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3.18.2013

"Surprise" Bonuses Boost Consumption - For Now

Large businesses in Japan have begun to respond to Prime Minister Shinzo Abe's call for higher wages by agreeing to unions' demands for salary and or bonus payments. At some leading retail companies, there were some extraordinary bonus payments that came as a very pleasant and welcome surprise, which seems to have done just what the Prime Minister had hoped - boost consumption. At least in the immediate term, says The Nikkei Marketing Journal today in its leading article.

However, while the "Abenomics" impact of a weaker yen and higher stock prices has already created some winners, after years of deflation and a consumption tax hike in 2014 on the cards, ongoing spending increases may be a bit too much to ask - at least for now.

Hankyu Department Store Umeda
- consumers queuing up to get in to the number one
department store in the Osaka Umeda district


50% SAY THEY WILL SPEND IT ALL - EXTRAORDINARY BONUS, EXTRAORDINARY SPENDING PLANS
The Nikkei Marketing Journal spoke to ten employees each from eyeware retail chain JINS, who paid out an extraordinary bonus of 6% of annual pay to all its employees at the end of February, and online hotel booking site operator Ikkyu, who paid out 500,000 yen bonuses to all their employees.

Of the 20 people interviewed, two at Ikkyu and 7 at JINS said they "plan to spend all of it," making the total 50% of those asked. Since Ikkyu's payment is quite significant, there are larger sums being committed to savings, but one person said he plans to spend 400,000 yen and two said they will spend 300,000 yen. On average, 50% of the Ikkyu payment is being saved and 80% of the JINS bonuses are being put away.

The most obvious trend among the spenders seems to be one of "inflationary spending" or to "upgrade" on spending they had already planned.

"We were going to have a really private wedding, but now we can review that," says a 36 year old woman at Ikkyu.
"The bonus has enabled my dream to buy a four-seater convertible a reality, so I am using the bonus as a down payment," says a 37-year old man at JINS.

A 35-year old employee at JINS said, "my wife had not counted on this bonus so it is a real pleasant surprise, and because of this, it will be easier for married men to spend the money."
"If it was around 100,000 yen, I would probably save it all, but with 500,000 yen, I am prepared to spend some money," says a 37-year old woman at Ikkyu.

On the other hand, Seven & I Holdings, the owner of convenience store chain Seven Eleven and the Ito Yokado chain of supermarkets among other retail stores, and Japan's largest retail conglomerate, agreed to base salary increases across the board for its Ito Yokado employees. When Nikkei Marketing Journal asked ten Ito Yokado employees about how the promised wage hikes will impact their spending (of which eight have families with children of school age), nine said they plan to spend more.

A 40-year old man said, "because this is a base salary increase, it will have longer-term impact and we will have time to think about how we will spend it."

For the child-raising families, their increases are supposed to be higher, so it was no surprise that five out of the ten interviewed said they will increase the number of classes/activities they enroll their children in.

It is the first time in four years for Ito Yokado to offer salary raises, and since the anticipated financial results for the period ending in February 2013 is a 34% decline in operating profit, several interviewees said "we knew it was a tough time for the business, so it really came as a surprise."

LUXURY SPENDING ON THE RISE
It is now two years since the 3.11 tsunami and earthquake disaster, which left a significant drop in luxury spending by the upper-middle class in Japan. But as Abenomics is kicking in, some luxury spending is enjoying growth in the form of attracting a wider audience.

Kamikochi Imperial Hotel in Nagano Prefecture launched an overnight stay with two meals package that includes round trip transportation by a driver who is a qualified medical caregiver for approximately 250,000 yen. As of 14 March, they have 22 bookings for the service. Overall bookings for the property is up 10% over the previous year and the Imperial Hotel says that a more diverse age group of customers are making bookings.

At Takashimaya Department Store, Japan's largest with stores throughout Japan, has enjoyed a 17% rise in luxury sales in February 2013, and watches for the same period grew by 25%. According to a non-Japanese luxury watch brand, the most popular price range was between 700,000 yen and 3 million yen after the earthquake, but since the last elections that brought Abe and the Liberal Democrats back into power, "activity on the sales floor has significantly changed."

Tiffany & Co., Japan Managing Director Daniel Perel says, "more affluent Japanese are shopping more now," as the brand saw an increase in sales of luxury jewelry priced at 3 million yen and higher even before the elections.

However, one must take note that some of the luxury spending happening now is boosted by the announcements by brands of planned price increases in response to the weaker yen.

Second hand retailer of branded luxury items, BrandOff of Kanazawa city saw its inventory of 500 Hermes Birkin handbags fly off the shelves between the end of 2012 and New Year's. Most of the buyers were not Japanese, but Asian buyers who speculated on the currency movement.

So, among all this hype and the extraordinary circumstances, will there be real consumption growth?

At Mitsukoshi Nihonbashi Department Store, a popular destination for some of Tokyo's more conservative wealthy, there was a 30% increase in tailor-made suits retailing for around 200,000 yen, and a 10% increase in shoes sales. "It may still just be led by optimism, but even the more conservative and careful men have begun to loosen their purse strings a bit," says Store Manager Naoki Sanzu.

Restaurants that offer courses priced around 10,000 yen a person that are used for special occasions are now enjoying some increase in customers. Subzero, a restaurant in Yokohama city and is known for its fantastic panoramic view of Yokohama harbour says that "we hardly had any female customers making reservations for some time, but now, we have around 20 bookings by women a week."

Tokyo Bay dinner cruise operator Crystal Yacht Club, based in Shinagawa, says bookings by individual customers has gone up by more than 23% over pre-earthquake levels.

In Fukuoka, luxury select shop Minority Rev Hirao Store has had five to six customers come in per month in 2013 who purchase more than 1 million yen at a time. President Hiroyuki Hayashi says, "we can't really be sure that the positive impact in Tokyo will make it to the regional cities for another six months," but already, their sales in January and February are 10% to 20% higher than the same period last year.

STILL CAUTIOUS ABOUT DAILY EXPENDITURES
Surprise bonuses lead to unplanned spending, but the longer term positive impact seems to be something we have yet to see. There are no immediate increases in such indicators as travel during spring break and sports club memberships, which often link to rise in stock prices. But after speaking to employees at businesses that have pledged salary increases, there seems to be some hope that significant increases in spending may begin to show in some figures.

Kobe beef won't yet be on dinner table regularly
Kobe beef won't be on the regular dinner plans except for special occasions



However, even among employees who received extraordinary bonuses, every one of them said that their plans on daily and regular expenditures will be "unchanged."
"Until I get a base salary increase, it will be difficult to change that. An extraordinary bonus is just that."

A 29-year old employee at Ikkyu, who experienced zero bonuses and benefit cuts with his previous employer says, "If I raise my standard of living, it is hard to cut back when my salary decreases."

Private investors who have already benefited from Abenomics seems to be even more level-headed about the future outlook. When the Nikkei Marketing Journal interviewed ten participants at a World Investors Travel Cafe event, nine said "we will not increase our consumption." From past experience, "a mere three good months is not enough for me to change my spending habits," says a 42-year old man.

There is also a very high concern for the anticipated increase in prices as a result of the waker yen. A 46-year old private investor says, "(it means that) salaries will remain the same but prices will go up." A 33-year old employee of a company that has promised salary increases says, "I will need to study the balance between the salary increase and rise in expenditures as a result of price increases before I can commit to higher spending."

Toshihiro Nagahama, Chief Economist at Dai Ichi Life Economics Research Institute says that the series of salary increases promised this spring will probably result in a much faster rise in income than in past economic recovery phases, but "it will still take some time before the positive impact can be felt over the rise in expenditures."

Even among the manufacturing sector, unions have won full commitment to their demands for bonuses, but base salary increases are still limited and not across the board. As such, we do not yet have the momentum of increased income generating higher spending that will enable us to get out of the deflationary cycle.

Reference:
18 March 2013 Nikkei Marketing Journal front page articles

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