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Chic is out, cheap is in

Far Eastern Economic Review 11/23/09
by Hiroshi Makioka

Japan's economy once again is growing, albeit slowly, but the road back from the nation's longest
recession since World War II is rocky. With the job market still unsettled and the Yen dropping in
value, wary consumers are not returning to their old shopping habits. A different breed of Japanese
consumer has emerged in the wake of the global financial meltdown and may be here to stay. Once
known for their mass consumption of luxury goods, they now are getting a reputation as avid discount
shoppers. As traditional department store revenues plunge, discount retailers are enjoying a surge in
popularity. Take Wal-Mart. For the first time since it entered Japan seven years ago through its Seiyu
subsidiary, the world's largest retailer expects to generate a profit in Japan in 2009.
This conversion of shoppers from chic to cheap signals a new reality for Japan's retailers and
consumer products makers. The recession accelerated shifts in shopping habits that have been gaining
momentum throughout almost two decades of economic slowdowns and stagnation. In addition to
becoming more budget conscious, Japanese shoppers have become less loyal-willing to change where
and how they shop, all in a search of better values. And even young consumers are becoming savers.
They're shopping at less-glitzy neighborhood stores and secondhand shops. Meanwhile, cash-
strapped shoppers of all ages are entertaining themselves more at home and making more online
purchases. Online sales grew 22% in 2008.
As Japan's consumers evolve, so must the companies that serve them. The trouble is traditional
business models aren't able to keep pace. Our research and work with clients shows that retailers and
consumer products companies that succeed are those that fully integrate their management structure,
processes and culture with the aim of addressing fast-changing consumer needs. They invest to
generate the intelligence that helps them understand how customers are-and are not-changing. They
create nimble organizations capable of quickly responding to those changes with new or reformulated
products-or ways of better serving customers.
What's striking in Japan is that many of the winners are middle to smaller businesses. Their ability to
emerge from the recession in even stronger shape provides important lessons for larger companies
about how to adapt to consumers who are breaking with tradition. While it may seem difficult for
large, established firms to mimic their success, the truth is that these are things that companies of all
sizes should be doing.
Consider the innovative concept introduced by eyeglass maker Megane Top when it realized that
customers' fast-paced lives gave them less and less tolerance for waiting. The company revised its
business model and supply chain and introduced Japan to 25-minute eyeglasses. Previously, it took
one week to deliver glasses. The concept boosted sales from 34 billion yen [$377 million] in 2006 to
46 billion yen [$511 million] by 2008. And when casual wear maker Uniqlo saw department store sales
plunging with successive downturns, it opened shops in railroad stations with product lines geared
towards travelers. These midsize shops now sell four times more merchandise than the company's
larger stores.
Companies also must adapt to another major shift. The Japanese consumer is getting older, with
changing needs and interests. The nation's most influential consumers are families whose heads of
households are over 50 years old. The segment has continued to grow in recent years and now
accounts for 80% of consumers' financial assets and income.
We found other new trends that are altering shopper's buying habits. For all their thriftiness, Japanese
shoppers are becoming more individualistic. They told us they are willing to make a purchase that
once might have been viewed as indulgent if it will promote their lifestyle or improve their self image.
And, while they are more price conscious, the lowest price isn't always the deciding factor. Over 62%
of consumers surveyed by Nomura Research in 2006 said they primarily consider "value for the
money" compared to 52% in 2000.
Winning consumer product companies and retailers are able to use these changes in consumer
behavior as a springboard for their business. They succeed by organically integrating five major
business skills that give them a competitive edge.
Top management at winning companies has an unrelenting focus on customers changing needs. They
look for every opportunity to track consumer shifts, relying on sophisticated data gathering systems to
analyze customer buying trends. But the difference sometimes boils down to this: some senior
executives do not rely solely on computer-generated reports. Often, they spend time in the field
themselves. At specialty shoe retailer ABC-Mart, President and Director Minoru Noguchi and his staff
visit and work in stores on weekends to learn first-hand what customers want. That's how the
company first struck upon the idea of boosting profits by selling private-label brands. For its part,
cosmetics' maker and health food company Dr. Ci:Labo has tapped into a wealth of new concepts by
inviting customers to register their ideas for new products on its community web site. A few of them
now are successful products such as scented moisturizers Rose Charge and Karada Mint, delivering
substantial sales.
Market leaders know how to redefine a product's quality, cost and price to better meet consumer
needs. ABC-Mart has earned a reputation for purchasing low-priced foreign product lines and then
repositioning them as a major private-label brand through well-targeted product development and
promotion. Hawkins is a prime example. Former CEO Masahiro Miki spotted the brand's potential
during a trip to London. It ultimately won the trademark to manufacture the Hawkins brand as its own
private label. It targets younger women and now generates 20% of ABC's sales. In September, same-
store sales rose 6.3% from a year ago. In addition to becoming a sales engine, the Hawkins
experience has given ABC-Mart knowledge about shoe production costs that has helped the company
negotiate better deals with other shoe manufacturers.
Leaders also look outside their own companies for partners that can help them develop products that
provide added value for consumers. In 2006, Uniqlo teamed with yarn maker Toray's engineers to
create high-tech thermal underwear that's promoted as quick drying, warm and preserves skin
suppleness. The product has become a perennial winner each winter for Uniqlo. Sometimes,
innovation can be as simple as changing a product's image. Kobayashi Pharmaceutical boosted sales
of its "Nicitol 85" by turning the women's diet product into a diet medicine for men with metabolic
As they innovate products, winning companies also work to foster stronger ties with customers. One
way is by finding more occasions to interact with them. Dr. Ci:Labo uses its call centers to provide
what the cosmetics maker calls "counseling order-taking." Staffed from 9 a.m. to 9 p.m. year around,
the 120 female operators are encouraged to spend time talking with customers as they place orders,
counseling them about the best products to buy and, at the same time, gaining insights into what the
largely female clientele wants.
Another way companies are building customer loyalty: adding full-time employees in high-sales areas
so that customers receive more personalized attention. Ozeki found it improved customer service in its
supermarkets by doubling the number of sales staff on the floor compared to competitors. Other
retailers build customer communities and promote memorable experiences. The goal is to encourage
customers to return, again and again. Village Vanguard bookstores achieves this by creating playful
environments, with its trademark humorous point-of-sale displays. DiskUNION develops its stores
around music genres and uses employees with music skills to foster communities.
To gain a competitive edge, winners also are expert cost cutters, often while improving performance.
They trim operating costs by moving manufacturing sites to less expensive countries. And they reduce
total costs through operational improvements. Ozeki has increased the efficiency of its inventory
management by purchasing smaller quantities and better understanding what customers want so
inventory isn't left on the shelf.
Kobayashi is able to save on costs and speed ideas to market by streamlining the product innovation
process. The company implemented a program by which R&D and product development occur
simultaneously, minimizing yield loss and cutting the time required to get new products to market. For
example, its popular nighttime facemask product was launched just 13 months after its conception.
Within six months, it was generating sales at an annual rate of $10 million.
In addition to honing operations, leading consumer products makers and retailers take full advantage
of each employee's potential. In doing so they build a winning culture that can help them consistently
outperform the competition. Culture motivates employees to do the right thing, not just the easy
thing, and always with customers in mind. The importance of culture was validated by a Bain &
Company worldwide survey of 1,430 top executives conducted as the global downturn intensified in
January 2009. Among the respondents, 88 percent said culture is as important as strategy for
business success. Yet our research indicates that fewer than 10 percent of companies succeed in
building vibrant, distinctive cultures.

Ozeki's management team motivates its workforce by spending 20% of its time working alongside
employees in the supermarkets and using the occasion to provide coaching. Kobayashi maintains a
decentralized management structure that values continuous employee feedback. And ABC-Mart
deploys a point-of-sale system that shows employees their sales ranking in real time, encouraging
internal competition. Other companies empower workers by urging them to take risks. For example,
workers at Village Vanguard bookstores individualize displays based on their own beliefs about what
will please their customers.
As Japan's economy rebounds, the winners will be those companies that can integrate these five skills.
Success depends on their ability to innovate the way their organizations work, a skill that's not
common in Japan. Most important, top management must do more than simply set the vision and
tone for an unrelenting focus on changing customers-they must take the lead, staying personally
involved to champion the effort. Because Japan's consumers are breaking with tradition, companies
serving them must do the same.
Hiroshi Makioka is a partner in Bain & Company's Tokyo office and a member of the firm's Consumer
Products and Retail practices.