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Hiroshi Mikitani: Retail revolutionary

As founder and head of online superstore Rakuten, Hiroshi Mikitani is fast conquering Japan and has set his sights on the wider world

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On a bitterly cold mid-February day, in the midst of an even harsher economic climate, Hiroshi Mikitani — founder, president and CEO of one of Japan’s largest online retailers, Rakuten Inc. — shook off a slight cold to announce at a concise news conference that in fiscal 2008 his company had achieved record results.

Rakuten’s net sales for the year were up 16.8 percent to ¥250 billion, he said, having been buoyed significantly by 20.2 percent sales growth in its core e-commerce segment and 24 percent growth in its travel sector. E-commerce sales hit ¥92 billion for the year and contributed a record ¥26 billion to the company’s annual profits. Meanwhile, Rakuten Travel — an eight-year-old offshoot from the retail business — attracted 2.5 million domestic travelers in 2008, topping even heavyweight Japan Travel Bureau’s total for 2007 (the latest figures available).

Forward-looking: Founder, president and CEO of Rakuten Inc., Hiroshi Mikitani, discusses his vision for the Internet retail super-company at his office in Higashi- Shinagawa during his JT interview in mid March.
Forward-looking: Founder, president and CEO of Rakuten Inc., Hiroshi Mikitani, discusses his vision for the Internet retail super-company at his office in Higashi- Shinagawa during his JT interview in mid March. | YOSHIAKI MIURA

All that was against a backdrop of belt-tightening nationwide that saw, for example, total department-store sales contract by 4.3 percent — the sector’s biggest fall in over a decade.

Even the sole item of bad news to emerge at the conference was interpreted by the media as a temporary stumble, and one for which Rakuten was not entirely to blame.

In his latest attempt to expand his empire — which currently comprises the travel agency, a stock brokerage, an e-bank, a credit company and a baseball team in addition to the core retail service — Mikitani had been buying up shares in Tokyo Broadcasting System (TBS). The global financial crisis laid waste to TBS’s stock price, leaving Rakuten’s investment valued at about a third of what they paid for it. News had also recently emerged that in order to resist Mikitani’s apparent takeover bid, TBS would turn itself into a “government-certified broadcasting holding company” — meaning no single owner could control more than 33 percent of its shares. (Mikitani is now trying to get TBS to buy his shares back.)

In a JT interview in 2003, Mikitani said he was aiming to create a new kind of online zaibatsu. That seems to have been achieved, and he now says one of his prime interests is to expand his business overseas. To that end, he’s tasked his staff to develop a system enabling people anywhere to buy and sell anything legal. All he needs now is a global “e-commerce free-trade agreement,” he jokes.

After earning his first degree in Japan, Mikitani, 44, received an MBA from Harvard University and did a stint at the Industrial Bank of Japan (IBJ) before founding Rakuten in 1997 with just six employees. It now has around 4,500 staff. It also has over 26,000 retailers utilizing its system and an astounding 47 million registered users — equivalent to almost 40 percent of the country’s population.

Team player: Shortly after creating the Sendai-based Tohoku Rakuten Golden Eagles baseball club in late 2004, Hiroshi Mikitani (left) visits its training camp at Fujiidera Baseball Stadium in Osaka.
Team player: Shortly after creating the Sendai-based Tohoku Rakuten Golden Eagles baseball club in late 2004, Hiroshi Mikitani (left) visits its training camp at Fujiidera Baseball Stadium in Osaka. | KYODO

Analysts generally attribute Rakuten’s phenomenal success to its unique core retail service, called Rakuten Ichiba (Market). Under Mikitani’s business model for this, Rakuten neither holds nor stores any merchandise itself, but instead operates like a giant virtual notice board, where — for a small flat fee — retailers offer their products for sale. When a consumer orders a product through Rakuten, the order is forwarded to the retailer, who is responsible for shipping the product. Rakuten then takes around 2.6 percent of the retailer’s sales revenue.

In his 2007 book, “Principles for Success,” Mikitani says this system forces retailers to compete with each other — in the same way they do in the real world. “Retailers had to think about how to present their products on the site . . . and had to deal directly with customer feedback, forcing them to make further improvements.”

Mikitani’s IBJ experience is in some ways ironic. That bank was created by the government to provide loans to industries — but it got wrapped up into the Mizuho Financial Group in 2002. Rakuten is now doing much the same thing — though instead of loans, it is providing a vast pool of consumers to businesses all over the nation. “Rakuten has made a lot of businesses viable,” says Mikitani, referring in particular to enterprises in the regions where depopulation had been forcing many to the wall.

In this interview with The Japan Times in mid March at his office in Higashi-Shinagawa, Tokyo, Mikitani says it is the knowledge that his company is helping other small companies thrive that makes his work worthwhile. But he doesn’t deny that Rakuten’s sizeable profits help too.

In February you announced that Rakuten’s sales were up for 2008. How is it that you are unaffected by the global financial crisis?

Well, are we really unaffected? Or is it the case that we would have been doing even better if the economy had been better?

There are a number of reasons online retail is strong. One is that human consumption is extremely diverse, and with the Internet people can buy more and more things they didn’t have access to in the past. The second is that because times are tough, people are paying more attention to prices. They are looking for good deals on the Internet, because online shopping is cheaper. The third is that online shopping is convenient; You shop from your home.

Upbeat:
Upbeat: ‘We’ve been able to achieve a win-win-win situation for Rakuten as well as for the retailers and consumers,’ says Mikitani during his interview with the Japan Times. | YOSHIAKI MIURA

Those characteristics are present at any time, but they’re why online shopping is strong in times of a weak economy.

So you are saying that as the economy worsens people are more careful with their money, and that benefits online retailers.

Yes. I think another factor is what I call the “small luxury market.” The economy is bad, so people don’t want to go to a restaurant, but they might go online and buy higher-grade meat than normal.

At the end of last year, sales of high-end sechi ryori (traditional New Year’s Day delicacies) were actually quite strong. It’s the same idea. In the past, where they might have splurged on an overseas vacation, they are now staying at home and treating themselves to a nice meal.

In the space of 12 years, Rakuten has become one of the largest Internet companies in the world. When you started the company in 1997, did you ever imagine it would go so well?

Well, in some ways, yes, and in some ways no. Yes, because I started it with a big dream. I wanted the Japanese people — as many as possible — to use Rakuten. I wasn’t hugely confident I could make that happen, but I was determined to show people that I could do it.

Was the plan to just go after as many customers and retailers as possible?

Yes. You know, when we started the company there were still no high-speed Internet connections. Everyone was using dial-up connections — on 56kpbs modems. So the spread of high-speed Internet has obviously been very important. I also knew that if the company got to a certain point, it would grow from there naturally. There are now a lot of surprising products selling really well on Rakuten: traditional crafts, like lacquerware, as well as Harajuku fashion. I had a vague idea that if we could capture such a diverse range of products, then sales would really take off. That has turned out to be true.

Are you satisfied with the company’s position at the moment?

Satisfied? I’m a businessman, so I am always setting new goals.

So is there no rest for you?

Yes, it’s a kind of sickness!

You’re one of the wealthiest people in Japan. Is there no point at which, if you attain it, you will retire?

No. It’s not just about money. The reason I like Rakuten Ichiba is because, unlike Amazon, which is all about the expansion of their own business, Rakuten is simply a large grouping of many small retailers. Rakuten is assisting those retailers, and by doing so it is helping to enliven Japan, and in particular regional Japan. So I feel like I am contributing to society.

I wanted to ask about that. Is it simply a happy coincidence that your desire to help regional areas is also furthering the success of your company?

The margin that Rakuten takes from retailers is about 2.6 percent. That’s far lower than other companies such as Amazon. That’s why we’ve been able to achieve a win-win-win situation for Rakuten, as well as for the retailers and consumers. It’s because of the efforts of our staff that we are able to function as a company on such a small margin. Most big companies couldn’t make it work, but our reward is the success of our company.

Going places:
Going places: ‘The biggest difference between Japan and the United States is that Americans believe from the bottom of their hearts that in order to develop their country’s economy they have to start new industries,’ says Hiroshi Mikitani, Rakuten Inc.’s founder, president and CEO, pictured in his Higashi-Shinagawa, Tokyo, office in mid March. | YOSHIAKI MIURA

In your book you say you realized that the world in 10 years will be completely different from today. What do you think Japan and Rakuten will be like in 10 years?

The underlying infrastructure that supports all economies and all information will be the Internet. In 50 years it’s 100 percent certain that that will be the case. The question is what will that make possible. For example, with education, what we now call “distance learning” could become the standard. In the same way, with medicine, “distance care” will also probably become standard. Voting will be done on the Internet. More importantly, the very concept of national borders will be eroded. Things that we always thought of as operating in single countries, such as the broadcast media, will start operating across borders. The way people work will also change. People will be working from home. Lifestyles will be revolutionized. Things that Rakuten is starting now, such as the Internet supermarket, might also become the standard.

How else will Rakuten play a role in that new world?

Rakuten Ichiba must always be evolving. Up until now it has been characterized by its ability to cater to lots of people’s different tastes. I think it will move more in the direction of selling everyday items. In terms of the Rakuten Group, we want to become a central feature in the Internet world. I want to focus more on travel and on our e-banking service.

We also have to expand overseas, with a focus on Asia. From Tokyo, you can get to most Asian countries in the same time it takes a New York businessman to get to San Francisco. And in New York, they have no problem buying things online from a vendor in San Francisco. In Japan, we have this tendency to think domestically. But I think in the future you will see a pan-Asia online market emerging. Chinese consumers might buy rice from Japan, or people in Japan might buy shark-fin soup from Hong Kong, or people anywhere may buy medicines from Japan.

Rakuten PR representative: A pan-Asia free trade agreement?

An e-commerce free trade agreement.

Do you think governments will be happy to facilitate that?

Some countries will get on board, others won’t. Those that don’t get on board will fall behind. At the end of the day, governments will have no choice but to listen to the demands of consumers.

So if the people want it, are you saying that it will happen?

Governments won’t be able to stop it. Remember America in the 1980s — they tried to obstruct car imports. But Toyota cars were good, so it was ultimately impossible for them to stop them.

In your book you said that Rakuten has been protected by language — in other words you were protected from foreign competition because you operated in Japanese and they couldn’t. When you try to move overseas, language is going to hamper you, is it not?

That will be a really big challenge for us. But I think one important point is that the Rakuten business model is extremely unique. So if we focus really strongly on our technology, our system and our service toward retailers, then I think it will work. It might take time, but I think it will succeed.

So now you are making it possible to purchase things on Rakuten Japan from some overseas countries. What is your next international aim?

At the moment you can buy things from Rakuten Japan from 28 different countries. U.S. department stores, for example, could sell things in Japan on Rakuten.

So do you mean that Bloomingdale’s would have a Japanese-language site in Rakuten? Then when a consumer in Japan buys something from that site, the product gets sent from the States?

Yes. However, there’s probably no reason to have the site in anything but English.

You’re obviously counting on Japanese doing a lot of their shopping online. Getting back to the domestic part of your vision, do you think that in 10 years there will be no more real-world shops and retail will all be online?

No, I don’t think so. Even I still buy things at convenience stores and supermarkets sometimes because sometimes they are more convenient. There are also purchases over which consultation is necessary. But I think that in 10 years you will see 10-20 percent of consumption being carried out online. At the moment it is about 2.5 percent, depending on how you measure it.

That’s a lot of potential for growth. Who will be competing with you for a piece of that 10 percent?

Well, the existing online retailers — Amazon and Yahoo. There will also be new retailers out there in the next 10 years. The existing supermarkets will start setting up their own online stores. One thing we can say for sure is that Rakuten won’t be the only winner. Just as there are a number of large supermarket chains, there will be several key players in the online retail world.

You mentioned earlier that economics and information will be online. What about other media, such as television? Will there be integration between conventional media companies and Internet companies?

Absolutely. It will definitely happen, no matter how much people try to resist it. In the past, the problem has been that they couldn’t get the bandwidth and it wasn’t possible to show video online smoothly. The other problem with showing video online is that it isn’t possible to provide the same content to a lot of people at the same time. A live telecast of a Japanese national soccer game, for example, is not going to work — the Internet network is not up to it.

So conventional broadcasting will not disappear. But the question is, how much content really needs to be seen at exactly the same time? That is the current point of contention.

Congratulations: In October 2003, Hiroshi Mikitani celebrates the birthdays of all his employees born that month. The monthly birthday parties, designed to enhance employee motivation, are still a feature of life at Rakuten Inc. today.
Congratulations: In October 2003, Hiroshi Mikitani celebrates the birthdays of all his employees born that month. The monthly birthday parties, designed to enhance employee motivation, are still a feature of life at Rakuten Inc. today. | KYODO

I think dramas, documentaries, and foreign programs will all end up online and people will be able to access them as they please. When that happens, what will change is that it will be important to be providing a service across multiple platforms. You won’t be able to just say “we only do television” or “we only do mobile phones.” When your customers are moving, they need to be able to see your content on their mobile phone; when they are at work, they need it on their computer; and at home on a big screen. I think the winner in this competition will be the one who develops the system by which you can have access to all these different media with a single user ID and password.

When retail and TV media become one, then Rakuten Ichiba could set up a shopping channel-type service, could it not?

Well, yes. That’s what we were trying to do by buying shares in TBS. You know, in the future, video-enabled retail is the way it will be done. What stops that now are the production costs, which are several hundred times more than to make a still photo. That would not be a problem if you could then sell hundreds of times more products, but you can’t — you can only expect an increase of about three or four times. If the production costs come down, people will start doing it.

But I’ve started to realize that although a video is conceptually superior to a still photograph, when you add hyperlinks to that photograph, then suddenly the photo is given a lot of depth. You can choose which aspects of something you want to explore. In Japan in particular, I think people still haven’t grasped the power of the hyperlink.

You’re very active in resisting government attempts to restrict the online sale of medicine. How do you think this will end up?

Again, I think it will come down to the desires of the consumers. The government can’t ignore them. As far as Rakuten is concerned, the profit we get from selling medicine is less than 0.5 percent of our group profit, so if we were thinking only of profit then, to be honest, I’d be better off spending my time doing something else. But there is this idea out there that the Internet is somehow dangerous. In reality, I think the Internet has so much potential — like what I was saying about distance-learning.

In terms of the safe delivery of medicine, too, I think the Internet has the potential to be better than the conventional method of sale. What they say is that there is a risk with medicine (that people will use it in the wrong way), and I think that is probably true. But can you really avoid that risk by insisting on counter sales? I think not. The most important point is that an explanation to the consumer should be made about how the medicine ought to be used. The Internet can do that. To restrict things that you don’t really understand — and haven’t really investigated properly — is, as a decision, extremely simplistic and negligent.

The government’s move to restrict online sales of medicines, and the resistance to your interest in TBS, suggests to me that some people in Japan aren’t happy with the sudden emergence of Internet upstarts like Rakuten treading on people’s toes. Is that the way you see it?

Well, I think the restrictions on the online sale of medicine are a slightly different issue. Actually, more than 50 percent of pharmacists have said that online sales are acceptable. With TBS, to be honest, I think it’s less a problem of the relationship between an Internet company and a TV broadcaster than simply a problem within the TV companies. They are not trying new things. They are not searching for a new business model.

I think the Ministry of Internal Affairs and Communications is partly to blame, too. The rules of the game are about to change completely, and they are saying that you have to operate within the confines of the old game. By prioritizing the stability of this country’s media, I think they have allowed Japan to fall behind. For example, it’s patently obvious that the regional broadcast license system isn’t necessary anymore. You can now broadcast to the whole country by satellite.

In your book you mention that the most important thing you learned from studying in the United States was the importance of starting your own company. In Japan, the traditional wisdom was to join a big company. Now you’re saying that the government in Japan is also behind the times. Are you disappointed in your fellow citizens?

The biggest difference between Japan and the United States is that Americans believe from the bottom of their hearts that in order to develop their country’s economy they have to start new industries. Now, the truth is that Japan is the same. All the companies that emerged after World War II in Japan were venture companies, and they were smart — Sony, Matsushita (Panasonic) and so on.

However, they were so smart that they created an atmosphere that has led people to believe that new companies are no longer necessary. But that’s wrong. Unless you have new companies emerging, you won’t get new industries or new services. I think that’s a fact.

The government should say that Japan is going to lead in scientific technology, and develop strategic policies to make that a reality. The national government needs to encourage entrepreneurial spirit. There is a real lack of vision among the leaders of this country. I mean, I wonder what percentage of lawmakers even use the Internet? Compare that with the BlackBerry-wielding Barack Obama.

Rakuten also has a baseball team — the Tohoku Rakuten Golden Eagles, based in Sendai. What does a baseball team contribute to your company?

One reason we did it was to give something back to society. The other is to improve brand recognition and also respect for the brand. Having a baseball team shows people that we are a solid, responsibly managed company.

What is the biggest regret of your career?

The regret I have really strongly now is that we should have developed our technology and services with an eye to eventually internationalizing the business.

They can’t be applied overseas?

We’re fixing one part of the system to work overseas and developing one part of it from scratch so it will work. It would have been a little easier if we had developed the system from the beginning so it could be used in China or the United States or any country.

Do you mean there is a language problem?

A computer-language problem, coding and things like that. At the time we didn’t really have plans to go overseas, but we should have addressed the issue at the earliest opportunity. As a result, the internationalization of the brand is not where I would like it to be.

What’s been the biggest highlight?

The best thing is seeing small retailers — farmers and other people who sell things on Rakuten — saying it was worthwhile. For example, people in the wafuku (Japanese clothes) business in Kyoto say they simply couldn’t stay in business without Rakuten. Long-established ryokan tell us that JTB and other agencies had stopped sending tourists. But now that they are on Rakuten Travel, visitors have started returning and their businesses are springing back to life. Hearing stories about how Rakuten allowed people to start a business or avoid bankruptcy — that’s the happiest thing.