NEW YORK — A ripple in the retail waters now, a “tsunami” later.
After getting burned in Germany and Indonesia, Wal-Mart is taking it slow in Japan, aware that it could be another tough overseas market to crack. Perhaps its toughest. Space is tight, Japan’s layered distribution network makes selling merchandise more expensive for retailers and Wal-Mart must learn the Japanese market, tastes and sizing. It’s been more than a year since Wal-Mart invested in Seiyu Ltd., a Japanese supermarket and general merchandise retail chain with more than $8 billion in sales, and it has yet to open a store in Japan.
Nevertheless, Wal-Mart’s impact on Japan, a market dominated by department stores, will be huge. Some analysts project up to 100 Wal-Mart stores and eventually $8 billion to $10 billion in volume. They see Wal-Mart eating into the market shares of such department stores as Mitsukoshi and Takashimaya, discounters like Jusco and Ito Yukado and smaller independents. Japan’s economy currently is among the worst of the developed nations, and consumers there are ripe for better values.
There’s also a sense that Japan’s retailers don’t see Godzilla coming, just like American retailers were caught off-guard as Wal-Mart conquered the U.S. landscape in the Eighties and Nineties.
In his report entitled “Retail Tsunami? Wal-Mart comes to Japan,” Carl Steidtmann, chief economist at Deloitte Research, predicts:
Wal-Mart will acquire a supplier and another retailer in Japan. General merchandisers are struggling and Daiwa is a potential takeover.
Wal-Mart will spark consolidation, as retailers seek to gain strength and size to fight back. It’s already happening, with Seibu Department Stores Ltd. and Sogo Co. integrating to form Millennium Retailing Inc., becoming one of Japan’s largest department store groups. Seibu, based in Tokyo’s Toshima Ward, has 21 outlets while Sogo, based in Yokohama, has 11 stores.
Implementation of Wal-Mart’s Retail Link system, the key to Wal-Mart’s successful low-cost, low-price business model, will take up to a decade.
Opening a store is a question of when, not if.
In an interview, Steidtmann cited other hurdles for Wal-Mart, namely Japan’s multitiered distribution system, versus Wal-Mart’s Retail Link. He also noted that real estate is expensive and of limited availability and that the Japanese love fresh food, while Wal-Mart’s food is generally not as good as that in Japanese grocery stores. Also, many Japanese prefer apparel selections that are more fashionable and brand intensive than Wal-Mart has.
Wal-Mart’s Retail Link operation is a just-in-time inventory replenishment system with real-time information shared between retailer and supplier, eliminating the wholesaler and utilizing EDI to speed orders and payments. But it’s not a speedy process to implement. With Wal-Mart’s Asda grocery chain in England, Steidtmann pointed out, Wal-Mart’s been at it for about three years and virtually all suppliers are hooked up. In Japan, Steidtmann noted the retail software will have to be translated to Japanese and Japanese suppliers and retailers will have to go through a transformation to adapt to Wal-Mart’s techno ways. In Japan, “there is much more of a personal interaction in how business is done than in the U.S.,” he said. “The distribution is multitiered, literally three or four steps from the time goods leave manufacturers to when they get to the retailer.”
Even in markets where Wal-Mart has done well, business wasn’t easy, initially. In Canada, for example, Wal-Mart experienced problems getting staff and meeting bilingual requirements for packaging. There are even more cultural and shopping differences in Japan. For example, Japanese retailers are generally into high-low pricing, rather than everyday low pricing, which is Wal-Mart’s method. Also, the Japanese consumer is used to shopping multifloored stores, developed along train lines, for food and general merchandise. They often shop on the way home from work, and transaction sizes are smaller. Wal-Mart’s newer convenience store format could go over easier than its supercenter format, since it’s a smaller footprint that could squeeze into Japan’s tight real estate landscape.
Last year, when Wal-Mart purchased a 6 percent stake in Seiyu, before raising it to 35 percent, Charles Holley, senior vice president and chief financial officer of Wal-Mart International, said, “This transaction is designed to give us the opportunity to work closely with Seiyu and its management team, and to study the business opportunities in Japan more thoroughly.”
On Tuesday, a Wal-Mart spokesman said, “I wouldn’t say that we have plans to open stores in Japan, but we haven’t ruled it out either.” He also said it’s possible that Wal-Mart decides to put its name on stores it might eventually own, just like it did in Germany and Mexico in some store locations the company took over, and with the Asda grocery chain, where there is some identification with the Wal-Mart name. Wal-Mart does have the option to buy a majority stake in Seiyu.
In Japan, “Wal-Mart can afford to be patient. It’s a complex market, and by testing and learning the rules of the road before jumping in, they will eventually maximize their opportunities or minimize their risks,” said Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates. “While Wal-Mart has had a few international growth disappointments, they have also thrived in this arena by taking well-researched, calculated risks. The best short-range results come out of following long-range plans. They are long-range planners.”
Added retail analyst Walter Loeb: “Japan will be a great challenge, but eventually Wal-Mart will get the costs down. Since most Japanese retailing is done through layers of distribution, the cost of merchandise is high. Wal-Mart is likely to streamline the logistics, but will still have to work with local operators. The Japanese are very interested in American products and American know-how. Wal-Mart will be successful in selling to the Japanese. However, not necessarily in all categories. The Japanese are very into quality, and some of the low-cost assortments may not be appealing to the Japanese. I’m thinking of apparel in particular. The Japanese are much more interested in durability and quality.”
According to one former American retailer consulting with Japanese stores, they know that American retailing, including discounting, supermarkets and category killers, will be coming. “They were told that 10 years ago, and the Japanese have ignored American retailing as the trend,” said the source. “Wal-Mart has an opportunity to really do a good job. The Japanese consumer is interested in value and big assortments. They’ll gravitate to the big boxes. What happened here in the U.S. will happen in Japan. Department stores will be diminished. Seibu, Mitsukoshi, Takashimaya, and Isetan, with its major specialty department stores — these stores are large and dominant and hang on without great sales increases. Their dominance will fade as Wal-Mart creeps in.”
“The Japanese retail industry has had five or six years of no growth or slow growth,” observed Marvin Traub, senior adviser to Financo Inc. and former Bloomingdale’s chairman. “The department stores are very large, and a number do over $1 billion, but with lower rates of return, lower profits and higher expenses. Department store pricing tends to be on the high side.”
That scenario seems like an invitation for Wal-Mart but, as Traub noted, “the first issue is whether Wal-Mart can find appropriate locations. The districts of Tokyo are filled with stores,” meaning Wal-Mart would have to examine the edges of major cities and areas adjacent to railroad stations, where much retail exists. The Japanese commute mostly by railroad, rather than by car.
Traub also observed that “Japanese consumers are very dedicated to brands. The concept of discounting is just coming to Japan.” But if Wal-Mart can get the real estate and build up the business, it’s a very big retail market. “The Japanese are consumer driven. They spend less for cars and apartments and spend more on apparel, dining and travel.”
But apparently, certain Japanese retailers don’t see the Wal-Mart threat, at least for now. Koji Nose, president of Mitsukoshi U.S.A., said, “Department stores are very different from discount stores. Wal-Mart will [have an effect], but not a big impact. I think there is room, but our business style is very different from the U.S. In Japan, it’s 96 percent concession.”