By  on August 31, 2012

TOKYO — Once the titans of the Japanese retail scene, department stores are now faced with the challenge of maintaining a strong customer base against stiff competition from online and smaller-scale, specialized retailers. As Japan’s luxury market remains largely stagnant, many of these stores are forced to look for new revenue streams that will set them apart from their competitors, while at the same time helping the companies stay profitable.

Isetan Mitsukoshi Holdings Ltd., the country’s largest department store operator that was formed by a merger between then-competitors Mitsukoshi and Isetan and which operates over 50 stores throughout Asia, is one such retailer that is finding ways to adapt to Japan’s changing retail climate.

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Here, the company’s president and chief executive officer, Hiroshi Onishi, talks about the changing habits of Japanese consumers, what the future holds for the nation’s department stores, and the ways his group is adapting its strategy to set itself apart and remain competitive.

WWD: Earlier this year Isetan Mitsukoshiopened some smaller-format concept stores, such as the beauty store Isetan Mirror and Isetan Haneda Store, aimed at business travelers passing through Haneda Airport. Why have you begun focusing on this type of retail outlet, and how do these fit into your overall strategy?
Hiroshi Onishi:
Well, for one thing, the [current] circumstances are such that we can’t open a newdepartment store. This is a balance of business and nourishing [customer relationships], so various channels are popping up in many places where we can do commerce with customers while also maintaining a connection. If you ask where the portion of sales that department stores have lost has gone, it’s online, to consumer electronics [stores], to drugstores…customers are shopping in a variety of places. From that point of view, it’s true that we’ve come to an age when department stores as a whole can’t win. The department store business has become quite difficult, and each one’s strategy and mission is changing.

In our case, it’s natural that from now on we continue with department stores, as I don’t think department stores will disappear from Japan. So for one thing, as we once again redefine what a department store is, we will also [focus on] small and medium-size stores, as this is one of our strengths. Specifically, we’re talking about stores between about 400 or 500 square meters [4,305 or 5,380 square feet] and 1,000 square meters [10,764 square feet], and in certain cases up to 2,000 or 3,000 square meters [21,528 or 32,292 square feet]. So from now on, we want to continue expanding by creating new channels, new settings for customers of about that size to showcase our strongest products and aspects.

In the case of cosmetics, they are the shortest [use] products for customers, and they aren’t affected much by business conditions because they’re a necessity. So we started with cosmetics for now. And there isn’t much point if it ends after just one or two stores, so within about three years we’d like the [overall] scale to reach that of about one department store, at which point…recognition will increase and we can continue with the next step toward growth.

WWD: How was the conceptof the Isetan Mirror beauty stores conceived?
About six or seven years ago — and at that time I had nothing to do with this — the company had proposed making Sephora-style stores in Japan. But in the end it was scrapped because [it was judged] not to be profitable and also, at that time, cosmetics manufacturers didn’t answer yes [to the concept]. Then three years ago when I became president, I saw the documents and I thought, even if it’s not Sephora, I think we can do this kind of thing. Plus, cosmetics are very difficult to buy at department stores — it’s difficult to enter, and it feels like a consultation, so [for customers] who know what they want to buy, it’s not an environment where they can [easily] choose products, so they don’t buy them. Compared with people who buy women’s clothing at Isetan, only 70 percent buy cosmetics, which means there’s a problem with the way we sell cosmetics at department stores. I’ve always had that feeling, so we thought we could create an environment where people could more freely purchase [cosmetics]. We didn’t think we could do it right away, but the reaction of the companies we’re dealing with was extremely good, so we were able to realize it relatively quickly.

WWD: And what about the Haneda store? Was that something that was originally proposed long ago as well?
Honestly speaking, this one came from the property. When Haneda [Airport] was being developed and evolving, I looked at a map. There’s a road called the Tokyo No. 8 Ring Road, and beyond that is Futako Tamagawa, where Takashimaya has a hugely successful shopping center. But after that, there are no other shopping centers. It’s not in the outskirts, and it’s also not in the city [center], but it’s just between the two. So I started thinking about what Haneda would become in the future, because if you keep going in that direction you get to Haneda and before Haneda there are a lot of open plots. So because of this — and I probably won’t be around at this point — but in 10 or 15 years perhaps, that area won’t just be an airport, but I think it will become a commercial complex. So I wanted to create a foothold for us there with a highly original shop, rather than the usual souvenir shops that Mitsukoshi has had [at airports] until now.

At first I thought since we were already doing the cosmetics store and the timing coincided with that, it would be good to make this a cosmetics store as well. However, upon looking at different types of data, I realized that at airports there are many male customers — businessmen. So I thought we should try [a store] based on the concept of gentlemen’s travel and general goods. But having said that, we also thought it would be good to link this with souvenirs, food products for families, a café and other such things. The way in which the [target] audience shops is not just because they happen to be on a business trip. But the number of people who actually treat it as one of the places they shop, as one of the places they buy the things they need, has increased a lot. So the frequency [of customers’ visits] is very high. The amount of traffic is about 30 percent less than I thought it would be, but the number of people who actually make a purchase and the value of individual purchases are high. So in a store of about 800 square meters [8,611 square feet], if we can make 500 million yen [$6.35 million] in sales per year, we’ll make a profit. So under existing conditions, we’re able to successfully do business with extremely limited customers.

In the future, for cosmetics, we really want to open more stores fairly speedily, but in the case of Isetan Haneda Store, I have a feeling that airport areas, not just in Japan, will change from now, so we want to open stores in those areas before it’s too late. But we’re not in a big rush.

WWD: You mentioned you want to open more beauty stores fairly quickly. Do you have any idea when or where the next ones will be opening?
The next one will open on Sept. 13 in Omiya [outside Tokyo]. After that, nothing’s been decided, but we’d like to open about five stores per year. For the first year or two we’ll focus on Tokyo, but in the future, if possible, we’d also like to open stores in Osaka, Fukuoka and other big cities. At the moment we’re thinking we’ll focus on [shopping centers attached to] train stations. In the suburbs, Aeon, Hankyu and Sumitomo Corp. have started similar things, so we’d like to concentrate on train stations and big cities in other regional areas.

WWD: Aside from the cosmetics stores and the Haneda store, are you planning on opening any other smaller-format stores under different concepts?
We’re thinking of the next one now. However, I think it’s best if we do it by fitting together our own strengths with customers’ needs. So, for example, maybe a little down the line [we might do] something with food, or something that creates a fusion between food and fashion, also maybe something [having to do with] living or home wares. We’re using a lot of different categories, so I want to move forward by pulling out our strengths from within those. But if the categories get too spread out it could actually get quite confusing, so I think it would be good to just have an additional two or three types [of stores].

On a broader note, for example, until now department stores have been at our core, so properties we’ve developed have been at least 20,000 square meters [215,278 square feet] — for example, when we were looking to open a men’s building, there were offers for spaces of around 10,000 square meters [107,639 square feet], but at that time we didn’t have the material for that [size of a store]. But from now on, I think we’ll be able to answer a lot of developers’ different needs — 1,000 square meters [10,764 square feet] would be OK, and 5,000 square meters [53,820 square feet] would be OK. In certain cases, if we combined different things, even 10,000 square meters would be OK. I think our types of stores will really increase.

WWD: You mentioned earlier that even though it’s a difficult time for department stores in Japan, you don’t think they’ll disappear completely. What do you think the role is of the Japanese department store in today’s retail landscape?
Retail sales [overall in Japan] are about 135 trillion yen [$1.72 trillion], and department store sales are 6 trillion [$76.35 billion], so the scale of [department store] sales is only about 5 percent. Web businesses have now exceeded 7 trillion [$89.08 billion], so the position of department stores — if we’re speaking in extremes — for customers, is such that they no longer really need them. The reason for this is that department stores ourselves, we didn’t do our best to [promote] our own strengths, our own intentions, our own originality, our own individuality. We came to depend on suppliers and we didn’t take responsibility for the risk, so we all ended up being the same. So within that system, if everywhere is the same, there’s no need for customers to go to other stores and, of course, that’s why department stores have become broken. Because we don’t take responsibility for the risk, naturally we also don’t get the returns, so sales decrease and profits decrease, and that’s how we got into the current condition, which is no good.

For us, the problem is clear, so we are taking drastic measures by taking on the risk, adding [our own] products in order to reverse the homogenization [of department stores] by pushing our own individuality with products only found at Isetan Mitsukoshi and things that only Isetan Mitsukoshi can do. By doing this, we want to revive the department store.

WWD: Do you have any plans to add new department stores or close existing ones?
No, we have no plans like that. We won’t be closing any stores. As for new stores, even in rural areas department stores need to have at least about 20,000 square meters, and that’s something we can’t easily do right now. But we have an oversupply nationwide, so especially in rural areas, the question is whether we can survive even with this oversupply. So now it’s difficult to think about new stores. As we revive the department stores, our strategy for new growth will be to increase the number of small- and medium-sized stores of up to about 10,000 square meters.

However, internationally it’s a bit different. We want to open slightly larger stores — ones that will become key stores for us — in other countries. We have quite a few stores [internationally], but they’re all small sized, so the return, or impact, is small.

WWD: What countries in particular are you looking at?
They say that in China the economic environment is extremely severe and that there are high risks [of doing business there], but even so I think there’s still a market there. Unfortunately, in China our Shanghai store is only about 15,000 square meters [161,459 square feet], and for department stores if you don’t have 25,000 or 30,000 [269,098 to 322,917 square feet] then you can’t have all the categories. So I want to keep that as a possibility. Also, our Singapore store reached 40 years old last year, so it has a degree of familiarity. But it’s unfortunate that our most recognized store is only 15,000 square meters. Takashimaya has a store of about 35,000 square meters [376,737 square feet], which leads to bigger profits. So I want to look for a store that will be more of a resource [for profits].

WWD: After last year’s earthquake, do you think the shopping habits of Japanese consumers have changed?
The earthquake was in March, so in March, April and May, numbers were quite bad because of the effects of the earthquake. Then we slowly started seeing signs that things were improving, and it’s true that at that time we were able to sell expensive things little by little. I get the feeling that this was perhaps because customers’ mind-sets changed after the earthquake and they became more interested in things that reflected emotional bonds, things with value, and not just monetary value.

Department stores have a price line, which is the price range that sells the most. For example, for women’s clothing the price range around 23,000 yen [$292.68] sells the best at Isetan. And that maybe has about 25 to 35 percent of the [total] share, so if there are 100 people about a third of them buy things for 23,000 yen. This price line is extremely important. It’s like the cornerstone of a store. But after the Lehman shock [in 2008] it was all about price, but we didn’t have any products that were low-priced. We continued offering things that were good [quality] and not just cheap. The result of that was that the share of things below the price line increased a little overall. But on the other hand, after the earthquake, the share of things above the price line has increased slightly. This means that the [average] purchase price per customer has risen. This is purely a guess, but I feel like customers are spending more money to buy things with value, things that have real quality.

Newspapers have written simplified things, such as that watches are selling well at department stores or that precious stones are selling, but I don’t think it’s that simple. Of course those things are selling, but we’re talking about things that only have about a four or five percent share at department stores. More than that, it’s about a sales increase among good quality things that are priced just slightly above the things that really sell well. And I think that’s the reason why retail sales aren’t really increasing, but they are relatively stable. There isn’t really any good news — the strong yen, the economic problems in Europe, the Japanese political situation — so in comparison, consumption is relatively stable. But the number of customers entering the stores has decreased. I imagine that compared to last year [before the earthquake], the numberof customers has dropped by about three percent, and I think it will continue to decrease. However, the number of products one person buys and the total value of the purchase has increased, so currently we’re just able to keep good numbers because of this multiplication.

WWD: In the future, do you think people will continue buying more, even as customer numbers continue to dwindle?
I think the number of customers will fall another 3 to 5 percent, so in order to be able to make our sales, on average we need to get customers to purchase about 1.2 to 1.5 times as much as they have until now. So our value policy is extremely important. If we can make products at a higher price point that have a different value, people will think that even though it’s a little more expensive, it’s better to buy that one. Department stores have a lot of customers who buy [products for] 23,000 yen, but if some of those people think that something for 26,000 yen [$330.86] has more than a 10 percent value increase, the average purchase per customer will increase, which is extremely important. Our price policy, which is very important, is not to sell cheap things, but to sell good [quality] things at a price that is slightly higher. It’s like value added things, so it has to be something that has an impact on the customer to make that extra 3,000 yen [$38.18] between 23,000 and 26,000 yen worth it.

WWD: In the past, international luxury brands have been very important for Japanese retailers. Do you think that has changed?
I think they’re still important, but the expansion of luxury brands in China, Taiwan and Korea over the past year or two — they’ve expanded with tens of stores at once. The reason for that is that they can make a store that they [the brands] themselves like, and they can show [the brands’] world. But inside a department store they’re limited. Especially in the case of Isetan Mitsukoshi, we’re incredibly strict about how brands are displayed in our stores, so for them, maybe department stores have lost their appeal. So maybe [it’s better] to have freestanding stores — of course in the case of Japan, even if they open a freestanding store in Ginza the real estate is expensive so they may not be able to make a return [on investment]. But looking at it globally, in China and Taiwan it’s a free-for-all of store openings. I think it’s true that the reality is shifting to that [region], but I don’t think international luxury brands will leave Japan, and I don’t think their importance to department stores has changed.

As individual cases, there are brands whose value or quality has increased and I think they’re very important to Isetan Mitsukoshi. And there are also brands that haven’t changed their quality over a history of many years, so it depends on the item. But speaking as a total, I think these brands will always have fans and they’ll always need to be a part of [our] plan. But we want to evolve with these brands within Isetan Mitsukoshi’s own concept.

WWD: How do you expect the rest of this year to shape up for Isetan Mitsukoshi as a company?
Our fiscal year goes from April to March, so for sales, if we count all of our main stores and regional stores, we think we’d like to be able to match last year’s sales. Naturally, we’d like to increase them, but the Shinjuku store is under redevelopment and we’re doing construction now, so until the grand opening in March there will be some part of it that is closed. Even now, for example, half of the third floor is closed, so sales at the Shinjuku store will fall about three points, which is about 600 or 700 million yen [$7.64 million to $8.91 million]. So by covering that [sales loss] through other stores, we’ll aim to match last year’s figures. But of course for profit there will be an increase. If possible, we’d like to have an increase in both sales and profit, but in the worst-case scenario sales would be parallel and unchanged, but profit will increase.

But next year it will be after the Shinjuku store reopens, so sales at the Shinjuku store will increase. So in the next fiscal year, I think the results will be a bit better.

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