What? Everyday Bargains? This Can't Be Japan

Off a back street near Ikebukuro station in northwest Tokyo, you take a graffiti-covered elevator past several levels of bowling alleys and amusement arcades. At the fifth floor, the doors open onto a room crammed with gun-metal-gray shelves full of boxes of electronic goods, mostly personal computers and peripherals. In one corner are two men and a cash register. They'll sell you whatever you want at bargain prices, but that's all: no explanation, no free service, no testing. You're in one of 11 stores operated by Step Co., a fast-growing discounter.

The chain is a far cry from the bowing elevator ladies and courtly service of traditional Japanese department stores, but it's the new face of Japanese retailing. Bargain hunting is in. The discounters are shaking Japanese retailing to its foundations. As part of their drive to win market share, they are finding shortcuts through Japan's labyrinthine distribution system and taking the lead in pricing.

Such efforts seem to fit nicely with new Prime Minister Morihiro Hosokawa's plans to reduce Japan's trade surplus, reform the distribution system, and give consumers a taste of the benefits of the high yen. The upshot could be a bonanza for U.S. exporters of everything from cosmetics and computers to oranges and lumber. From 15% to 30% of what the discounters sell is imported--vs. less than 5% at department stores.

BEACHHEADS. Discounting's allure shows in the numbers. Sales by the 116 members of the Japan Department Stores Assn. have declined for 17 straight months. In contrast, Step expects its sales to swell 10% this year. Sales at Mr Max Corp., a discounter of household goods and appliances in the southern island of Kyushu, jumped 18% in the fiscal year ended last March, and a 15% increase is predicted for this year.

Discounting is invading retailing sector by sector, with strong beachheads already in clothing, furniture, and electronic goods. Not long ago, notes Paul Heaton, an analyst at Baring Securities (Japan) Ltd., retailers of electronics were each tied to a single manufacturer. But "new electronics retailers are prepared to sell anybody's equipment, if it's cheap enough," he says. And the high yen is only accelerating the trend, as other retailers opt for cheap imports. Japan's imports of men's suits rose 58% last year, for example, thanks to aggressive clothing discounters.

Of course, change isn't coming overnight. Many discounters say recent reforms to make it easier for retailers to set up large-scale stores have not gone far enough. "Things haven't changed much since the old days," says a purchasing manager at a furniture discounter in northern Japan. Official waiting periods for store expansions have been shortened, he says, but bureaucratic delays of a year or more are still common. Such waits, he says, are disrupting his company's plans to boost volume and raise imports from 20% of sales to nearly half.

One retailer that is going head-to-head with the bureaucrats is Jonan Denki, a discounter with $12 million in yearly sales. Toshio Miyaji, its president, recently started importing surplus cosmetics from the U.S. via Okinawa, where he pays no duties. As a result, Miyaji is able to sell such imported items as Chanel lipstick for around $24, compared with nearly $40 at department stores.

OLD SQUABBLES. But there's a catch: the Health & Welfare Ministry requires that all foreign-made cosmetics bear seals identifying the importer. Jonan is not licensed to apply the seals, and he has drawn warnings from the Ministry for selling goods without them. The feisty 65-year-old vows to go to court before he stops selling the cosmetics.

Discounters are also going to the mat with manufacturers. Kawachiya Shuhan Co., a high-volume liquor store that tried its hand at discounting domestic cosmetics, got into a battle with Shiseido Co. last month. In response to Kawachiya's price-cutting, the cosmetic maker stopped shipping to the company. Kawachiya has appealed to the Fair Trade Commission, which is conducting an investigation.

The squabbling is old stuff to Yoshio Terada, the president of Step. He started off in 1979 with a shop that sold a brand of consumer electronics called National, made by Matsushita Electric Industrial Co. But when he tried lopping an extra 10% off the price of batteries, Matsushita protested. When Terada tried to argue, Matsushita ripped down the National sign out front. But he has given up on trying to win support from the Fair Trade Commission: "Those officials are thinking of getting high-paying jobs in industry after they leave the government."

Terada, a frequent traveler to the U.S. and an admirer of Kmart Corp., has ambitious plans for expanding his discounting operations. But there are still a lot of barriers to be breached. He would like help in the form of more saber-rattling by Japan's trading partners. Only when U.S. Commodore Matthew Perry trained his cannon on Japan in 1853, he notes, did Japan end its seclusion. "Just point your cannon this way, and people will respond," he says. Japan, it seems, still has a long way to go before it becomes a shopper's paradise.

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