What: Takashimaya’s future is linked to upmarket tourists travelling to city hubs.

Why it is important: A similar trend remarked worldwide, department stores are all focusing on their key flagship units as they struggle to generate profits in their regional stores.

Japan's department store industry has been in decline for the past two decades due to various factors such as fast fashion, budget-conscious consumers, e-commerce, and deregulation. As a result, the number of department stores in Japan has decreased from 210 in 2019 to just 192 at the end of 2022.

Luxury-focused stores such as Takashimaya and Tokyu have also been hit hard, with some stores closing due to poor growth prospects. However, Takashimaya has shown signs of recovery, with strong sales growth in January across its 15-store chain. The revival of inbound tourism has played a key role in driving category sales, particularly in apparel and expensive personal accessories. The return of overseas visitors has also been a boost for stores that derive a significant portion of their sales from tax-free sales to tourists.

Takashimaya's overseas business is stabilizing with its four units outside Japan in Singapore, Ho Chi Minh City, Shanghai, and Bangkok generating nearly $219 million in the first nine months of 2022 and contributing 4.1 billion yen in operating profit. The weak yen has been a factor in the improved numbers for the overseas stores.

The Shanghai unit is now much improved, and management is confident it can be profitable in the long term. In Singapore's Orchard Road, Takashimaya operates one of the largest department stores in Southeast Asia, with 20% of sales from tourists. Takashimaya's Vietnam store and Bangkok flagship are also on the rise.

The company sees huge promise in Toshin's expertise in developing retail small tenant support and other uses such as office and residential to build out integrated mixed-use projects (Toshin is the development arm at Takashimaya).

With the department store business recovering nicely, Takashimaya announced revisions to its earnings forecast for FY23. The big city flagships are recovering well, but regional stores are lagging, and the company is looking at ways to cut costs, including having fewer store personnel.

Why tourists and flagships are essential to Takashimaya’s recovery