Japanese department store operators are benefiting from increased spending by wealthier shoppers despite the inflationary environment, in contrast to lower-end retailers which are underperforming as people become pickier in what staples they choose to buy. 

The top three operators by market capitalization, Isetan Mitsukoshi Holdings Ltd., Takashimaya Co. and J. Front Retailing Co., which operates the Daimaru and Matsuzakaya chains, rose by 55% on average in the past year, outperforming the broader Topix’s 18%.

The companies’ performance comes despite inflation dragging down household spending, which fell in May. The Bank of Japan is said to see weak consumer spending as a hurdle in its decision to further hike rates, Bloomberg reported earlier. 

Department stores are bucking the sluggish retail trend thanks in part to continuing strong inbound tourism figures and high spending by foreigners taking advantage of the weak yen, but wealthy Japanese are also splashing out. 

The strong performance in higher-end retailers contrasts with that of companies such as drugstores, which are suffering from worsening consumer sentiment. Retail sales figures from the Ministry of Economy, Trade, and Industry show department store revenue was up 13.7% in May from the same month last year, compared with a 6.8% gain among drugstores and 1.2% at supermarkets. 

“Consumption is polarized,” said Kohei Onishi, senior investment strategy researcher at Mitsubishi UFJ Morgan Stanley Securities. Wealthier people are looking to hold physical assets to offset inflation, and in response department stores are focusing on services to cater to such customers, he said.

Analysts expect the polarization trend to persist as inflation looks to stay in Japan. 

Isetan, for example, reported the highest sales ever at a gaisho, or personal shopping event, in February, it said in its earning report. Its shares have nearly doubled over the past year and rank among the top 10 performing stocks on the Topix 500.

A spokesperson for Takashimaya said that the stock market rally is fueling sales of products such as watches, jewelry and art. The average amount customers spend on gaisho has also risen. The company said it is expanding into other services, including overseas-themed events for Japanese who are reluctant to travel abroad due to the weak yen. Takashimaya’s share price is up 38% over the past year.

The widening wage gap between large and mid- and small-size companies after the annual spring wage negotiations will further perpetuate the retail divide, said Daisuke Aiba, an analyst at Iwai Cosmo Securities. “The recent consumer trend is to minimize spending on essentials and shift money more to hobbies or leisure,” which has been making discount stores more competitive, Aiba said. 

Drugstore operators MatsukiyoCocokara & Co., Sundrug Co. and Cosmos Pharmaceutical Corp. are among the names that have lagged behind the Topix benchmark in the past year. Meanwhile, budget chains have benefited as households seek ever-lower prices when shopping for essentials. For example, Seria Co., which operates 100-yen stores nationwide, has risen 44% in the past year. 

Nobuhiko Kuramochi, market strategist at Mizuho Securities, said that persistent negative real wages is another concern.

“It does not yet appear that people’s real incomes will steadily increase,” he said. “It still feels too early to buy the weak end of the consumption sector.”