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Outdated Otsuka Kagu business model is at the root of family feud

by and

Retailers know that image maintenance is important for their bottom lines, as proven by Otsuka Kagu Ltd.’s 37.8 percent drop in sales last month compared to March 2014.

Otsuka is one of Japan’s best-known furniture stores, and since last year it has been roiled by a dispute within the family that owns and runs it. Chairman and founder Katsuhisa Otsuka objected to changes that his daughter, Kumiko Otsuka, the company’s president, intended to carry out, thus setting the stage for a proxy fight among shareholders. Kumiko came out on top, but the damage was done: Consumers, it seems, don’t like to watch family businesses implode in public.

However, the dispute and its financial effects have drawn attention away from what it was all about — namely, a change in service policy. Kumiko believed that the membership sales model the company had always used was no longer relevant in today’s economic environment.

When customers come to an Otsuka showroom for the first time, they are asked to fill out a form and become members, who are then entitled to guided tours around the store. Kumiko wants to discontinue this practice and make Otsuka showrooms open to the general public for browsing, with no memberships and no sales staff tagging along unless the customer specifically asks for help. Katsuhisa, however, believed this system is what made Otsuka different and — more significantly — appealing to affluent consumers. Otherwise, the company would just be another furniture store.

Katsuhisa’s idea is based on the belief that buying furniture is a once-in-a-lifetime event. Traditionally, when two people in Japan marry, the family of the bride buys all their furniture, and in this context a place like Otsuka makes sense, since it could help couples coordinate their purchases. But newlyweds today are different — more casual and idiosyncratic about interior decorating decisions.

Such a trend is characterized by the rise of three other retailers who have done more to challenge Otsuka’s sales model than Kumiko: Mujirushi Ryohin (aka Muji), Nitori and IKEA. These stores offer not only cheaper furniture than Otsuka, but also a unified aesthetic, since all their respective merchandise is designed and made expressly for them in accordance with an integrated in-house style. Coordination is built-in; Otsuka, on the other hand, buys furniture from various wholesalers and manufacturers.

According to the wedding industry magazine Zexy, the nationwide interior retail market declined from ¥4.5 trillion in 2001 to ¥3 trillion in 2011. One of the main reasons for the shrinking revenue is that newer houses often come with features that obviate the need for some types of furniture. Older Japanese houses did not have closets and pantries, so families had to buy huge wardrobes (tansu) and standalone cabinets. Now, many new homes have walk-in closets and built-in storage features.

The burgeoning success of the Swedish do-it-yourself interior retailer IKEA is probably what worries Kumiko the most. The company first tried to enter the Japanese market in the ’70s and couldn’t make a go of it. Several decades later, it tried again and younger people with less disposable income and a greater desire for self-expression became dedicated customers.

IKEA now has eight stores in Japan and plans to open six more by 2020. The company’s trademark showrooms, structured like theme parks with lots of illustrative displays, are the opposite of Otsuka’s, which contain merchandise arranged in an almost random fashion, thus requiring a salesperson to navigate.

Nitori is presently the biggest interior retailer in Japan, owing mainly to its low prices but also to its highly developed services, such as a wide range of custom-made curtains and blinds. The company recorded more than ¥340 billion in sales in 2012, with Muji coming in second with ¥220 billion. That year, Otsuka made ¥54.5 billion.

Another reason Otsuka fell out of favor is that consumers no longer think — or maybe they still do but don’t care — that Japanese cabinetmakers and carpenters are necessarily the best in the world. Japanese craftsmen traditionally preferred hardwood from broad-leaf trees, most of which were wiped out during World War II and replaced with fast-growing Japanese cedar (sugi), which produces a soft wood considered ill-suited for furniture. Because Japan doesn’t take care of its forests any more, all the good hardwood has to be imported, which has had a negative impact on the domestic manufacture of furniture.

In the past, Otsuka and smaller mom-and-pop furniture stores were able to exploit this preference for Japanese craftsmanship to maintain high profit margins, which is why they didn’t need to sell a lot of merchandise to stay in business. Recently, however, Japanese consumers have become more savvy about their tastes and more confident in their demand for living spaces that match those tastes. To them, Otsuka seemed to represent a retail model where the seller, not the customer, is king.

Yen For Living covers issues related to making, spending and saving money in Japan on the second and fourth Sundays of the month. For related online content, see blog.japantimes.co.jp/yen-for-living.

  • HSM

    Oh, stop creating misperceptions. The year-on-year drop in sales for the month of March 2015 had very little to do with Otsuka Kagu’s “image maintenance” and everything to do with consumers purchasing heavily, particularly on big-ticket items like furniture, in March 2014 before the surge in the consumption tax the following month. Comparatively, domestic sales of Toyota passenger cars dropped 19.1% year-on-year for the month of February 2015, and I’m sure the drop will be greater for March 2015,,once that data is released.