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| Chinese consumers shopping in Tokyo's Akihabara district. |
DALIAN, China -- Spectacular spending by Chinese tourists visiting Japan has become such a familiar scene that it gave rise to the term bakugai -- "explosive buying" -- which was named one of 2015's top buzzwords.
Entering this year, many say the trend is losing steam, and accounts by retail managers seem to point to waning demand for Japanese products. But how accurate are those claims?
New business model
"We will be able to cut prices because costs are falling," said Huang Gang, chairman of trading firm Etsuyou Tsusyou, which imports Japanese food, general goods and other products to China. "There's no need for traveling to Japan and dragging back heavy luggage."
The company operates roughly 30 retail locations, mainly in China's northeast, to sell imported products. The Dalian outlet devotes a full section to "cross-border products." Health food items, hair care products and other goods sought by Chinese are put on display.
At first glance, the section looks no different from other sales spaces. But the products are for display only. The goods are actually stored in warehouses located in special government-designated free trade zones. Customers wishing to purchase those items would need to scan QR codes and pay for them via Etsuyou Tsusyou's internet retailing platform. The goods will later be delivered to their doorstep.
China has set up pilot cross-border e-commerce zones this year in Dalian, Shanghai, Guangzhou and nine other cities. Within those zones, companies can import and store goods duty free. The program has allowed internet sellers to move past much of the red tape that comes with customs and bring down transportation and other costs.
The government also reformed tax laws governing cross-border internet retailing this April. Applicable imports are duty free up to a certain value, and other levies such as the value-added tax are only 70% what's slapped on normal imports.
Etsuyou had been importing Japanese wares through conventional means and selling them at brick-and-mortar locations. The company had reportedly been selling them at three to six times Japanese prices, with the price tags reflecting taxes, labor expenses, gross margins and other costs. But by making use of the pilot zones, Etsuyou's prices have become much more comparable to those found in Japan, said Huang.
Traders left in the lurch
At the same time, China abolished the import duty waiver applied to payments of 50 yuan ($7.49) or less for products sent by persons living overseas. The aim is to level the playing field. Private Chinese brokers used to exploit this loophole in the tax system by posing as tourists visiting Japan and procuring goods at Japanese department stores and pharmacies. Those traders, pretending to be private individuals, would then ship those items to China. They would make a killing in that market to the detriment of merchants that import goods through normal channels.
With the inauguration of the new rules, it is those same brokers that are now feeling the crunch. "I'm basically getting no customer traffic at all," said a 26-year-old trader in Tokyo, who also runs a bar with her husband. "I also have to deal with stiff price competition and I'm not making a profit." She said that up until the end of last year, she used to make around 12 million yen ($119,000) a month selling imported merchandise.
But things started changing this year when she faced a growing number of competitors looking to peddle Japanese goods, increasingly popular for their high quality. They all share the same business model where pricing is the only real way to differentiate themselves, so a price war ensued. On top of that, the yen gained strength while the yuan went soft, and her government changed the tax code to boot.
"Most of my peers have left the business," she said.
Changing the playbooks
As those entrepreneurs make a mass retreat, Japanese retailers are reporting a steep decline in what was seen as foreign visitors' inbound consumption. In the face of choppy exchange rates, demand by actual tourists has also shifted to sweets, general merchandise and similar goods and away from high-end products such as rice cookers.
More Chinese tourists are spending money on hot springs and other leisure pursuits. That helped depress consumption per Chinese tourist in Japan by nearly 10% during the first three months this year. Those observations lend support to the idea that Chinese bakugai is losing steam.
But not so fast. Chinese consumers' love for Japanese goods is not gone. What's happening is that they are now buying those goods in their home country. Bakugai is entering a second stage.
Zhou Lu, a 28-year-old company worker living in Dalian, vividly remembers the exhausting days when she would travel to Japan and bulk-buy merchandise at several locations. She still prefers Japanese goods when it comes to diapers, cosmetics and other items. But "I prefer to buy things on Chinese retailing sites, and I want to enjoy a vacation during my vacations," Zhou said. Sensible Chinese will likely be sticking to this style of Japanese excursion.
Meanwhile, private traders in China are partnering with run-of-the-mill importers in order to forge a new path to earnings. Hong Yunlai, a 30-year-old broker who has been in the business for five years and whose clientele spans 2,000 customers has recently started purchasing goods from traditional shippers once those products reach Chinese shores.
Not only are those shippers able to procure goods at high volume and low cost, they also enjoy tax benefits. For Hong, that translates to purchasing costs that are even cheaper than buying goods directly at Japanese retailers: "I will enjoy steady revenue, even if the profit margins are narrow."
Will Japan Inc. shift gears?
China's cross-border e-commerce market grew 50% last year to 900 billion yuan ($134 billion), according to Chinese research firm iResearch Consulting Group. The market is expected to expand this year to 1.2 trillion yuan. Japanese retailers might see a temporary resurgence of business if the yen retreats. Even so, the armies of Chinese tourists schlepping large suitcases will still likely become a thing of the past.
It is easy to blame the loss of store sales in Japan on the Chinese economic slowdown or currency fluctuations, rather than on the rapidly transforming commercial landscape in the Middle Kingdom. Yet, the Chinese middle class, the ones that travel to Japan, are still seeing their income levels grow. High-end products and similar goods can be purchased anywhere in the world, and it was only a matter of time before the advantages the cheap yen presented became undone.
Japanese managers who pin their woes on conventional boogeymen may be simply rationalizing their own inertia.
Chinese manufacturers are not likely to improve product quality anytime soon, and the ranks of Chinese seeking Japanese products are expected to grow. Although internet shopping has made buying that merchandise on the mainland easier, the product lineup remains limited. It is up to Japan's retailers and manufacturers to generate new inbound demand, such as furnishing products that can only be obtained in Japanese stores.
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