It is estimated that the Japanese grocery retail market is worth US$539bn (€634.11bn). The retail infrastructure is diverse and static, with supermarkets and superstores the largest segment, accounting for around 38 per cent of the market. In recent years, the fastest growing segment has been the discount and convenience store sectors, to the detriment of food specialists.

BACKGROUND

The Japanese grocery retail market is dominated by large conglomerates operating a multitude of retail formats. In 1999, Ito-Yokado overtook Daiei as the largest retailer in the country, and it currently holds a 5 per cent share of the market. Daiei had been the market leader since 1972 and grew along with the Japanese economy, which between 1955 and 1990 went from 2 to 15 per cent of the global economy.

Daiei’s strategy was to invest in land to build large supermarkets to cater for rural families migrating to cities. During this period, the value of land sky-rocketed and the company used it as colateral for loans to buy more land and expand even more rapidly across the country. On top of this, it invested heavily in non-retail stock and property. Daiei focused on market share gains and growing sales rather than profit, which came from capital gains on land rather than from its core business. By 1990, the company’s assets largely outweighed the debts. However, the asset deflation of the 1990s brought the company to its knees.

In contrast, Ito-Yokado preferred to rent land rather than purchase it, building stores without expecting capital gains from the property. As a result, Ito-Yokado doesn’t have the paralysing burden of Daiei’s debt. Daiei has a Y2.6tr (US$22.9bn) debt, and could only pay it off by selling its stocks, land/property and even a big share of its Lawson convenience chain.

A number of Japanese retailers carry large amounts of debt accumulated through rapid expansion in the 1980s. Others are still run by the ageing founders who have proved unable to keep pace with rivals’ cost cutting efforts.

In addition, the traditional general merchandise department stores (which account for a large part of the store network of most of these groups) have come under increased competition from cheaper and more innovative chains such as Uniqlo. The retail giants have been slow to react to these new entrants and have lost customers as a result. According to a spokesman for the Japanese Department Stores Association, the end of the slump among the department store sector is not yet in sight, although the decrease in sales is apparently slowing. Food sales in the sector are still small, but gradually climbing, and currently account for about 25 per cent of total department store sales.

As a result of market saturation and increased competition, the convenience sector is showing signs of a slowdown. In an attempt to revive sales growth, leading convenience store operators have diversified into new services such as e-commerce and banking. In the last few years, mini-supermarkets have gradually shifted to fast food, public utility services, and parcel handling and delivery services.

MARKET STRUCTURE

In 1974, legislation known as ‘Daithenho’ or the Large Scale Retail Store Law was put into effect to protect small and medium-sized retailers by restricting the size and trading hours that a large store retailer could operate. In June 2000, ‘Daitenho’ was replaced with ‘Richiho’, or the Large Scale Retail Location Law, which put the decision- making for large stores in the hands of local government. It is debatable whether the move will make the opening of large stores even more difficult than it was under the previous legislation.

THE CONSUMER

Japanese consumers are known as the world’s most difficult to please. Psychoanalist Ken Ohira wrote a book about the ‘psychological disorder’ of affluent consumers in Japan who, on one hand demand top-quality and love branded goods, but on the other hand are incredibly frugal, despite their enormous purchasing power.

FOREIGN PLAYERS

The structural change of the retail sector has eased entry into the Japanese market for non-Japanese players. Bankrupt department stores like Nagasakiya leave behind property that foreign retailers can purchase for relatively bargain rates.

Until 2000, few foreign grocery retailers had entered the Japanese market due to expensive property prices and a tough competitive environment. However, property prices have fallen and the recession has considerably weakened the leading Japanese retailers and instigated deep changes in consumption patterns.

Over the next few years, Japan is set to become home to several dozen foreign-controlled grocery stores. 12 Carrefour hypermarkets are scheduled to open in Japan by 2003, while Costco plans to establish 20 to 30 outlets in the country by 2010. Tesco and Wal-Mart are said to have sent scouts to assess opportunities in Japan, and Metro has announced it will open in 2002.

Although a number of foreign retailers in the non-food sector have successfully penetrated the Japanese market, the grocery market is a tougher nut to crack. Many Japanese consumers still prefer the traditional shotengai (narrow shopping streets with specialty stores), which plays a significant role in local communities.

The Japanese distribution infrastructure is controlled by a network of wholesalers resulting in a complex price structure which makes it difficult to operate a discount retail business.

Perhaps the biggest hurdle faced by foreign entrants is the cumbersome distribution chain. Carrefour has at least 50 per cent of its product range sourced from 45 local wholesalers, and says that it intends to deal with this issue pragmatically rather than seeking confrontation. In the early stages of its development, the retailer needs assistance from wholesalers, since it will not open its own distribution centres until it has established 20 stores in the country. However, in the longer term, the presence of foreign food retailers in Japan is likely to speed up rationalisation in the supply chain, with wholesalers losing their grip on food distribution.

So far, Carrefour and Costco have committed themselves to organised growth in Japan, but it is doubtful whether this strategy is sustainable if they intend to capture a sizeable chunk of the market. Before opening its first store, Carrefour was reportedly in talks with Daiei about a joint-venture in the discount sector, while Wal-Mart is said to have visited all the top 5 Japanese retailers. Local chains have begun to open their minds to the idea of joint- ventures with foreign players, attracted by their buying power and merchandising experience.

ETAILING

E-commerce and other IT related shopping is in its infancy in Japan, with many Japanese very sceptical about e-commerce and its use. A recent survey of 3,000 people in Tokyo showed that 53 per cent blatantly refuse to consider e-commerce, while one third planned to do some online shopping. Only 7 per cent said that they had already purchased online. Interestingly enough, 64 per cent of those polled had no problem whatsoever with mail ordering and catalogue buying.

THE FUTURE

Some experts think that Japan could pull out of its slump if corporate management were to change from old-fashioned consensus and no-risk style to more aggressive management. Japan’s management style and lifetime employment are only sustainable when the economy is expanding steadily. Now that the country bankruptcy law has been relaxed, old management can be cast out and leaner companies could emerge.

Date article published: 13/03/2002

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