Japan's Answer to Wal-Mart?

Giant Aeon's stores lag in profitability, so the CEO aims to cut out middlemen, lift quality, and win shoppers

Like many of Japan's large retailers, Aeon, the biggest of them all, is struggling to find profitability in its core businesses. Indeed, Nomura Securities estimates that Aeon's general merchandising stores (GMS) will contribute just 15% of group profits, despite accounting for 43% of the company's projected $40.1 billion in sales in the fiscal year that ended Feb. 20.

Recognizing the need for action, Aeon CEO Motoya Okada believes mimicking Wal-Mart's (WMT ) "every-day low-price" model is the way to boost earnings in Japan. Sofar, though, despite investment in larger stores and info tech and concerted attempts to bypass wholesalers, moving to a Wal-Mart-type model is taking longer than planned (see BW, 2/28/05, "Japan Isn't Buying The Wal-Mart Idea").

Okada, the older brother of the leader of the Democratic Party of Japan, recently talked with BusinessWeek Correspondent Ian Rowley in Tokyo. Edited excerpts of their conversation follow:

Q: How do you view Aeon's recent performance?

A:

For the fiscal year ending on Feb. 20, the consolidated performance will be very good. But the performance of our general merchandise stores, where sales of apparel and home furnishings haven't done so well, isn't as strong. We're determined to reconstruct those businesses during our current three-year plan. In Japan, customers are not just willing to accept apparel based on low price, but they say that the merchandise sold in department stores is too expensive. We will emphasize our low price, but at the same time provide merchandise that has higher value.

Q: How close are you to the kind of every-day low-price model pioneered by Wal-Mart?

A:

Compared to other general merchandising stores, I think our dependency on flyers [advertising special offers] is very low. We no longer advertise many key products such as bottled water, processed foods, and packaged goods. Customers already recognize that these goods are being sold at low prices.

But for fresh food and perishables, it's very difficult to find economies of scale. One major reason is that producers are local people, often very small businesses, while fresh-food markets tend to be dominated by supermarkets local to each region.

Q: So what can you do to resolve this?

A:

Well, we will continue to enhance our supply chain and reduce costs, [so savings] can be passed back to our customers. We can also enhance our private brand.

Q: Are you making progress with suppliers?

A:

We have direct transactions with 46 manufacturers without having to go through wholesalers, but that has taken four years to achieve. Gradually, the situation is changing in Japan. We believe that we are the only GMS in Japan that can establish a global supply chain.

Q: Is it difficult to execute strategy in the Japanese retail market?

A:

In terms of seeing results, I think we're two or three years behind our plans. We've not caught up with our vision. This is because we aren't starting from scratch even though we're making something new. There's an old way of thinking that needs to be rectified. But we should start to improve in 2005, and by 2007 we will be back on track.

Q: Is Aeon threatened by the presence of Wal-Mart, which owns a stake in Seiyu, Japan's fourth-largest retailer?

A:

Currently they are not a threat, but they will undoubtedly become stronger, although this will be more tomorrow than today and more next week than this. We believe that Aeon in Japan can be like Wal-Mart in the U.S. But that doesn't mean we're going to become the American Wal-Mart.

Q: What are your overseas plans?

A:

Of course, we have to be No. 1 in Japan but, as China is the fastest-growing and largest market in the world, we want to increase our share there. China and elsewhere in Asia are both culturally close to Japan, and that is where we have the advantage, compared with global players like Wal-Mart or Tesco (TSCDY ) from the U.K.

Q: Are you confident that you can improve profitability in the future?

A:

There are several factors causing stagnation in the retail industry in Japan. One is the economy itself, and another was the abolition of law governing large-scale retailing, which enabled competition to intensify.

There's also globalization of the market and advent of new outside competitors. In terms of the economy, the great majority of Japanese people are not receiving any great increase in their income, so there is no way that consumption will increase. But unlike...the U.S. and U.K., it is not as if the top five companies dominate the market. It will take another 5 or 10 years for that to happen.

Edited by Patricia O'Connell

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