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Japan’s Department Stores Look to Reverse Slide

Facing a continued decline in department store sales for five straight years, major Japanese retailers are reworking their strategies to regain ground.

TOKYO — In the face of a continued decline in department store sales in Japan for five consecutive years, diminishing 14 percent from a peak level 10 years ago, major department stores here are restructuring their business operations and strategies to regain their ground in the retail market.

This could be the face of American retailing, circa 2005, with a little bit of American déjà vu thrown in for good measure.

New management initiatives involve unifying parent and group companies for economies of scale; centralizing merchandising, sales, customer service and promotional functions; and integrating customer and financial information systems and corporate accounting operations.

Japan’s department store sales in 2002 fell 2.3 percent — or 2.7 percent on a same-store basis — to $69.5 billion, according to the Japan Department Stores Association. This represented a drop of 14 percent from the peak level of $80.9 billion in 1991. The association said there were 292 department stores in operation nationwide at the end of the year. Dollar figures have been converted from the yen at current exchange rates.

Apparel sales in department stores landed at $27.6 billion, 6.1 percent below those of 2001 and 7.7 percent below 1991 levels, but still, at 39.7 percent of sales, the largest single sales generator within department stores.

Apparel sales included $17.75 billion of women’s wear, 1.6 percent below 2001 levels but 2.8 percent above those of 1991. Men’s wear dropped 4.8 percent last year to $5.34 billion, 35.3 percent below 1991 revenues due principally to the sharp downturn in men’s suit sales. Children’s wear was down 1.5 percent to $2.13 billion, 16.3 percent below the 1991 mark.

Even with department store employment dropping 3.4 percent last year to 98,939 — about 57 percent female — sales per employee declined 1.6 percent and sales per square foot dropped 4.6 percent.

In the past decade, competition for the Japanese apparel dollar has intensified on several fronts. The so-called “select” specialty shops, such as United Arrows and Beams, have grabbed market share once held by department stores, and luxury, designer and prestige brands from the U.S. and Europe have established their own subsidiaries in Japan and opened shops that they own and operate themselves.

Even the money generated by basic apparel needs has been adversely affected by accelerating deflation, and the bursting of the “bubble” economy has tended to pull market share into stores selling lower-priced apparel.

As in the U.S., the department stores often have found themselves sandwiched in the middle — too low for the luxury purchaser and too high for the value shopper.

Department stores have hardly been alone in their battle against a soft national economy. A recent government survey of Japanese salaried workers showed that consumer spending in 2002 averaged $2,755 a household per month, down 0.2 percent from the previous year, the fifth straight year of decline. Of the total, monthly expenditures on clothing and footwear last year accounted for $131.86, down 0.1 percent, according to the Ministry of Public Management, Home Affairs, Posts and Telecommunications survey.

While the drop in Japanese department store sales has been more sustained than the more recent one in the U.S., Japanese firms have only recently begun to adopt some of the cost-saving and consolidation measures that stores on the other side of the Pacific have been applying for the better part of two decades.

Seibu Department Stores had no choice, as reported, developing a reorganization plan — including a nearly 40 percent cut in its workforce and the sale and liquidation of both retail and nonretail assets — in exchange for nearly $2 billion in debt forgiveness. Seibu’s debt was not related to its retailing activities, but threatened to greatly disrupt them nonetheless.

Under a new five-year business plan, Mitsukoshi Ltd. is merging its four department store subsidiaries in Nagoya, Chiba, Kagoshima and Fukuoka to form a greater Mitsukoshi. The company is also reorganizing and consolidating its group companies in food, restaurant, real estate, physical distribution and other businesses.

“The slump in consumer spending in Japan is becoming prolonged, while consumption is likely to continue at a low level in coming years because of changes in the structure of the Japanese economy and population,” Mitsukoshi said in announcing the new management plan, which affects its 45 subsidiaries and 11 business projects.

Mitsukoshi is looking to boost its department store sales to $7.32 billion in fiscal 2004 from $5.6 billion last year. The reorganization should boost overall operating profit to $187.5 million next year from $108.3 million in 2002.

Mitsukoshi said it will continue to reform the company’s infrastructure this year, regrouping its subsidiaries and affiliates, reviewing personnel policy and pay scale, and undertaking other cost-cutting measures.

This will be followed by a second phase of structural reform in fiscal 2004 through 2006, Mitsukoshi said, to reorganize businesses, close unprofitable stores and make new investments, such as opening a new flagship store in Tokyo in 2004 and a specialty store in Nagoya in 2005. The aim is to achieve operating group profit of $250 million, or more than 3 percent of sales, by the year 2006.

Japanese department stores are moving in the direction of centralization and standardization to benefit from economies of scale in stocking, facilities and investment, said Masafumi Shoda, retail analyst at the Financial Research Center of Nomura Securities Co. For one, there will be closer coordination of transportation and shipping operations between stores.

“The same management concept of chain store operation is being brought into department stores,” Shoda asserted.

But this means that department stores here must bear greater business risks, the Nomura analyst noted. “A big question is if department stores here have sufficient training and competence for risk management,” he observed. “What works in Ginza may not work in local areas.”

Mitsukoshi said the number of visitors to its stores in the first half of fiscal 2002 (March to August, 2002) came to 59.9 million, down 3.8 percent from a year-earlier level, with per-customer purchases registering $26.20, down 0.1 percent from the previous year.

During the same six months, women’s wear sales slipped 0.3 percent and men’s wear sales went down 6.5 percent. Children’s wear sales fell in between, declining 3.7 percent.

Neither have the sales doldrums eluded Takashimaya Co., Japan’s largest department store. Department store sales are responsible for 82.5 percent of revenues. In 2002, sales were off an estimated 1.7 percent to about $9.83 billion and consolidated operating profits fell about 15 percent to $125 million, according to a recent published report.

Prestige and luxury brands from abroad previously had withstood the effects of Japan’s long recession, but they proved vulnerable last year. Women’s wear sales at Takashimaya in the past year reportedly slid 5 percent, although sales of cosmetics, handbags and other women’s accessories trended upward.

In 2001, Takashimaya inaugurated a three-year program, focused on enhancing “the value of the Takashimaya brand,” that concludes this year. Under the program Takashimaya is promoting new brands of merchandise, developed in collaboration with apparel manufacturers, and mining greater amounts of customer data to be used in merchandise development and assortment planning.

Isetan Co., one of the first Japanese department store chains to emphasize forward fashion, especially for the young, also began a three-year plan in 2001. It emphasizes strengthening profit-making capability in the department store business; strengthening Isetan companies as a group, and venturing into new business fields for higher growth. Elevating the Isetan name, and its profitability, by elevating its fashion profile is a major component of the plan.

The company participated in the Business Process Engineering project sponsored by the Ministry of Economy, Industry and Trade. This led Isetan to structure a new business format for higher profitability by effecting a unitizing or standardizing program for business processes for its stores and for broadening its coalition with a number of local stores through the formation of All Nippon Department Stores Organization, and for a closer business alliance with Hankyu Department Stores.

For higher growth, Isetan is moving more aggressively into mall-based department store development and also the expansion of fashion-oriented specialty stores.

In the fiscal year ended in April 2002, Isetan posted consolidated sales of $5.13 billion, up 3.8 percent following an increase of 3.4 percent in the previous year, while its pretax profits rose 10 percent to $180 million following a 94.4 percent jump in 2001.

Matsuya remodeled its Ginza store two years ago under the theme “Fashion begins with Matsuya Ginza.” The company sent buyers overseas to bring name brands to the store and remodeled sales floors for specialty products and brands that were selected by the store’s buyers. Louis Vuitton opened a large shop on the first floor.

The investments paid off in fiscal 2001. During the year ended in February 2002, Matsuya’s department store sales grew 8.6 percent to $696 million following a decline of 2.9 percent in the previous year. Its operating profit more than doubled to $12.3 million and its pretax profits skyrocketed 135.5 percent to $10.3 million versus a decline of 73.5 percent in the previous year.

However, with spending depressed, Matsuya’s sales for the six months ended August 2002 dropped 2.4 percent to $403 million, even though pretax profits during the period increased 4.9 percent to $6.7 million. Several large American department store companies concluded fiscal 2002 with similar results — bottom-line increases despite decreases in sales, comparable-store sales or both.

“The key to successful department store operation is procurement ability,” said Michinori Shimizu, an analyst at Morgan Stanley Japan Ltd., noting that a department store, in order to be successful, must possess expert ability to select, buy and stock merchandise that’s appealing to consumers by all standard definitions.

The key to doing so, he asserted, was in finding and retaining capable and experienced buyers.

The combination of sales regression and profit progression also played out at Daimaru during the six months ended last August. Group sales decreased 2.6 percent, to $3.23 billion, but operating profits picked up 3.1 percent, to $59.7 million.

The company cited crossover competition from other industries, stubborn deflationary pricing trends, falling stock market prices, a decline in bonus payments and generally lackluster spending conditions in explaining the sales decline, also pointing out that shopping activity was depressed last June when many consumers stayed home to watch the World Cup on television rather than venturing out to acquire merchandise.

Tokyu Department Store Co. is in the process of establishing a new merchandising system that will unify its products with suppliers, store environment, marketing, customer service and such elements of internal operations as personnel, information, shipping and accounting.

In the first half of fiscal 2002 concluding last July, sales declined 6.3 percent to $1.8 billion.

Amid the intensifying competition and the changing structure of consumer market, “department stores have been groping for a new path,” stated Nobuyuki Ota, president of Issey Miyake Inc., who was formerly executive director of the Council of Fashion Designers, Tokyo. “After all, they have realized that the vector of business should be upward, not downward.

Their future, he said, lies in sharpening their specialties and staying in the forefront of fashion, serving as “transmitter sites” for the latest fashion information.

Ota agreed that success of a department store depends on human resources — skilled buyers and salespersons with expertise.

It also requires that a department store must win recognition from the public for being a contributor to the promotion of “culture,” not just being a shallow image of a business only concerned with per-square-foot sales value, he said.