While Japanese retailers struggle to cope with the burden of a sales tax hike, discount store operator Don Quijote Holdings aims to extend its 25-year run of rising profits by taking a different approach: turning Japan into a tourist mecca.

Foreign tourists flock to its chain of 24-hour mega-stores for midnight shopping sprees, spending on average almost 20 times more than the typical Japanese shopper. Other retailers are looking to follow Don Quijote's lead as Japan on Wednesday expands the list of items eligible for duty-free shopping.

Best known for selling everything from toilet paper to sex toys to Prada handbags, Don Quijote has long been a magnet for foreign visitors - including Lady Gaga. But with Japan ranking 33rd in the world by visitor numbers, foreign tourists made up only 3.5 percent of its revenues last year, most of that at a handful of outlets in Tokyo and Osaka.

Don Quijote now wants to boost sales further by leading an effort with hotels, restaurants and even rival retailers to promote Japan to international tourists. A company it spun off last year aims to partner with local governments and businesses to attract tourists through promotional maps and membership cards, by advising businesses to offer duty-free services and by providing language lessons for store clerks.

The move, it says, will ultimately bring more business to its 250-plus stores around the country as the government targets a doubling in the number of visitors to 20 million by 2020.

"The important thing is to create a framework that attracts visitors to Japan, and that requires cooperation that goes beyond one company or industry," Don Quijote founder and chief executive Takao Yasuda told Reuters.

SALES TAX RISE

Attracting tourist dollars is crucial for stemming sales declines for Japanese retailers as the population shrinks and ages. Japan is also due to raise the sales tax to 10 percent as early as next October, in a further threat to spending. The tax rose to 8 percent from 5 percent this April.

Major retailers such as Isetan Mitsukoshi Holdings have only recently woken up to the potential windfall from targeting tourists. Mitsukoshi's flagship department store in the upscale Ginza district is due to convert an entire floor to cater to inbound visitors, but that won't happen until late next year.

Meanwhile, Don Quijote has been at it for six years, signing on hundreds of travel agencies and hotels with incentives. By distributing bar-coded membership cards, they get 3 percent of revenue spent on the cards at Don Quijote stores.

As bad weather punished sales at most retailers in August - data this week showed household spending fell by a worse-than-expected 4.7 percent that month - Don Quijote saw its same-store sales rise 2.3 percent. The rise was supported by tourists, who spend more than 40,000 yen ($365) on average at its stores, compared with domestic consumers' 2,400 yen. Don Quijote says most tourists shop between 10 p.m. and 2 a.m. at its outlets.

"When it comes to capturing inbound visitors, Don Quijote is unrivalled," said Ryota Himeno, retail analyst at Barclays.

Don Quijote estimates that half of Japan's 10 million visitors last year set foot in its stores.

From Oct. 1, visitors will be exempt from paying the sales tax on consumables such as snacks, drinks and cosmetics on combined purchases over 5,000 yen ($45). Don Quijote was instrumental in lobbying for that change, arguing it was a powerful way to attract tourists.

"There's no other store that sells toilet paper and Louis Vuitton bags," CEO Yasuda said. "This is going to be huge for us."

COLLECTIVE EFFORT

Tracing its origins to a tiny discount shop that Yasuda started in 1978, Don Quijote has flouted every rule in the book, most famously by making merchandise hard to find, forcing shoppers to navigate the winding aisles in a kind of treasure hunt.

To get more foreigners in on the game, its spun-off company, Japan Inbound Solutions, will from Wednesday offer an upgraded membership card that allows tourists to rack up points at partner hotels, restaurants, karaoke parlous and elsewhere. Those points can be cashed in at ATMs at two Don Quijote stores in central Tokyo's buzzing Shinjuku district.

The plan eventually is to install the machines at all major airports as the membership card catches on nationwide.

An earlier initiative to promote Shinjuku during this year's Lunar New Year holidays resulted in a fivefold jump in purchases made with China's UnionPay bank cards at Don Quijote stores in the district - far more than the fourfold increase nationwide, Japan Inbound Solutions CEO Yoshiaki Nakamura said.

"The idea is to repeat this formula in all of Japan's 47 prefectures by 2020," he told Reuters.

Still, windfalls from tourist spending have been interrupted in past years by flare-ups in diplomatic tensions, particularly with China under Prime Minister Shinzo Abe's leadership.

While those dips are often short-lived, Yasuda said Japan as a country fundamentally needed to find ways to improve its citizens' foreign language abilities to become more tourist-friendly.

"Tourists to Japan mostly leave with a good impression," he said. "We just need to do a better job in marketing ourselves."