Will Wal-Mart Conquer Japan?

So far, its Asian adventure has been less than excellent

On Mar. 14, when Wal-Mart Stores Inc. (WMT ) announced its first foray into Japan, the Bentonville (Ark.) retailing giant placed a big bet that it could succeed where countless other foreign companies have failed. In the past five years, a number of famous Western brands have been forced to close up shop after failing to catch on in Japan, one of the world's largest--but most fickle--consumer markets.

Can Wal-Mart make a go of it where others have stumbled? One good sign is that the mass marketer is not rushing in blindly. It has taken an initial 6.1% stake in ailing food-and-clothing chain Seiyu Ltd., which it can raise to a controlling 33.4% by yearend and to 66.7% by 2007. That gives Wal-Mart time to hone its strategy--or run for the exits.

Moreover, after some embarrassing setbacks in Hong Kong and Indonesia last decade, Wal-Mart is learning to adapt to local conditions. Says Richard Chavez, chief of Asian operations at major U.S. rival Costco Wholesale Corp. (COST ): "If anybody can figure out how to do retail in other parts of the world, it's them."

Indeed, Wal-Mart needs to get it right overseas because sales growth is flattening out at home. Wal-Mart's international sales grew 10.5% last year, to about $35.5 billion, or 16% of total sales. Operating profit from those sales surged 31%, to $1.46 billion. And the company expects international operations to contribute a third of its sales and profit growth in the next three to five years. Hence, Japan is crucial.

So far, however, much of Wal-Mart's overseas growth has come from Britain, Canada, and Mexico. Wal-Mart's Asia business is growing steadily, even if profits remain elusive. While Wal-Mart failed to gain traction in Hong Kong in the 1990s, it is making gains in China, where it now has 19 stores. The strategy is basic: appeal to local tastes -- which means selling such exotic fare as live frogs, turtle blood, and whole roasted suckling pigs. Still, shoppers in Shenzhen see a trip to the local Wal-Mart as a "one-day tour" of America. In Korea, where the company already has nine stores, Wal-Mart ran into unexpectedly robust competition from local retailers, but it hopes to break even next year. It aims to open five more stores in 2002. "We will expand at a steady pace in Korea," says a Wal-Mart official.

The question is whether Wal-Mart can apply the lessons it has learned in other parts of Asia to Japan. This, after all, is a nation of notoriously finicky consumers--who have become even more so since Japan slipped into a decade-long slump. How will Wal-Mart bring to bear its legendary cost-cutting savvy in a market already ravaged by falling prices? Analysts are understandably skeptical. "It is uncertain whether Wal-Mart's business models will be effective in Japan," Standard & Poor's said in a Mar. 18 report.

Much depends on whether Seiyu turns out to be a good partner. The 39-year-old retailer is a member of the swank Seibu Saison retail group that fell on hard times in the early '90s. It also has deep ties to trading house Sumitomo Corp., which will take a 15% stake in the venture with Wal-Mart. Perhaps the best thing that can be said of Seiyu's 400-odd stores is that they're not as deeply troubled as other local retailers. Seiyu is burdened by big debt, but the underlying business at Japan's fifth-largest supermarket chain remains profitable. Still, there's a gaping chasm between the two corporate cultures. "We've never been known for cheap everyday pricing," says a Seiyu spokesman. Another potential problem is Sumitomo, which may not want to lean on suppliers to the extent that Wal-Mart routinely does.

One thing that Wal-Mart has going for it is that Japanese retailing has had a cleansing shakeout. Moreover, under recent reforms, retailers are now allowed to open mega-stores and stay open around the clock--previously verboten. Besides, recession or not, Japanese consumers are still Asia's richest.

The clock is ticking. Wal-Mart executives say they need several months to "study" the deal with Seiyu before acting on it, but in the meantime a new wave of hypercompetitive Japanese and foreign rivals are carving up the market. If Wal-Mart succeeds, it will reduce its reliance on its home market even further and--who knows?--it may even revolutionize Japanese retailing in the same way it has in the U.S.

By Chester Dawson in Tokyo, with Alysha Webb in Shenzhen, Wendy Zellner in Dallas, and bureau reports

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