Guess Who's Selling Barbies In Japan Now?

Jumping out of his car in an empty parking lot 40 miles north of Tokyo, Larry R. Bouts stands back and admires the white, spanking-new building sprawling before him. "Can you believe this?" he exclaims. "Pretty amazing!"

White buildings and empty parking lots normally have little power to amaze. But Bouts is right to exult over this particular patch of real estate. Bouts, 42, is president of the international division of Toys 'R' Us Inc., and this is his first look at the company's inaugural store in Japan--and the very first large U. S.-owned discount store there.

SLOGGING. When Bouts's new Ibaraki Prefecture store opens on Dec. 20, it will culminate three years of heavy slogging through the swamps of Japanese bureaucracy, local vested interests, labyrinthine real estate practices, and heavy, often hostile, Japanese press coverage. And it will be the most visible payoff to date of the two-year-old, U. S.-inspired Structural Impediments Initiative aimed at prying open new markets for American companies in Japan. "We hope Toys 'R' Us will be the first in a long line of stores to locate in Japan," says Commerce Secretary Robert A. Mosbacher.

Small wonder Japanese toymakers and retailers are edgy. Toys 'R' Us Japan Ltd. hopes to be opening 10 stores per year from 1993 through the end of the decade. Each is expected to generate sales of at least $15 million its first year. That foretells minimum annual sales of $1.5 billion by the year 2000, roughly half of which would be from toys made outside Japan. Toys 'R' Us, with global revenue of $6.4 billion, can bring a lot of firepower to bear. The typical small Japanese toy store stocks between 1,000 and 2,000 different items, while Toys 'R' Us will start out with about 8,000 items, rising to 15,000 over time. If it can offer toys for 10% to 15% less than competitors, as it does elsewhere and as Bouts says is possible, Toys 'R' Us will have a huge impact on Japanese toy retailing. With more than $6 billion in annual sales, Japan is the world's No. 2 toy market after the U. S.

It was the size of that market that moved Toys 'R' Us to launch the effort in the first place. Anticipating the day when it would saturate its domestic market, America's largest toy retailer went international in 1984, first in Canada, then Europe, Hong Kong, and Singapore. Japan was always tempting, but the country's notorious Large-Store Law, aimed at protecting the country's politically powerful small shopkeepers, seemed an unbreachable barrier. Under the law, local communities and the Ministry of International Trade & Industry often managed to stall incursions by big retailers, such as Japanese supermarket operator Daiei Inc., for 10 years or more.

But by late 1988, recalls Toys 'R' Us Vice-Chairman Robert C. Nakasone, "there were rumblings MITI was thinking about a major change." Pressure was mounting from the U. S., big Japanese retailers, and consumers looking for the lower prices mass merchants could offer. Toys 'R' Us immediately began looking for a local partner to guide it through the ordeal it faced. In early 1989, Bouts's predecessor met Den Fujita, president of McDonald's Co. (Japan). "He was our kind of guy," says the U. S.-born Nakasone. "He was bicultural, and he had quickly grown a retail business in Japan. He really understood the impatience of a company like ours."

BIG MAC ABOARD. Fujita also liked what he saw. Since McDonald's serves a similar clientele--families with small kids--he figured it could profit from building restaurants on the same sites as Toys 'R' Us. And after 20 years of building McDonald's into Japan's largest fast-food operator, with $1.3 billion in sales, Fujita had acquired an encyclopedic knowledge of Japanese real estate. "If you name a city, I can see the post office, train station, everything," boasts Fujita, who estimates Japan has at least 100 sites suitable for a Toys 'R' Us. McDonald's Japan quickly agreed to take a 20% stake in Toys 'R' Us Japan.

In the spring of 1989, MITI unveiled its new retail industry "vision," which included eventual relaxation of the Large-Store Law. And the U. S. began proposing its Structural Impediments Initiative, aimed in part at cracking open Japanese markets. Nakasone, Bouts, and Fujita began lobbying their respective governments for help. Bouts and other Toys 'R' Us executives met directly with U. S. Trade Representative Carla A. Hills and her deputy, Linn Williams. Bouts says Hills's backing was critical. Back in Tokyo, Fujita made the rounds of his government contacts, many of them former classmates and fellow alumni of the University of Tokyo's elite law department.

By April, 1990, MITI had agreed to shorten the big-store application pro- cess to no more than 18 months. "That was a major, major breakthrough," says Nakasone. He and Bouts already had handshake agreements with various landlords. Within weeks, the company had submitted building applications for several locations.

COOL RECEPTION. But the work had just started. Since then, Toys 'R' Us has been slowly negotiating the local barriers still in place after the Large-Store Law's amendment. Take the fairly typical case of Sagamihara, a Tokyo suburb of 520,000. In May, 1990, Toys 'R' Us started talks on opening a store there. The welcome was hardly a warm one. "The site Toys 'R' Us had chosen didn't fit our plans for development," says Goro Kakishima, senior managing director of Sagamihara's Chamber of Commerce & Industry. "But we couldn't legally prevent it." So in July, conforming to MITI-prescribed procedures, Toys 'R' Us submitted applications to the ministry, Kanagawa Prefecture, Sagamihara City, and the Chamber of Commerce.

In August, Toys 'R' Us had to join in an "explanation meeting" at the local public hall. Next came presentations to Sagamihara's Commercial Activities Council, a MITI-inspired body of 18 consumers, merchants, professionals, and academics. After four meetings, the council gave the green light in June, 1991. Toys 'R' Us could open its store after Dec. 1. But like many other stores, it had to close every day by 8 p.m. and shutter itself 30 days a year. In addition, Toys 'R' Us had to consult with other bodies over possible traffic problems. By September, those consultations and construction delays forced a postponement of the Sagamihara opening until March, 1992. Determined to open one store this year, Toys 'R' Us turned to Ibaraki.

At Ibaraki, the store and 850-car parking lot are massive by Japanese standards. The colorful, English-language Toys 'R' Us signs jump out at passersby. Bouts says the store will get only minimal customization -- some Japanese- language signs inside and perhaps a section for items especially popular with Japanese. Although he's aiming for discounts of up to 15%, he's not making any promises. "You won't see deep discounts," he says. "Real estate and distribution costs are high here."

The early stores will feature a mix of roughly two-thirds Japanese toys and one-third imports, including Huffy bikes, Mattel's Barbie dolls, and Tonka trucks. But Bouts says imports' share will gradually rise to as much as half. Meanwhile, local opposition seems to have subsided. "An integrated store for children is a good thing," says Katsuyuki Fujii, whose small Toy's House Joy sits just a half-mile down the road from the first Toys 'R' Us store. "My wife can't wait to go shopping there for our kids." Fujii says he'll survive by finding a profitable niche--which he won't specify.

HUE AND CRY. Nobody at Toys 'R' Us is predicting clear sailing, though. Last year, for example, frightened toy shop owners in the city of Niigata generated international headlines by clamoring against the application of Toys 'R' Us to build a store there. They succeeded in delaying the opening until 1993.

Toys 'R' Us still faces obstacles in Japan. It's having a hard time winning low-cost, direct-supply contracts from local toymakers, who don't want to upset powerful wholesalers and longtime customers. Such arrangements are key to the ability of Toys 'R' Us to discount. Only one major Japanese toymaker, Nintendo Co., has publicly stated it will sell directly to Toys 'R' Us Japan. And small retailers such as Fujii say they expect lower prices from wholesalers, and possibly financial support, if the heat from Toys 'R' Us gets to be too much.

Despite their anxiety over Toys 'R' Us, Japanese retailers probably don't have to worry about an onslaught of giant U. S. retailers. True, smaller specialty stores such as Computerland and Brooks Brothers Inc. are already in Japan. But their operations are a far cry from those of a "superstore" operator intent on commanding a market. As analyst Richard Baum of researcher Sanford C. Bernstein Inc. puts it: "Only a handful of big retailers have the kind of format, supplier relationships, and expertise that let them succeed globally." So, the intricate Japanese system of retailing may, by and large, remain undisturbed by U. S. companies. That larger issue isn't the giant toy retailer's problem, though. Toys 'R' Us is just intent on expanding its tenuous foothold in the world's toughest retail market.

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