Japan’s luxury shoppers move on

Japan’s luxury market is worth as much as $20 billion—second only to the United States. Yet Japanese consumers’ seemingly insatiable appetite for luxury goods has declined, with the current economic crisis not only reducing discretionary spending but accelerating fundamental shifts in their attitudes and behavior. While these changes are likely not temporary, the market will remain very large and attractive. If luxury players want to succeed in such an environment, they must adjust their strategies.

Cannibalisation

If a firm introduces a new product or service into a market where there is little scope for further growth, that product or service will either eat into the share of the market’s existing products, or swiftly disappear from sight. If some of the existing products are manufactured by the firm that is introducing the new product, the newcomers will cannibalise the old ones; that is, they will eat into the market share of their own kind. For example, it has been estimated that two-thirds of the sales of Gillette’s Sensor razor came from consumers who would otherwise have been customers for the company’s other razors. Each new blade is cut-throat competition for its predecessors.

There are sound reasons for firms to do such a seemingly stupid thing. In the first place, they may need to keep ahead of the competition. In the chocolate-bar market in Britain, for instance, the decline in Kit Kat’s share was arrested by the launch of a new, more chunky bar, which undoubtedly cannibalised the market for the original. Its appeal was to all those people who buy chocolate bars, which includes those who bought the old Kit Kat.

Firms may also choose to cannibalise their own products by producing marginally improved products. The idea is to persuade existing customers to purchase an upgraded version. This is common in the PC market, for example, where Intel’s newest, most powerful processor cannibalises the last generation of Intel processors, but in the interests of arresting decline in the total market.

Economists sometimes distinguish between planned and unplanned cannibalisation. Planned cannibalisation is an anticipated loss in sales of an existing product as a result of the introduction of a new product in the same line. In the unplanned version, the loss of sales is unexpected.

China and its Trade Surplus

A rebalanced global economy requires America to consume less and save more. That means the world’s three big surplus economies—China, Germany and Japan—will have to save less and spend more. None is under more scrutiny than China, whose vast current-account surplus has been fingered by some as the ultimate cause of the financial crisis. The case against China is exaggerated but a surplus of more than $400 billion in 2008, or 10% of GDP, was clearly too big. Can China right its trade imbalances, and if so, how will it achieve rapid growth in future?

The good news is that the surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. Another way to look at the huge swing in China’s trade is that net exports (exports minus imports) contributed 2.6 percentage points of the country’s GDP growth in 2007, but shaved almost three points off its growth in the first half of this year.
(From Economist)