European companies take a nibble at food retail in Japan
It comes as little surprise that for decades, foreign supermarket chains shunned the opportunity to set up shop in Japan. They faced a formidable list of obstacles, not least a close-knit, labyrinthine network of suppliers and distributors, and notoriously picky consumers.
Many of those obstacles remain in place. While Japanese consumers have long had a penchant for foreign luxury brands, they cling to the belief that cheap unfamiliar groceries from abroad are synonymous with poor quality.
The challenges facing big-name retailers from the US and Europe have been magnified by consistent falls in supermarket sales, stagnant consumer spending and the return of deflation, all of which have made Japan’s consumers even more cautious.
Yet, foreign supermarkets have cause for optimism. Far from giving up on Japan, retailers such as Tesco, Wal-Mart, Costco and German wholesaler Metro Cash & Carry are expanding their presence and battling Japanese rivals for a stake in the world’s second-biggest consumer-spending market.
They have the advantage of being able to learn from the mistakes made by the French supermarket giant Carrefour, which beat a retreat from Japan in 2005 with accumulated losses of $264 million.
Carrefour did not seek leverage via a Japanese partner and soon fell foul of wholesalers when it attempted to source products directly from manufacturers.
“It was a bold attempt that eventually created tension and conflicts with wholesalers,” recalled Laurent Levan, a Carrefour executive at the time who is now a group director with the Singaporean supermarket chain NTUC FairPrice. “Carrefour lost the battle and its credibility, and the suppliers never really forgave it for trying to bypass them.”
Carrefour’s hypermarkets were the targets of a litany of complaints from Japanese shoppers: they were too big, their shelves too high, their aisles too wide and their trolleys cumbersome.
“The right thing to do is to take over a domestic retailer, as Wal-Mart and Tesco did,” said Levan. “We failed to appreciate the uniqueness of the Japanese market compared with other Asian countries in which we had a presence.”
Tesco, Britain’s largest retailer, has trod a much more cautious path. It bought its first 80 Japan stores in 2003 after acquiring C Two-Network, an operator of smaller supermarkets in the Tokyo area under the Tsurukame brand.
Four years later, Tesco – whose own-brand produce and signage had been largely absent from the Tsurukame stores – came out of its shell with the opening of its first Tesco Express in Tokyo’s Oizumi Gakuen neighbourhood.
Tesco has since dotted the capital with more Express stores, each about 300 square metres in size. It has offered more own-brand items and opened two large supermarkets in Kanagawa and Chiba prefectures, bringing its total outlets to 128, according to the company’s website. Tesco Japan was unavailable to comment for this article.
Local competitors are surely watching carefully for Tesco’s next move. “Japanese supermarkets were happy as long as Tesco stuck to the smaller stores, but big Tesco supermarkets are definitely now seen as a threat,” said Roy Larke, professor of international marketing and Japanese business at Rikkyo University.
Tesco’s tactic of sandwiching its own-brand products between pricier and cheaper private brands is proving a clever piece of retail psychology, he added. “The fact that Tesco is still here means it is not unhappy with Japan,” said Larke. “Having said that, firms like Tesco and Wal-Mart don’t yet have the scale to really make Japan work. The question is whether they can build that scale through acquisitions of companies that already have large premises and supply chains.”
Wal-Mart, the world’s biggest retailer, has used its impressive buying power and global network to take on Japan’s inefficient supply chain and expand its presence in a notoriously fragmented market.
Wal-Mart took a stake in struggling Seiyu in 2002, later increasing its interest to make the Japanese partner a wholly owned subsidiary. It revamped Seiyu’s distribution system, closed unprofitable outlets, trimmed the workforce, and implemented other cost-cutting measures. Wal-Mart used its contacts with global suppliers to drive its Every Day Low Prices strategy, and now runs 371 retail units in Japan.
Although Wal-Mart Japan suffered seven straight years of losses, now it is poised to return to the black.
“Since Seiyu became Wal-Mart’s wholly owned subsidiary in 2007, we have been saying that will accelerate the reforms at Seiyu and position it for profitable growth,” said Kumie Wama, a spokesperson for Wal-Mart Japan. “This year we are ready to take the next step in our expansion.”
While foreign retailers have learned the hard way about Japan’s structural impediments, that still leaves the tricky question of whether consumers are warming to cheaper products from overseas.
“We think that Japanese consumers are more price sensitive than before, but they will not sacrifice quality,” said Wama.
In any case, said Larke of Rikkyo University, the near-stasis in incomes during Japan’s two decades of economic turmoil has not yet been reflected in dramatically lower food prices.
“The reduction in food prices over that time hasn’t been that great,” he said. “Food should be cheaper than it is, so if you are a low-price retailer with good stores, cheap products of a high quality, and reasonable branding and supply, then now should be a great time to be in Japan.”