Commentary: Why Japan Shouldn't Throw This Giant a Lifeline

A Daiei collapse would affect some 104,000 employees. But bailing it out would do more harm than good

By Chester Dawson

Just before Japanese retailer Sogo Co. collapsed 18 months ago, officials in the ruling Liberal Democratic Party warned darkly that its fall would imperil suppliers, lenders, and thousands of jobs. But plans for a government bailout provoked an outcry, and bankers let it go bust. As it turned out, no big suppliers capsized. And visit the old site of Sogo's flagship department store in the tony Ginza district today, and you will find an electronics emporium in its place, run by discounter Bic Camera. Its eight floors are jammed with customers buying DVD players, mobile phones, and other gadgets sold by 250 full-time staff, about 70 more than Sogo employed.

Now another debt-burdened retailer, Daiei Inc., is on the brink. There is no more reason for the government to prop it up than there was for Sogo. But again, politicians are crying doom. Daiei, Japan's second-largest supermarket chain, is $19 billion in debt and talking with its top creditors, who may try to help by stretching out loans, cutting interest payments, and swapping debt for equity. Daiei spokeswoman Kumiko Takashi says a three-year restructuring plan is due by mid-February, but "nothing has been finalized yet."

If Daiei and its banks can strike a deal, fine. But what shouldn't happen is for the government to shower Daiei with tax breaks and new financing from state-owned lenders. This would be allowable under a 1999 corporate rehabilitation law. So far, 77 companies have received aid under the law. Economy, Trade & Industry Minister Takeo Hiranuma has already signaled his willingness to assist Daiei in order to "prevent a major crisis."

Dumb move. Signing off on a government bailout--especially before it's clear one is needed--sets a bad precedent. It relieves pressure on embattled companies to devise solutions on their own. Worse, it jeopardizes the deregulation of Japan's retailing industry, which has delivered low-priced goods to consumers. Bailing out big retailers sends the wrong signal to better-managed rivals about their chances of competing fairly.

So far, Daiei hasn't applied for official handouts. If it did, that would be no small irony, since the company backed a U.S.-led crusade to repeal restrictive retail laws. Clearly, Daiei is under pressure to prove it's a going concern. It is giving jittery suppliers notes with the phone numbers of its banks so they can confirm Daiei is still getting funding. True, a Daiei collapse would affect 104,000 employees, 10 times as many as Sogo. But if it cannot hammer out a deal with its lenders, what the company really needs is an orderly restructuring and debt workout along the lines of U.S. Chapter 11 bankruptcy proceedings, which Japanese law allows. "A company's size shouldn't matter more than its viability," says Takeshi Tanaka, CEO of Fuji Heavy Industries Ltd. "That era is over."

Rather than being a catastrophe, a Daiei bankruptcy probably would speed needed changes in Japan's retail sector. Prices are plunging as imports of everything from garments and vegetables to tatami mats flood in from low-cost producers in China and elsewhere. Once-loyal consumers are increasingly willing to shop at the cheapest outlets.

Other venerable chains are proving they can adapt. Ito-Yokado Co., Japan's biggest retailer, and No. 3 AEON Co. both now offer cut-rate prices. AEON President Motoya Okada has proven a whiz at using information technology for nimble global sourcing. Okada "was the first major Japanese retailing leader to understand that price destruction was a permanent condition," says Jerry Black, Asia managing director for Kurt Salmon Associates, an AEON adviser. In fact, the arrival of discounters has helped ritzier stores such as Mitsukoshi Ltd. and Takashimaya Co., which now focus on upscale customers. By contrast, Daiei has been slow to streamline global sourcing, stay fashionable, and improve inventory controls.

With a thorough restructuring, Daiei might survive. Last year, it eked out its first profit since 1998 after selling its stake in convenience store chain Lawson Inc. The new management team, headed by former trade official Jiro Amagai, expects Daiei to stay in the black. It needs to aggressively sell assets, shut dozens of unprofitable stores, and shed its crushing debt. If all of that can't cure Daiei's ills, then neither will government handouts.

Dawson covers Japanese business from Tokyo.

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