At a recent global retailing conference in London, delegates were told that Japan remains an ideal destination for retailers seeking to expand. But does Japan represent a market full of potential or a risky investment? Paul French argues the case for steering clear of Japan and turning to China instead.
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The plain and simple truth is that foreign retailers have not performed well in Japan and there is little prospect that the prolonged period of deflation and recession now afflicting the Japanese economy will make matters much better. Most retailers know this and have avoided Japan like the plague, preferring more developing markets in Asia where there is the possibility of attaining first mover advantage and carving out a niche in the emergent retail landscape, and where plenty of consumers feel receptive to new retailing concepts.
In fact, Japan has been a disaster for most foreign retailers that attempted to tackle it – one example being UK health and beauty chain Boots, which withdrew from Japan in 2001 after finding the venture too costly. Where exactly are the gaps in the Japanese retail landscape? The market can be divided into three key sectors:
Supermarkets
Japan’s major supermarkets have
extensive networks that cover the country.
To enter this market a foreign supermarket
chain would need to spend massively to compete
or enter a joint venture and become embroiled
in Japan’s archaic distribution system.
French retail giant Carrefour has succeeded
in China but lost in Hong Kong, a market
developed to the level of Japan. However,
Thailand and other more emerging markets
prove enticing prospects. Now Carrefour
can look to carve another niche in the discount
supermarket sector with its Dia discount
brand in China. In Japan, Carrefour opened
its first retail outlet in the city of Chiba
in December 2001. Initially, it adopted
a largely Western-style retail approach,
including selling vegetables by weight,
but this style proved less popular than
expected and a revamp was called for. Initial
plans for 13 stores by 2003 were scaled
back to seven and the chain currently has
five.
Meanwhile, US titan Wal-Mart has a 37.7% stake in Japanese supermarket group Seiyu but has yet to open a store in Japan. Wal-Mart must learn the Japanese market, tastes and sizing, as well as dealing with Japan’s layered distribution network which makes selling merchandise more expensive for retailers. One problem for both Wal-Mart and Carrefour is that Japanese consumers prefer fresh food, while Wal-Mart’s food is generally not as high quality as that in Japanese grocery stores. Wal-Mart will also have to compete in the non-food sector with the Japanese department stores where 96% is concession. In China Wal-Mart has expanded from being a major sourcer of Chinese made products to a retailer that has lasted seven years in China now and is gaining brand recognition as it spreads across the country’s major cities.
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By GlobalData
German
retailer Metro has managed to build a chain
in China that has been successful and is
now expanding to other Chinese cities –
this for a fraction of the price it would
have cost in Japan. Metro entered Japan
in late 2002 in a joint venture with Marubeni
Corp and plans ten more stores by 2007.
Metro has tried to crack Japan before –
but its joint venture partner Ito-Yokado
turned down its offer, saying it was concerned
that the German retailer’s business model
would not easily fit Japan’s retail culture
– no delivery service, membership only,
cash only.
Makro is another company enthusiastic about China and keen on more emerging markets than Japan. Makro has targeted China, having found success in Vietnam, where it has stores in Ho Chi Minh City and Hanoi. In both places the concept of bulk buy cash and carry for trade customers has been original and much welcomed. China, like Vietnam, is both communist and home to literally hundreds and thousands of small independent business run by individuals, collectives and families. All those restaurants, hole in the wall stores and kiosks have found a retailer which works well for them.
In corporate Japan, levels of private small-scale entrepreneurship have remained stubbornly low as people have little interest in investing money in small restaurants of shops amid the deepest recession the country has ever seen. Makro may have difficulty finding enough customers to justify the high costs of Japan. The retailer therefore appears to be avoiding Japan.
Convenience stores
Tokyo has 5,000 convenience stores,
Shanghai just over 2,000. Tokyo has just
under 12 million residents, with an ageing
population, while Shanghai has over 13 million
and an extremely youthful population. Japan
probably has too many c-stores and, while
a city like Shanghai now has hundreds too
(including Japanese chain Lawson), Beijing
has only a handful. The capital city of
China has very few 24-hour stores, while
Tokyo is packed with them. Chains such as
7-11 and FamilyMart are actively entering
Beijing, Guangzhou and other Chinese cities
where the market is dominated by small mom-and-pop
stores. In this market the c-store operators
are bringing an advanced retail concept
that is largely absent. Prime locations
are available, store set-up costs are greatly
reduced, the government is encouraging c-stores
and staff are cheap and plentiful. All this
is in stark contrast to Japan.
Indeed, one may ask why any foreign company would want to enter Japan’s c-store sector, since the five major c-store operators have suffered year-on-year drops in same-store sales in the year to February, hit by Japan’s prolonged economic slump. Furthermore, the average cost of opening a c-store in China is RMB800,000 (US$97,000), around 20% less than the average cost of opening a store in Hong Kong and far less than Japan. At the moment it is the Japanese c-store chains (7-11, FamilyMart, Lawson) that are setting up operations in China, with nobody looking at setting up in Japan.
Department stores
Undoubtedly some of the best department
stores are in Japan – worldwide names such
as Isetan and Mitsokoshi. However, they
are as entrenched as leading department
stores are the world over. Breaking into
the department store market in Japan would
be as tough as trying to do so in other
developed markets such as the UK or US,
where it would require a huge gamble and
a massive financial investment. It would
be possible to buy into a Japanese department
store chain but this has never proved popular.
Department store sales in Japan are falling
anyway, down 4.7% in May from a year earlier
according to the Japan Department Stores
Association.
China
provides a contrast yet again. The vast
majority of department stores are decrepit
old state run institutions with uninspiring
store displays, unmotivated staff, few customer
attractions and most are in need of refurbishment.
However, they do have strong brand names
and, despite the entry of Isetan and others
in Shanghai, most people still flock to
Shanghai No.1 or No.9 Department Store.
What Chinese department stores have is strong
links with the distribution system, prime
locations, large established premises and
a government keen to see them overhauled,
upgraded and kept in business. Joint ventures
and partnerships where foreign department
store operators bring their management and
operational expertise to combine with the
local store’s reputation and location are
a major opportunity.
Even if a foreign retailer managed to secure a Japanese department store partner, would it be a good idea? It’s not as if the sector is in great shape, with sales falling around 5% year-on-year, and it is worth remembering Yaohan’s bankruptcy and the current rush to merge among operators (Seibu and Sogo looked at this last year).
Difficulties with distribution
The problem with Japan is that
while it is possible to establish a retail
outlet, it is more difficult to circumvent
the entrenched dinosaur that is the distribution
system. Of course, 50 years of a state planned
socialist economy hasn’t exactly made China’s
distribution system a model of smoothness
and logistical ease but it can be circumvented.
Boots and other foreign retailers in Japan
soon found that whereas China’s distribution
system might be a little like so much else
in China – communist in outward appearance,
yet as capitalist as the day is long beneath
the surface – and open to flexibility, Japan’s
system was not to be tampered with by anyone.
Where Carrefour could bend the rules in China and the government mostly looked the other way, grateful for the extra jobs and taxes as well as managing to get a little extra out of Carrefour in the form of a cursory fine for breaking the rules, in Japan Boots got taken to the cleaners by its joint venture partner – a distributor with massive vested interests in maintaining the status quo.
Consumer flexibility
Additionally, the Japanese consumer
has a certain level of sophistication that
is way above China. To introduce a new brand,
retail fascia or product to this market
often requires shifting customer loyalties
and brand allegiances that have been in
place for decades. In China most products
still have the advantage of being new –
from foreign beer and wine, to snacks, yoghurts
and household chemicals. China’s urban consumers
are massive taste testers – they are always
looking for new products and are often still
impressed (albeit only temporarily in many
cases) with foreign brands. For instance,
a mere three years ago the vast majority
of urban Chinese would turn their noses
up at the offer of a cup of coffee but now
firms like Nescafé have become a staple
of the retail chain. Another example is
the phenomenal success of Starbucks in China,
where even in cities like Shanghai, where
incomes are relatively higher than the rest
of the country, US$3 for a cup of coffee
is still a significant expenditure.
This consumer flexibility, or malleability if the power of advertising is to be believed in, means that retailers that would find themselves fighting an uphill battle in Japan have found receptive audiences in China. Consider the DIY retailers in China – B&Q, OBI and even Japan’s Komeri. DIY has taken off to a flying start in China thanks to rising income and the government’s policy of selling off state-owned housing stock, as well as a great deal of new construction of residential areas across the country. China has been blessed with low interest rates and a high rate of personal saving that has allowed for widespread and massive property purchasing.
New
properties in China are usually bought as
a ‘shell’ without even a light switch or
a curtain rail. New Chinese homeowners decorate
from scratch and few have significant amounts
of furniture and fixtures to take with them
from their old cramped state apartments.
Home decoration and furnishings magazines
are new to China too and indicate that most
Chinese people are just looking for inspiration.
With labour costs low it is easily possible
for the average Chinese family to decorate
their house, and B&Q, OBI and others
have stepped into the market with superstores
on cheap out-of-town land that feature everything
from taps to sofas in suggested room formats.
The Chinese have flocked to these stores.
Made in China
Regarding land costs and overheads,
China remains cheap compared to Japan –
prices are rising in China and falling in
Japan but the gap is still massive. Long-term
residents of Tokyo, like those in Hong Kong
these days, may talk of their city being
cheaper than ever before but it is still
among the most expensive in the world.
China also has one big advantage over Japan
– what most retailers sell globally is made
in China. Pioneering Japanese retailers
such as Fast Retailing with their UNIQLO
brand casual wear outlets were among the
smartest and realised that manufacturing
in Japan was just not cost effective anymore.
Retailers the world over have made this
simple financial calculation – from Marks
& Spencer to Wedgewood – and shifted
production to China. When you are sourcing
increasing amounts of your stock from China
it makes all the more sense to open stores
there too, reducing your China margins even
further (the Chinese encourage this through
favourable retail licensing deals for companies
that source and manufacture in China). This
situation was a key factor in deciding to
expand in China, rather than increasingly
deindustrialised Japan, for many retailers
including Carrefour, Wal-Mart, B&Q and
Parkson as well as more specialist retailers
such as the clothing chains Giordano and
others.
Despite all this, Japan is not totally without potential. The country has economic problems and these have translated into weak consumer sentiment. If there is a silver lining to all this it is that the sector may be changing. UNIQLO’s overseas sourcing strategies and the 1,000Yen stores show that the domestic retail sector is not completely inflexible. However, all the evidence suggests that investing in Japan’s retail sector is a risky business – not least when compared to other more emerging countries where there is a real chance of carving out a niche, a brand, and a new loyal customer base.
A risky business
Furthermore, China is not perfect
by any means. It remains an incredibly difficult
market to crack. A distribution system still
too often based on state control and political
patronage, a complicated registration system,
poor staff training and other problems still
beset the industry. However, things are
improving – the number of sectors open to
retailers is growing since China’s accession
to the WTO in 2001 – the book retailing
and distribution sector recently became
the latest to be partially liberalised.
For global retailers looking for expansion opportunities the options appear pretty clear. China offers a newly liberalised market with great potential and still relatively low costs for land, rent, labour and utilities while Japan remains excruciatingly expensive and antiquated. China offers an eager consumer population keen to try new retail formats and products while Japan offers a traditional retail sector dominated by large entrenched local interests. China has a consumer market with growing incomes and still low daily overheads and a fast emerging middle class eager to catch up with their counterparts in Asia and the rest of the world. Japan has an embattled population reeling under growing unemployment, falling levels of real wages and an uncertain future. To claim that now is the time to commit a massive budget to expansion in Japan seems foolhardy at best and reckless at worst. It seems that China will be the focus of attention for some time yet.
Paul French is the Shanghai-based Publishing
& Marketing Director of research publisher
and business information supplier Access
Asia. He is co-author of the book ‘One Billion
Shoppers – Accessing Asia’s Consuming Passions
After the Meltdown’ (Nicholas Brealey Publishing,
1998, London). You can contact the author
at paul@accessasia.co.uk.
Click here
to view Access Asia’s research reports.
Paul French was responding to an article written about a speech made by Professor Roy Larke on the attractions of retailing in Japan. Members can view that article by clicking here.
