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A Bargain Basement Called Japan


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A BARGAIN BASEMENT CALLED JAPAN

Shiro Kajikawa sounds a bit like a kid in a candy store. Second-in-command at Domy Co., a discounter based in Nagoya with sales of $270 million, Kajikawa has just returned from an eight-day buying spree in California, where he dropped in at the stores of Oakland-based Safeway Inc. Domy already imports Safeway cola, jam, canned corn, and fruit cocktail, and Kajikawa has come back from this trip with such new candidates as lemon-lime soda, cookies, and bottled water. "Everything is cheap in America," he marvels. With Safeway's cola selling in Japan for only 47 cents a can, Domy can undercut the price of local beverages by 55%.

Bargain days are coming to Japan. The flow of inexpensive foreign products is growing, as maverick discounters such as Domy drive a wedge into the traditional maker-distributor cabals. They're slashing costs and prices by using U.S.-style distribution shortcuts, including warehouse outlets. And with more retailers buying overseas, consumers are finally getting a taste of the merits of a strong yen. Consumer spending is expected to jump 1.9% this year, and economists see light at the end of the tunnel for Japan's economy.

The consumer revival is also good news for the U.S. and Japan's other trading partners. For once, Japan may be able to keep its recovery rolling without cranking out even more exports. Indeed, Salomon Brothers Asia Ltd. sees Japan's trade surplus shrinking this year by 7% in volume terms. For President Clinton, that might make it easier to sell Washington's less confrontational Japan policy.

MOVING METAL. Once on the fringes of Japanese distribution, this breed of retailer short-circuits traditional channels in myriad ways. Keiyu Co., a Yokohama used-car dealer, takes unsold autos off the hands of makers' captive retailers, marks them down, and moves the metal. "In the middle of a recession, their revenues are growing by double digits," says Thomas Norton, president of Thomas Norton Associates Inc., a specialist in over-the-counter Japanese stocks.

Deregulation is helping the trend along. Japan's retailing law was relaxed in May to permit new outlets as large as 1,000 square meters without prior permission. Limits on store hours and business days per year were also lifted, allowing such retailers as Toys `R' Us Inc. to stay open more. The result, says Paul Heaton, analyst at Baring Securities (Japan) Ltd., is that more retailers are seeking the wide-open spaces of the suburbs. "Strip malls are coming out all over the place," he says. In Niigata Prefecture on Japan's northwest coast, for example, ArcLand Sakamoto plans two 14,000-square-meter "membership warehouses." The huge stores will sell everything from curtains to chopsticks to soup ladles off the shelves and still in the boxes. The company thinks it can move nearly $50 million in goods a year out of each store.

Meanwhile, traditional retailers are taking heat from Japanese officialdom. Planners at the Ministry of International Trade & Industry see the inefficient distribution system as a drag on the economy. Moreover, Yoshio Terasawa, head of the Economic Planning Agency, said last month that his agency might launch an investigation to find out why some consumer prices aren't dropping in step with wholesale prices. Wholesale prices have been falling 2% to 3%, but consumer prices are up at an annual rate of about 1% over the past six months.

A strong yen, up 8% since Jan. 1, is also making importers out of more and more retailers. Nihon Jumbo Co., a discount film processor, undercuts rivals in part by importing cheaper materials from German giant Agfa-Gevaert. Nissen Co., a Kyoto mail-order house, hopes that expanding imports will help it sell $1.3 billion worth of kitchen utensils and clothing this year, 15% more than last year. Since China is the source of much of its stock, the company opened a purchasing office in Shanghai in March. Warburg Asset Management Japan Ltd. likes Nissen's strategy so much that it has bought 3.8% of the company. "Traditional retailing methods are breaking down," says Warburg President Clifford Shaw.

Consumer durables are fair game for the discounters. Japan's largest chain-store operator, Daiei Inc., may soon contract with a South Korean electronics maker to buy TVs and sell them under its own brand name. The sets are likely to sell for $290 apiece--30% less than the cheapest available now.

Retailers are importing foreign expertise, too. Ito-Yokado Co., parent of 7-Eleven Stores Japan, has linked up with Philip Morris Cos. to develop bargain items such as beer, cheese, coffee, and pet food. Since May 18, Ito-Yokado has been selling a cut-rate cola, which it developed with Cott Beverages USA Inc. of Columbus, Ga.

Fresh capital could give retailers a lift. They are already the darlings of the Tokyo stock market. Over the past month, 4 of the 15 initial public offerings on the over-the-counter market have been retailers.

With all the price-cutting, manufacturers are seeing their margins squeezed, but the impact on profits isn't as bad as might be expected. After two years of restructuring, Japanese companies are more efficient. Lower costs mean that even a modest rebound in sales will translate this year into a rise in profits of 20% to 40%. So the discounting revolution is good news for the economy as a whole.

"MORE CANNY." Consumers should get an additional boost this month. As part of former Prime Minister Morihiro Hosokawa's $58 billion fiscal stimulus package, they'll receive a $13 billion rebate on income-tax withholding over the entire first half. Some companies are sweetening the deal: Citizen Watch Co. brought summer bonus payments ahead five days to beat the first-half rebate deadline, doubling the average windfall per employee to $380. Others, including Matsushita Electric Industrial Co., have followed suit.

After three years of belt-tightening, though, Japanese consumers want more than tax cuts. They're demanding lower prices. "The bursting of the bubble economy has made consumers more hesitant, more canny," says Masahiro Morizumi, who follows consumer trends at advertising giant Dentsu Inc. And brand loyalty is fading among younger Japanese, just as their elders are turning into bargain-hunters.

As a result, Japan's new retailers seem to be doing nearly everyone a favor. They're stimulating demand, helping trim Japan's surplus, and knocking down barriers in the retailing network. So the bargainmeisters can be forgiven for talking like visionaries. Kajikawa brags that Domy has been sending scouts to the U.S. for 20 years. "We want to see what's happening in U.S. retailing because we think Japan is going the same way," he says. If he's right, Japan's retailing revolution is here to stay.

A MIXTURE

OF ECONOMIC TRENDS...

-- The 8% drop of the dollar against the yen since Jan. 1 cuts prices of imports, ranging from Safeway jams to Compaq computers

-- Retail giants offer more low-price house brands of everything from TVs to soft drinks

-- Innovative small companies avoid traditional supply and distribution channels to sell such items as eyeglass frames and photo film at cut-rate prices

-- Foreign retailers such as Toys `R' Us spark mass-merchandising practices

DATA: BUSINESS WEEK...BRINGS BETTER BUYS

FOR JAPANESE CONSUMERS

May 1994 Price drop

average price from year ago

Item Dollars Percent

AIR CONDITIONERS $1,506 17%

WOMEN'S SWEATERS 68 15

VIDEOCASSETTE RECORDERS 508 13

WORD PROCESSORS 1,350 9

VIDEO CAMERAS 1,506 9

WHISKEY* 28 8

GOLF CLUBS* 1,354 7

*Imported DATA: JAPAN MANAGEMENT & COORDINATION AGENCY

Larry Holyoke in Tokyo, with William Glasgall in New York


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