Costco: Still Finding Its Way in Japan

After four years, Richard Chavez, head of the bulk-retailer's Asia operations, says we expected to have a difficult time

Spiraling deflation, shrinking consumer spending, and white-hot competition. That's the state of play in the Japanese retail market. So why would any U.S. company want in?

For one thing, with $1 trillion up for grabs, Japan's retail market is the second-largest in the world, after the U.S. For another, deregulation has finally leveled the playing field for foreign companies and domestic rivals. Then there's the finicky Japanese consumer. If a company can succeed in this market, it's virtually guaranteed success anywhere else.

Those are the challenges and rewards facing such companies as Wal-Mart (WMT ), which announced on Mar. 14 its intention to enter the Japanese market, as well as its competitor Costco Wholesale (COST ), which marks its fourth anniversary in Japan next month (see BW, 4/01/02, "Will Wal-Mart Conquer Japan?"). Richard Chavez, who is in charge of Asia operations for bulk-sales specialist Costco, recently spoke with BusinessWeek Tokyo Correspondent Chester Dawson about his company's experience and future plans in the Japanese market. Edited excerpts of their conversation follow:

Q: When will Costco's money-losing outlets in Japan turn the corner?


We expected to have a difficult time, and we have. We don't plan to break even for a while. It's asking too much for a two-store chain to talk about profitability. When we have grown to five, six, or seven stores here, then we can leverage the scale to our advantage [and start to make money]. We can be there in about two more years. Japan is the second-largest retail market in the world. And we're still growing.

Real estate prices have come down since we first started looking four years ago. We're finding a number of sites that are cheaper than in South Korea. We plan to open up a new store in Tama [outside Tokyo] in September and another between Kobe and Osaka in the spring of next year.

Q: What lessons did Costco learn from its earlier ventures in Asia, starting in the late 1990s with three outlets in Taiwan and five stores in South Korea?


First, we learned: Don't think of Asia as [one big market]. Think of it as separate markets. [That said,] a lot of our startup experiences in Taiwan and South Korea were similar to Japan: things like real estate negotiations, supplier relations. We also found Japanese and Korean commercial and labor laws to be very similar.

Q: What are the biggest challenges faced by foreign retailers in Japan?


Operating costs are high in Japan -- things like utilities, service, and maintenance expenses -- so we need to have higher sales per store. To be as profitable as a typical U.S. store, we need to have higher sales volumes -- by 20% or more.

[Also,] if you're going to be successful here, you need to do Japanese food items well. But that's the area where we're still learning. People will buy in bulk, but not in as large volumes as in the U.S. So we've been experimenting with smaller multipacks. [For instance,] the same amount of seaweed is being sold as before, but it's now broken down into more packages per unit. That avoids freshness issues. Sales of those [newly repacked] items are up 40% to 80% compared to previous sales [of bulkier sale items].

Q: How has Costco gotten around uncooperative suppliers and powerful middlemen?


We are buying directly from manufacturers for most of our supplies -- about 86% of the 4,000 items we sell. There are still some top suppliers that won't deal directly with us [out of respect for long-term ties to wholesalers and other middlemen]. We just don't sell their product. We go to the second- or third-largest supplier instead. We will do what we need to do to sell at a discount.

Q: Any surprise hits with prickly and recession-weary Japanese consumers?


The U.S. imports have done very well, and we weren't sure that would be the case initially. It's well over one-third of our business here, and there's continued demand for even more. Our top-selling U.S. items are nonfood: clothing, sporting goods like basketball hoops, jewelry, and housewares, like mops. I was really surprised by the strength of these products, so I've been running around trying to get more stuff in.

Q: Is Costco ready to do battle with Wal-Mart in Japan and local rivals such as Aeon [a major Japanese retail group]?


We compete with Wal-Mart all over the world. [They have a go-slow approach to Japan for now, but] everything is changeable. That could accelerate once Wal-Mart is comfortable here. Wal-Mart is pretty smart. If anybody can figure out how to do retail in other parts of the world, it's them. The Aeon group is also very forward thinking. They have a very smart and young management team. They're the ones to watch in Japan.

Edited by Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal. LEARN MORE