Time was, Japan had a well-deserved reputation as a black hole for foreign retailers. Its close-knit webs of suppliers, customers raised on high-cost department stores and mom-and-pop shops, and a Byzantine distribution system made Japan nearly impenetrable to outsiders. Three years ago, though, Wal-Mart Stores Inc. (WMT) bought a stake in struggling Seiyu Ltd. as relaxed restrictions on retailers and changing consumer attitudes appeared to create an opening for its big box stores.
Today it looks as if Japan may not have changed so much after all. Seiyu -- in which Wal-Mart owns a controlling 37% share -- on Feb. 15 reported a loss for 2004 of $117 million, more than triple its earlier projections. Revenues, meanwhile, slipped by 3.7%, to $9.8 billion. Worse, the decline seems to be accelerating: Sales tumbled by 5.7% in the second half, compared with a 3.5% drop in the first. Blaming the shortfall on unseasonable weather, stiff competition from rivals, and difficulties with new computer systems, Seiyu says it expects sales to fall a further 2% this year. "Clearly we're disappointed with the results," says Jeff McAllister, Wal-Mart Japan's chief operating officer. "We recognize that with the changes we've been through, we created some confusion for our associates and our customers." Profits, meanwhile, aren't likely before 2006, Seiyu says. Investors don't like the sound of that, and Seiyu's shares are off by 31% in the past 12 months.
Just as worrisome is that Seiyu remains far from offering the storewide, permanent discounts that have made Wal-Mart so dominant in the U.S. Seiyu says full implementation of Wal-Mart's Every Day Low Prices -- which everyone at the company refers to as "EDLP" -- is at least two years away because the company hasn't yet been able to cut costs enough to allow it to offer the deep discounts necessary to keep customers coming back. And Seiyu continues to use chirashi, newspaper inserts that are a staple of Japanese retail outlets. They offer a handful of weekly specials but otherwise keep prices relatively high. That's anathema to Wal-Mart and its EDLP mantra. The company says, though, that it will keep on using the flyers until customers no longer require wooing.
Some are wondering whether the Wal-Mart model will ever work in Japan. "The current situation suggests that [EDLP] is a very difficult target," says Masafumi Shoda, a retail analyst at Nomura Securities Co. (NMR) in Tokyo. One big problem is that Japanese customers don't seem as motivated by rock-bottom prices as Americans. U.S. shoppers generally believe Wal-Mart sells the same products as other stores but for 15% to 20% less. In Japan, shoppers associate low prices with low quality and are suspicious when a retailer offers jeans for $10. "In the Japanese consumer mind, they're seen as selling cheap stuff at cheap prices -- and that can be a problem," says David Marra, a principal at management consultancy A.T. Kearney Inc. in Tokyo.
It is also tough for Seiyu to take more costs out of its supply chain -- a key to Wal-Mart's success in the U.S. Seiyu stores combine the functions of a supermarket with those of a mid-level department store. One big issue for the supermarket side is that Japanese consumers buy more fresh produce than shoppers elsewhere. That makes lowering costs difficult since most farms and fisheries in Japan are small, family-run operations that frequently offer better deals on smaller orders rather than on larger ones. And what sells well in Hokkaido is often eschewed in Kyushu, so retailers have to do lots of local customization, which creates logistical headaches that can cut into profits.
To be fair, Wal-Mart isn't alone in its troubles. Even though convenience stores and specialty retailers are thriving, big-box outlets continue to flounder. Aeon Co., Japan's largest retailer, has struggled to make the leap to storewide low prices as well. To cut costs, Aeon has sunk more than $300 million into new computer systems in the past two years and has attempted to use its size to bypass middlemen. Yet Nomura reckons that Aeon's general retail arm, which accounts for 43% of group sales, will contribute only $228 million toward group operating profits in fiscal 2004, just 15% of the total. Its other businesses -- from credit cards to convenience stores -- are far more profitable.
UP FROM $10 JEANS
Aeon President Motoya Okada admits that changing to a Wal-Mart model is taking longer than expected. "We are two or three years behind in our plans," he says. "We have not yet caught up with our vision." Meanwhile, Carrefour, the world's second-largest retailer, is widely rumored to be looking for a buyer for its eight hypermarkets in Japan after failing to make an impact with Japanese shoppers. Carrefour declined to comment. Daiei, another icon of Japanese retailing, remains deeply troubled and is in the hands of Japan's state bad-debt agency.
Seiyu promises that better news is just around the corner. The company says it has cut costs by 6.1% by trimming payrolls, reducing distribution expenses, and scaling back advertising. And it has installed Wal-Mart's computer systems in more than half its 400 stores. The technology lets Seiyu see exactly what customers are buying and what remains on store shelves, helping managers track inventory better. "This is a real competitive advantage," McAllister says. "We'll take the systems and continue to roll them out to get a better insight into consumer spending habits."
To head off any concerns that its bargain prices mean low quality, Seiyu is adding more expensive wares. For example, it is supplementing its current range of $10 jeans with a $35 option for less price-conscious customers. Similarly, Seiyu stores is offering 100% cotton dress shirts for as much as $28 -- in addition to the cotton/polyester blends costing as little as $8 it has specialized in so far. Wal-Mart also plans to spruce up about 20 of Seiyu's stores, many of which look frumpy. Seiyu says a 4,800-square-meter outlet in the Tokyo suburb of Saitama saw customers increase by 35% after the layout was improved and product mix revamped in a renovation last year.
For Seiyu and its 36,000 workers, Wal-Mart may be the last, best hope. When Wal-Mart bought in, profits were plunging as the company reached too far beyond its core supermarket business. "Everyday Low Prices cannot be achieved overnight, but we have to meet the challenge," Seiyu President Masao Kiuchi told reporters on Feb. 15. "Otherwise, there will be no rebirth of Seiyu." For Wal-Mart, success in Japan is almost as important, since a solid foothold in the world's No. 2 retail market could someday be a key to future growth. But even McAllister won't say exactly when Seiyu will get to U.S.-style EDLP in Japan. Until it does, it will remain unclear whether Japanese retailing has really changed enough to make room for Wal-Mart.
By Ian Rowley in Tokyo