Otsuka Kagu familial feud nears climax

A battle between the founder of Otsuka Kagu Ltd. and its current president, who also happen to be father and daughter, is expected to turn into a proxy fight at the company's annual shareholders' meeting scheduled for Friday, with the result deciding the fate of the struggling furniture giant.

Founder and Chairman Katsuhisa Otsuka, 71, and his eldest daughter and company President, Kumiko Otsuka, 47, said they remain divided over the Tokyo-based firm's business strategy and have both made proposals to the board to oust the other.

Otsuka wants to stick with his original business strategy, which offers consulting services to customers on selling sets of premium furniture. His daughter, on the other hand, plans to promote more midpriced products to expand the customer base.

Experts say that Otsuka Kagu's traditional business model has lost its edge amid the rise of rivals in the market ranging from cheaper retailers such as Nitori and IKEA to luxury brands. Changing consumer trends have also added to the firm's woes over the past several years.

The father-daughter feud has been the subject of intense domestic media coverage since Otsuka held a news conference slamming the daughter's business strategy on Feb. 25.

"I have to admit that it was a mistake to appoint (Kumiko) as president," he told a news conference aired on numerous TV programs, adding that he would propose new board members, a move that would include him reassuming the firm's presidency.

Otsuka founded the company in 1969 and headed it until 2009, when he handed the reins to the daughter.

However, he took up the post again last July, as she launched a new business model in an attempt to boost sales and profits. In January, she was reappointed as president, which Otsuka labeled "a coup."

"In its developing phase, there will be a time when a company should no longer depend on the founder," she said at a Feb. 26 news conference. "(But), indeed, this is not the ideal way (to make that shift)."

The pair said that they had attempted to find a way to cooperate but were unable to work together in the end.

According to a Nikkei Shimbun report Wednesday, the fate of the proxy fight is still unclear, as both sides work to secure the loyalty of shareholders.

At the heart of the pair's conflict is a disagreement over the struggling firm's business strategy.

From the 1990s to the early 2000s, Otsuka Kagu grew sharply. In 1994, its sales and operating profit were ¥23 billion and ¥200 million, respectively, with those figures skyrocketing to ¥73 billion and ¥6 billion in 2003. But since 2008, the company has struggled to return to not only that level of growth, but any growth at all.

"A major problem is that Otsuka Kagu's strength is no longer effective" in the changing market environment and shifting consumer behavior, said Minoru Fukuda, a senior project manager who watches industries related to consumer goods at German consulting firm Roland Berger.

Otsuka Kagu is known for its large-scale stores that sell a wide variety of products ranging from the midpriced to the premium. Although it now accepts nonmember customers, it had been a membership-based company, and interior design consultants would routinely tour stores with customers, consulting them on selecting furniture.

Fukuda said that at the time the firm was growing at a stable rate, large furniture stores were a rarity, and it was common for people to buy furniture sets when they purchased a new home or got married. Otsuka Kagu, with its wide selection and consulting services, proved popular among such customers. The company was also the first furniture retailer to directly buy products from factories, allowing it to offer competitive prices for quality products, he said.

But the situation changed around 2008 following the collapse of financial services firm Lehman Brothers, which rocked the global economy. Since then, consumers' values have become more diverse.

This environment created openings for large furniture retailers like Nitori and IKEA, which have increased their presence, selling more reasonably priced furniture than Otsuka, while luxury brands like Cassina have emerged as popular alternatives for people willing to spend more money.

Fukuda pointed out that many consumers now purchase furniture that fits their lifestyles, so firms like Ryohin Keikaku Co., with its no-frills Muji brand, are attracting customers. Otsuka Kagu has a huge selection, but "the value of simply offering a variety of items at stores has decreased because of the Internet," said Fukuda.

"When you look at IKEA, they don't just display their products, they show IKEA's uniqueness through the displays, so it interests consumers," Fukuda added.

In addition, few people buy furniture sets at a single store when moving into a new home these days. While some are willing to spend money for furniture they really like, most tend to buy reasonably priced products, he said.

For Otsuka Kagu, Fukuda said, the key is finding new competitive edges, which it still has a chance to do. With no debt and about ¥28 billion of accumulated earnings and ¥10 billion in cash as of December, the company is in good financial shape.

Kumiko Otsuka has stressed the needs for an image change at the company, as people still think of it as a members-only retailer that sells expensive furniture at stores they can't casually visit. She said the company's advertisements have tended to focus on promoting expensive products, making a lot of people unaware of the firm's shift to selling reasonably priced products.

Otsuka Kagu's price range is indeed wide. For instance, it sells sofas with price ranges from under ¥100,000 to more than ¥1 million.

"We need to get rid of that image, so that more customers can casually drop by our stores," she said.

Her father, on the other hand, has criticized her for promoting cheaper products, saying that trying to compete with firms like Nitori and IKEA is the wrong direction for the company. A spokesman for his office said Nitori and IKEA are also expanding midpriced products, so Otsuka Kagu should focus on premium products through consulting services at large-scale stores, which is more along the lines of the company's traditional strategy.

Fukuda said it is hard to see exactly how Otsuka plans to do this due to limited information.

Meanwhile, the daughter "appears to be logical and her strategy is based on recognizing what the company's problems are," he said.

But it remains unclear how exactly she intends to give Otsuka Kagu a new edge — whether she will focus on a new retail format appealing to shifting trends, price competitiveness or possibly both.