Can Wal-Mart Woo Japan?
Perched astride a busy highway interchange alongside Suruga Bay 100 kilometers southwest of Tokyo, the fishing port of Numazu has long been a gateway for tourists en route to Mt. Fuji and nearby hot springs. But lately, a large, boxy building on the edge of town has started drawing a different sort of visitor by the thousand. On Apr. 7, Wal-Mart Stores Inc. (WMT ) affiliate Seiyu Ltd. opened its first Japanese supercenter there, an 8,000-square-meter behemoth that the U.S. retailer hopes will be a model for stores across the archipelago.
Wal-Mart has big plans for Japan. Two years ago the U.S. giant bought a stake in Seiyu, a struggling local retailer, and today owns a controlling 38% interest. At the time it made its move, analysts scoffed that Wal-Mart's model was all wrong for Japan, where shoppers traditionally preferred convenience to knockdown prices and patronized multistory stores with good service in city centers. Moreover, Japan's close-knit network of suppliers and shop owners has given a hostile greeting to outside retailers.
But a decade of economic stagnation has changed Japanese consumer culture. Cut-rate outlets such as 100-yen shops have flourished, new zoning regulations make it easier to build big-box stores in suburban areas, and, like their U.S. counterparts, younger Japanese now spend more time shopping on weekends at malls or discount outlets rather than in small stores closer to home. With the economy finally bouncing back, Wal-Mart execs are convinced they can capture a big slice of Japan's $1.3 trillion retail market -- the world's second largest -- with their sprawling brand of discount shopping. "Japan's a challenging market, but it's also a very significant growth opportunity," says Greg Penner, CFO of Wal-Mart Japan.
So far the signs are promising. Seiyu says some 8,000 customers a day have passed the cash registers at the Numazu store on Saturdays and Sundays, well above forecasts of 5,000. And they've been spending an average of $30, compared with the predicted $24, as shoppers cruising the wide aisles have snapped up $10 skirts and jeans, $95 folding bikes, or any of 330 varieties of fresh seafood.
BACK IN THE BLACK. Even more is happening behind the scenes. Although the Numazu center is Seiyu's first megastore, the company has 404 outlets where Wal-Mart has been cutting fat, improving efficiency, and ferreting out new, cheaper suppliers to bring down costs. In the first quarter of 2004, expenditures fell by 3.6% compared with the same period last year, the result of improved operating efficiency. Furthermore, 1,600 of Seiyu's full-time employees, 25% of the total, were nudged into voluntary retirement in March, which will carve $46 million off the annual wage bill. By August next year, Seiyu will have installed Wal-Mart's supply-chain management network, called RetailLink, in all of its stores. The system can instantly transmit details of each purchase to a central database as a customer pays. That helps managers better track inventory and lets suppliers see what's selling -- something the old Seiyu couldn't do.
The cuts and new systems have helped Seiyu get back in the black. The company expects to eke out a profit of $4.6 million on sales of $10.2 billion this year, compared with losses of $754 million in 2002 and $67 million in 2003. "Looking at the first- quarter performance, we're right on target," says Seiyu Chairman Noriyuki Watanabe. Seiyu's Tokyo-traded shares have risen 60% in the past year.
Staying in the black may be a challenge, given mounting competition from other big-store retailers. France's Carrefour, after some initial missteps, now has eight stores in Japan. Britain's Tesco last year bought C Two-Network, a convenience retailer with 78 stores in the Tokyo area, which Tesco could use as a springboard for building a chain of bigger outlets. Local rival Aeon Group expects to have 100 Wal-Mart-style supercenters in suburban areas by the end of next year, up from four today. Beisia Group hopes to open 75 supercenters by the end of next year, while supermarket and convenience store operator Ito-Yokado is beefing up its computer systems. "The biggest threat to Wal-Mart in Japan will be from domestic competition," says Frank Badillo, chief economist at Retail Forward, a U.S. consulting firm. "Ito-Yokado and Aeon aren't just going to roll over."
Wal-Mart says there's plenty of room for everyone. CFO Penner notes that the top five food retailers, including Seiyu, control just 10% of Japan's market. In Britain the top five -- including Wal-Mart-owned Asda Group PLC -- eat up 70%, and in the U.S. the five leaders have 43%. "There are opportunities for new store growth in the next couple of years," he says. The alliance with Seiyu, he says, will help it win the competition by catering to local tastes. The food section in the Numazu store, for instance, is much larger than in Wal-Mart's U.S. stores, while sushi is prepared in full view of shoppers, rather than prepackaged as it is overseas. And Wal-Mart is likely to adapt its typical one-story layout to two floors because of the high cost of Japanese real estate.
Wal-Mart may have a bit more trouble with another pillar of its strategy, so-called everyday low prices. Japanese retailers typically lure customers into stores with deep discounts on selected items, which they advertise in weekly flyers called chirashi. By contrast, Wal-Mart relies less on specials, and instead promises consistently rock-bottom prices. In the U.S., Wal-Mart's information technology and huge buying power allow the company to undercut rivals by some 15% across the board. That's "the strike zone," says David Marra, a principal at management consultancy A.T. Kearney Inc. in Tokyo. Until Wal-Mart can better streamline its operations in Japan and push prices low enough, though, batting in that zone may be tough. Last year Seiyu dropped its chirashi for a few weeks because specials didn't fit the Wal-Mart model, but when sales started falling the fliers were quickly reintroduced.
In any event, Wal-Mart is taking its time in Japan. It waited two years before opening its first Seiyu supercenter, using the time to conduct focus groups and study retailers around the country. The next supercenter isn't slated until 2006, and the company won't discuss plans for more of them. Penner says the transition to everyday low prices won't happen until 2006. "We'll get the building blocks in place first -- the systems, the financials, and then the merchandising -- and then we'll move toward" the U.S. model, he says. Will Wal-Mart steamroll the opposition? Or will Japanese get their sashimi elsewhere? Keep an eye on Numazu.
By Ian Rowley in Numazu, Japan