luxury brands to expand their presence and stock there. Even after the bubble burst in the early 1990s, and the Japanese economy plunged into a decade-long recession, Parasite Singles’ appetite for luxury brands did not wane. They were the only demographic group to increase spending during the 1990s, and they became responsible for up to 80 percent of Japan’s consumer spending.
When they found they could buy more overseas with their strong yen, Parasite Singles embarked on international shopping trips, usually organized by charter companies, inciting brands to open stores in new markets and to add Japanese-speaking sales staff. One of Parasite Singles’ favorite destinations was Hawaii: it was close, it was beautiful, and the yen went far.
In the early 1980s, Rolf Vogel, then president of Chanel in Japan, went to Hawaii on vacation and was stupefied to see the number of Japanese there, shopping. “Let’s stop playing golf and look for a location,” he told his colleagues.
Vogel rang Chanel executives in New York to inform them of his idea.
“Hawaii?” they responded incredulously. “Are you crazy?”
He wasn’t. In 1984, Vogel opened Chanel’s first freestanding store in the United States—before New York, before Beverly Hills—in the Royal Hawaiian Shopping Center, a mall at the entrance of the famed hotel’s drive. The store carried accessories as well as a small selection of ready-to-wear by Chanel’s new designer Karl Lagerfeld. The Japanese flocked to it, snatching up quilted leather purses, gold chain belts, and two-toned shoes like crazy. Throughout the 1990s, the Waikiki boutique was the number one Chanel store in the world, with $60 million a year in sales.
The success of Chanel drew other brands to open on Kalakaua Avenue. All the usual suspects arrived, each building a large, lush boutique with Japanese-speaking staff. It was a wise business move: within five years of its 1992 opening, the Louis Vuitton store on Kalakaua Avenue was doing nearly $100 million in sales annually. Several brands reported that their Waikiki stores were among the most successful in the world, enticing more brands to open there and those who were there to upgrade their locations. In 2002, Chanel moved out of its Royal Hawaiian digs down Kalakaua Avenue into a twelve-thousand-square-foot flagship; Cartier moved into the old space.
The new Chanel store is a luxury shopping palace with expansive salons, high ceilings, plush carpeting, and gobs of handbags, sunglasses, shoes, suits—and security video cameras that are viewed at headquarters in New York. Of the seven hundred to eight hundred customers who enter the Chanel boutique on Kalakaua every day, most are Japanese and most buy accessories. Sometimes a Japanese customer will take a picture of an item in the store with her cell phone and zap the image to a friend in Japan with a note asking, “What do you think?” If the friend says yes, then the customer will make the purchase. If the desired luxury brand product is not available in the Waikiki store, the brand’s salesclerk can find it in one of the mainland U.S. boutiques and have it overnighted to Hawaii before the customer heads back to Japan. Joyce Okano, regional vice president for Chanel in Hawaii, tells me that “more than half the sales of Chanel in Hawaii are to Japanese.”
THERE WAS ANOTHER great attraction that drew the Japanese to Hawaii: buying luxury goods duty-free. Duty-free shopping allows shoppers holding boarding passes to buy tax-free goods that have never entered the local stream of commerce, thus providing a discount of 10 to 30 percent off full retail price. Hermès products in Japan, for example, cost 30 percent more than in France and 15 to 20 percent more than in duty-free stores. In 2005, about 10 percent of all Hermès sales were duty-free.
Today, according to the Tax Free World Association, annual duty-free sales are about $25 billion—$9.1 billion of which are luxury goods. There are several duty-free companies in the world today, but the largest by far is Duty Free Shoppers (DFS), which operates primarily in Asia and the Pacific, and is majority-owned by LVMH. In 2006, DFS did about $2.2 billion (€1.7 billion) in sales—30 percent more than its nearest competitor.
The notion of selling items duty-free dates back as far as commerce itself. In Britain during the 1500s, seamen were offered liquor duty-free—or tax-free—for consumption on board ships in international waters. In the nineteenth century, liquor, cigarettes, and perfume were supplied duty-free to crew members and travelers on ships for voyages that took weeks or months. The modern version of duty-free retailing began with the International Civil Aviation Organization at the Chicago Convention of 1944, which allowed the selling of articles duty-free on ships in international waters and on aircraft on international flights, and created “customs-free” zones in airports. Soon after, Brendan O’Regan, the head of the Shannon Airport Catering Service in Ireland, opened a kiosk at the airport to sell gifts and souvenirs tax-free to departing passengers on transatlantic flights that stopped to refuel. Business started slowly—on a good day, it would do £5 in sales. But as international travel grew in the 1950s, so did O’Regan’s business: in 1953, it did £120,000 in sales.
In 1960, two Americans college buddies named Robert Miller and Chuck Feeney, both graduates of Cornell University’s hotel management school, were drinking in a bar in Barcelona and dreamed up a business to sell liquor tax-free to GIs ending their tours in Europe. They called their business Duty Free Shoppers and opened shops in Hong Kong and at the Honolulu airport in Hawaii to target Asian tourists. Business went so well that they eventually hired a British accountant named Alan M. Parker and an American tax lawyer named Anthony Pilaro to help optimize the profitability of the company and gave them each a small stake. Between 1977 and 1995, DFS generated some $3 billion in dividends, 90 percent of which the four partners received in cash or funneled into their tax-driven trusts or foundations; both DFS and Feeney’s foundations were then based in Bermuda, an offshore tax haven. “This was not just a nice cash cow they milked,” said lawyer who knew the company. “The size is more on the magnitude of Godzilla and King Kong.”
Feeney, the more conservative of the pair, set up a foundation called the Atlantic Philanthropies and donated generously to Cornell, underprivileged youth programs, and Sinn Féin, the political wing of
the Irish Republican Army. He gave anonymously, and most recipients never knew who their benefactor was. “I simply decided I had enough money,” he explained. “It doesn’t drive my life. I’m a what-you-see-is-what-you-get kind of guy.” Miller, by contrast, lived large, with stately homes reportedly in New York, Gstaad, Paris, Hong Kong, and Yorkshire, England, and a taste for the extravagant: he once threw a three-day party for which his Ecuadorian wife, Chantal, dressed as a South American princess, arrived in a hot air balloon. For his daughter Marie-Chantel’s marriage to Crown Prince Pavlos of Greece, Miller hosted a wedding for fourteen hundred guests that reportedly cost $1.5 million and included a reception at the posh Claridge’s Hotel in London officially hosted by Queen Elizabeth II.
In 1994, Feeney decided to sell his stake to LVMH, DFS’s largest supplier. Miller was dead-set against it. “Despite his promises, Bernard Arnault has a pattern of exploiting the assets of partially acquired companies for the benefit of LVMH with no concern for the best interests of the minority shareholders,” Miller charged in court. Feeney and Parker sold their majority stake of the company to Arnault for $2.47 billion. Eventually Pilaro sold his 2.5 percent to Arnault, too. Arnault abruptly stopped negotiations for Miller’s 38.75 percent—said to be worth $1.6 billion at the time—and Miller remained a minority shareholder of the company. Arnault told financial analysts it was “not necessary at this stage to invest an additional 9 million francs [$1.58 billion] to take advantage of the synergies that already exist between [LVMH and DFS].” In other words, the world’s leading producer of luxury goods controlled the world’s leading purveyor of luxury goods.