Japan’s retail industry, suffering from a decade-long economic slump and the advance of powerful specialty discount stores, is gearing up to compete with another formidable player.
At the end of May, U.S. retail giant Wal-Mart Stores Inc. purchased a 6.1 percent stake in Japan’s fourth-largest supermarket chain, Seiyu Ltd., and the new alliance is already accelerating a realignment of the domestic retail industry.
Also in May, Aeon Co., Japan’s second-largest supermarket chain, acquired a 26.1 percent stake in midsize supermarket chain Inageya Co. as part of its aggressive strategy to establish a foothold in Tokyo, where Aeon operates just three Jusco stores.
Some experts predict that similar mergers and acquisitions will follow, and that the retail sector will be roughly reorganized into four major groups, centering on Japan’s No. 1 supermarket chain, Ito-Yokado Co., the Seiyu-Wal-Mart alliance, Aeon and a fourth group that has yet to emerge.
In the wake of major supermarket chain Mycal Corp.’s bankruptcy in September, and as the third-largest chain, Daiei Inc., sees its group scale dwindling while receiving massive financial assistance from its main banks, experts are suggesting a likelihood that new players will emerge, comprising the future fourth group.
While some believe that regional retailers such as Uny Co., which is based in Aichi Prefecture and operates about 160 stores nationwide, may emerge as core players, others think foreign entrants may tie up with Japanese firms to form a competitive force.
The ongoing reorganization is expected to simplify Japan’s multilayered wholesale system, benefiting consumers by enabling them to purchase quality products at lower prices.
“Wal-Mart’s entry in Japan is putting pressure on Japanese supermarket chains to adopt global standards,” said Takayuki Suzuki, an industrial analyst at Merrill Lynch Japan Securities Co.
Foreign retailers like Wal-Mart, the world’s largest retailer, with annual sales of 28 trillion yen, have expanded their businesses globally, offering discounts through bulk buying, direct trade with manufacturers and reducing overhead and inventories by putting the latest information technology to work.
Referring to the realignment of retail chains in Europe in the 1990s — partly triggered by Wal-Mart’s entry into the region in 1999 through a merger with British supermarket chain ASDA — Suzuki said, “Those supermarket chains that cannot innovate to the global level will not be able to survive.”
Wal-Mart, which was looking for a Japanese partner, is struggling Seiyu’s best choice to survive the severe domestic competition, experts agree.
Seiyu’s financial condition has continued to deteriorate since the end of the bubble economy in the early 1990s, due mainly to the disposal of bad loans held by Tokyo City Finance, its subsidiary for financing business, and decreased sales amid the economic downturn.
Seiyu earned 1.11 trillion yen in group sales in fiscal 2001, but had interest-bearing group debts of 610 billion yen as of February.
“With the integration with Wal-Mart, Seiyu got a chance to change itself from being a retailer that was like a worn-out car short of fuel, into a super car,” observed Tomoo Noguchi, a marketing professor at Waseda University.
According to the comprehensive tieup plan, Wal-Mart, which has put up 6 billion yen to date, is expected to increase its stake to 66.7 percent by the end of 2007, bringing the total equity injection to 260 billion yen.
Seiyu will receive knowhow on the U.S. retailer’s advanced IT system, procurement of products and customer service, Seiyu President Masao Kiuchi said at a news conference in May.
Wal-Mart, recognizing that IT is a necessary tool in streamlining operations, briefed 500 suppliers of Seiyu stores in May on its system of Internet-based supply chain management, which enables retailers and suppliers to cut their operating costs by accessing store data, including sales trends and forecasts.
Wal-Mart and Seiyu are currently conducting feasibility studies as they work toward the compilation of a five-year business plan, but their rivals — Ito-Yokado and Aeon — are taking different approaches.
Aware that Japan’s retail sector will eventually be forced to compete in the global market, currently dominated by foreign giants including Wal-Mart and French-owned Carrefour, Aeon insists that Japanese stores need a better strategy. Ito-Yokado meanwhile believes retail business should focus on responding to domestic needs.
“What is important (for supermarkets) is not to compete with rivals but to respond to consumer needs,” Ito-Yokado President Toshifumi Suzuki said. “Japanese consumers will not buy things just because they are cheap.”
Based on this principle, Tokyo-based Ito-Yokado is working on new product development and store operations by taking advantage of its strong financial condition and its sophisticated point-of-sales information system.
Reflecting other departures from traditional policies, an employee in his 30s was selected to manage a Tokyo store located in an area where young families with children are the main customers.
Female employees have also been selected to manage stores, or have been assigned to floors that specialize in women’s clothing, food, and medical and health care products. Part-time workers — mainly middle-aged women — are responsible for the food sections and fish corners at 11 Ito-Yokado stores.
Aeon is taking a more aggressive strategy. By 2010, the firm aims to earn 7 trillion yen in annual group sales and become one of the world’s top 10 retailers.
The Chiba-based retailer is quickly expanding its partnerships with domestic retailers, hoping an economy of scale will enable it to procure products at lower costs and consequently offer lower prices.
Sponsoring the reconstruction of Osaka-based Mycal and Kotobukiya Co., a Kumamoto-based supermarket chain that collapsed in 2001, is one way to expand its sphere of influence.
To reduce operating costs, Aeon plans to drastically overhaul its information and distribution systems by the end of 2003, increase the percentage of private-label products and introduce direct trade with manufacturers — an nontraditional procurement method in Japan.
Some of these measures seem to be bearing fruit. According to Aeon, Jusco stores that have been operating for more than a year managed to reduce their inventory management costs by 20 percent in fiscal 2001 to Feb. 20 from a year earlier by introducing a new information system to handle men’s clothing.
But critics believe that success in Japan will not come easily to Wal-Mart. They say it will be difficult for Wal-Mart to adjust its information and operating systems to suit the Japanese market, citing different consumer tastes, product lineups, and even weather patterns.
Others, however, argue that Wal-Mart has a better chance in Japan than that of Carrefour and U.S.-based paid-membership discounter Costco Wholesale, both of which entered the Japanese market in recent years without Japanese partners.
Operating few outlets in Japan, the two predecessors appear to be struggling to draw local customers. Observers have pointed out that Carrefour, which operates three hypermarkets in Japan and is the world’s second-largest retailer, has failed to differentiate its stores from its Japanese counterparts and has yet to achieve low-cost operations due to its weak influence over domestic suppliers.
Noguchi of Waseda University said Wal-Mart’s partnership with Seiyu, which operates about 200 stores, would give it strong purchasing power and enable the U.S. giant to build better relationships with suppliers, enabling it to procure a variety of products that meet consumer needs.
“Seiyu and its suppliers would make desperate efforts for Wal-Mart’s success because the failure of the partnership would mean death for them,” he said, noting that Wal-Mart can withdraw from the Japanese market whenever it wants.
Whether retailers can satisfy consumers’ growing demand for quality services is becoming a decisive factor in their survival, Suzuki of Merrill Lynch said.
“How to satisfy mature consumers is becoming one of the major themes for intensifying competition,” he said. “I think what more and more consumers demand of large supermarkets is high-quality products at low prices and attentive service from salesclerks.”
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