The Luxury Bubble.(luxury goods industry falters)(Industry Overview)

Shoppers lined up outside Tokyo's glitzy boutiques would seem to signal that all is well in Asia's pre-eminent luxury market. Unless, that is, the crowds have turned out to cherry-pick overstock items at cut-rate prices--as they did on Jan. 17, when bargain hunters mobbed an invitation-only Gucci sale at Tokyo's Isetan department store. Everything from womens wear, shoes and handbags was on offer, most at 30 to 70 percent discounts. The invitees--Isetan credit-card holders-- turned away from Gucci in the months preceding the sale, and it took the lure of big discounts to bring them back. "Gucci is suffering more than the rest," says Tatsuyuki Iwamura, a spokesperson for the retailer. "But in general, none of the luxury brands are doing well."

Indeed, across the luxury-brand horizon, the Japanese market is looking less like the El Dorado it's been since the mid-1990s--and a lot more like Waterloo. In 2002, according to the Yano Research Institute in Tokyo, sales of imported luxury goods in Japan fell 2 percent to $11.1 billion--a dramatic change, since the sector boasted 9.7 percent growth in 2001. Even worse, the downturn comes at a moment when the world's elite brands are banking on the Japanese shopper to make up for lost sales elsewhere. Market leader Louis Vuitton christened a warehouse- size boutique in Tokyo's Omotesando shopping district just last September, earning $1 million in opening-day sales. This year, rivals Christian Dior, Salvatore Ferragamo and Prada will follow suit, while American handbag maker Coach plans to open as many as 30 new stores in Japan by 2006. Kensuke Kojima, founder of Kojima Fashion Marketing, whose consultancy tracks monthly sales of some 430 labels in Japan, thinks the luxury market will collapse under the weight of this pell- mell expansion, triggering a major shakeout. "A very small group of very popular brands are doing OK," he says. "The rest are dead."

Until recently, Japan's love of stylish brands had transcended macroeconomics. By the late 1990s a booming trade in high-end footwear, handbags and apparel seemed to defy grim data showing rising unemployment and falling industrial output. To optimists, strong demand for luxury goods foreshadowed a consumer-led recovery in which 120 million Japanese with fat bankbooks and expensive tastes literally would spend the country out of the economic doldrums.

The illusion created by this so-called Gucci Recession may finally be evaporating. Even Tokyo's well-heeled "office ladies," the single females responsible for tripling Japan's consumption of luxury imports over the past decade, seem to be facing facts. "The biggest change we can see is in the spending trends of the young," says Masahiro Matsuoka, head of equity research at UBS Warburg in Tokyo. "Whenever I visit a department store I hear the same thing, that the younger generation--even the women--are starting to be concerned about their futures." His forecast for Japan's luxury import market in 2003: "Dreadful."

Luxury's numbers, in fact, are looking gloomier than the rest of the economy's. In 2002, Japan's luxury-goods ...