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Bargain cashmere tests thrifty Japan's taste for little luxuries

By Ritsuko Shimizu

TOKYO (Reuters) - Cashmere sweaters at Uniqlo. Gourmet coffee and ice cream at 7-Eleven. These incongruously premium offerings by two of Japan's biggest retailers are part of a strategy to lift profit margins by enticing thrifty shoppers to splurge on little luxuries.

Uniqlo brand owner Fast Retailing <9983.T> and Seven & I Holdings Co Ltd <3382.T> plans to boost spending per customer are being challenged as Prime Minister Shinzo Abe's aggressive economic stimulus has done little to loosen the purse strings of Japan's traditionally frugal consumers.

While Abe's policies have lifted the stock market and spurred spending on luxury goods, overall retail sales have grown only tepidly since he was elected last year.

A sales tax increase could also dent consumer spending once it takes effect in April. After luring customers through discounts and promotions, Fast Retailing and Seven & I hope to counter a further slowdown in spending through their value-for-money offerings.

"When it comes to day-to-day spending, people are still in penny-pinching mode. We can't see any impact from Abenomics," Seven and I Holdings President Noritoshi Murata said after the company reported a record high operating profit for the first half.

"Japan has a lot of people with money to spend," he added. "If we make things of quality, of value, and at a reasonable price, we can breathe some life into the market."

Uniqlo in Japan accounts for two-thirds of the sales and 80 percent of the profit of Fast Retailing, which is expected to report a record high operating profit for the full-year to August 31.

Profit margins, however, are likely to have been squeezed. Uniqlo, the company's biggest brand, saw sales and customer traffic in Japan grow during the second-half at double-digit rates, but spending per customer fell more than 5 percent.

The cashmere V-necked sweaters and cardigans are aimed at changing this pattern. Priced at 5,990 yen ($62) and 7,990 yen ($82) respectively, the items are pricey by Uniqlo standards but come at a fraction of the cost of luxury designer wear.

Whether customers will buy, however, remains uncertain.

Taketo Yamate, a Credit Suisse analyst, believes shoppers accustomed to Uniqlo's discounts will be unwilling to pay more for premium items.

"It's possible that the pricing policies will face bigger challenges than the market's optimism suggests," said Yamate. He forecasts an 8 percent drop in Fast Retailing's operating profit in the current financial year.

The success of Seven & I's premium brands may have encouraged Fast Retailing. The operator of Japan's biggest convenience store chain sells luxury home-brand food and drinks made by well-known firms such as Meiji Holdings Co <2269.T> and Kirin Holdings Co <2503.T>.

It has also rolled out "Seven Cafe", a freshly brewed coffee similar to the daily brew offered by Starbucks, that has boosted sales of accompanying sandwiches and snacks.

Seven and I estimates sales of its private brand, "Seven Premium", will account for more than 10 percent of total sales this year and rise by 50 percent over the next two years.

Other retailers have also taken notice.

"The economy has improved but wages haven't gone up. It's said that expensive goods are selling, but that's not fashion wear, it's luxury watches and such," said Masato Nonaka, president of low-price casual clothing chain Shimamura Co Ltd <8227.T>.

"The preference for low-priced clothing isn't really fading but there's a move towards buying slightly better things, so we'll add products that are one are two notches above low-priced goods."

($1 = 97.2700 Japanese yen)

(Writing by Edmund Klamann; Editing by Miral Fahmy)

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