Wal-Mart in Japan:

Survival and Future of Its Japanese Business

Prospects of overseas ventures are not very bright for the shopping Mecca, Wal-Mart. International
operations of Wal-Mart gain importance as sales slow down in the US and the shut down of its German and
South Korean operations in 2006.1 Wal-Mart is also struggling to prove its presence in Japan since its entry
in 2002. With five consecutive years of losses after investing $1.3 billion in its Japanese operations, Wal-
Mart expects a profitable 2007. For the first quarter ended March 31 st 2007, it has posted a net loss of ¥4.4
billion (as of March 31st 2007, $1=¥117.79), which is much less when compared with the net loss of ¥52.8
billions for the first quarter of the previous year.2

Japan is characterised by a slow economy, demanding consumers and high bargaining power of suppliers.
But its ¥130 trillion3 retail market is the world's second-largest, after the US. If Wal-Mart makes a cautious
move, Japan will be a tempting prize. As the competitors are well ahead in the race, Wal-Mart’s
technological advancement and global network may come handy. The Japanese retail scenario has
witnessed a wave of mergers and acquisitions as many players fight for a share of the pie. How Wal-Mart
would plan its future moves in the highly competitive Japanese retail industry is to be seen.

Retail Scenario in Japan

The Japanese retail industry has evolved over the years. Various factors such as population, income,
competition, technology and legal reforms have contributed to the emergence of various retail formats in
Japan (Exhibit I). After the Meiji Restoration, 4 Japan promoted industrial production. This led to an increase
in population and wages in the urban areas and the development of infrastructure at the beginning of the
20th century. These changes also led to the appearance of Department stores, which carried a large
assortment of goods. During the 1950s, the average per-capita income of Japanese was rising steadily and
General Merchandise Stores (GMS)5 supported the changes.

The 1970s witnessed an increase in suburban population and a drop in income levels. The increasing
competition between GMS, the decline in the small store and regulations on GMS by the Large Scale Store
Law6 prompted the emergence of convenience stores.7 Convenience stores targeted small commercial
zones.

1
Scheer Peter, “Wal-Mart Can’t Hack it in Japan”, www.truthdig.com/eartotheground/item/20060823_wal_mart_cant_hack_ it_in_japan/ , August
23rd 2006
2
“Seiyu First Quarter FY2007 Results”, http://www.seiyu.co.jp/english/pdf/press/070425Engrelease_final_HP.pdf, April 27 th 2007
3
Ueno Kiyori, “Seiyu's First Qtr Net Loss Narrows to 4.37 Bln Yen”, http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=
WMT:US&sid=akMf.I1CLAhk, April 27th 2007
4
The Meiji Restoration was the catalyst toward industrialisation in Japan that led to the rise of the island nation as a military power by 1905, under
the slogan of "Enrich the country, strengthen the military’.
5
General Merchant Stores are the non-food item stores which include house wares, toys, greeting cards, and hardware.
6
According to Large Scale Store Law, new store openings, changes in operating hours and store expansions had to gain approval from the Ministry
of International Trade and Industry (MITI) before they could occur. The Law was introduced to protect the interests of small and medium sized
retailers.
7
Convenience Stores are shops that sell essential groceries, alcoholic drinks, drugs and newspapers outside the traditional shopping hours.

1
In the 1990s, deregulations such as the ‘Large Scale Retail Store Location Law’8, ‘category killers’9, and
shopping malls in cities which had lost competitiveness, resulted in large suburban shopping centres called
Regional Shopping Centres (RSC).10
Exhibit I
Evolution of Various Retail Formats in Japan
Factors and Changes
Period Population Income/ Competition Technology Legal Retail Formats
change Economy Forms
1900s - Centred - Increase in - Railways - Second - Department
on Urban income of Department Stores
areas urban people Store Law
1950s - Increase - Increase in - Cash - Second - General
in salaried income of Register Department Merchandise
workers salaried Store Law Stores
- Increase workers
in nuclear households
families
1970s - Increase - Oil crisis - Excessive - Increase in - Large - Convenience
in suburban competition automobile Scale Stores
population - Decline in Retail Store
small stores Law
1990s - Return to - Deflation - Decline of -Development - Large - Regional
Urban centres in of Roadways Scale Shopping
areas rural areas Retail Store Centres
Location
Law
2010s - Decline in -Concentration - Excess - IT - Three -Neighbourhood
population of income stores Urban Shopping
- Increase - Competition planning Centres
in between laws
retirement different
stores
Source: Takei Hirokazu, et al., “Adaptive Strategies for Japan’s Retail Industry facing a Turning point”,
www.nri.co.jp/english/opinion /papers/2006/pdf/np2006110.pdf, October 1st 2006

In 2002, there was an increase in the number of larger stores and Japanese consumers also showed an
inclination to shop at large-scale shopping centres. Japan's retail property market had seen an increase in
per store floor space, despite a corresponding decline in the overall number of retail establishments.
Specialty stores, grocery stores and convenience stores had a strong growth while clothing super stores
suffered (Annexures I (a), I (b) and I (c)). The Japanese shopping centres were developed based on the
American models. These centres had GMS (general merchandise stores), department stores, 'category
killer' segment, and high-end luxury goods stores. The shopping centres catered to the diverse needs of the
Japanese consumers. For example, certain economy-oriented shopping centres, attracted customers with
appealing prices since consumers are price sensitive with respect to necessities. However, at the other end
of the retail spectrum a number of 'super or luxury’ brands are likely to perform well in Japan. According to

8
Large Scale Retail Store Location Law includes economic related regulations, such as floor space, store holidays and also environmental
regulations concerning the environmental impacts of large stores with floor space greater than 1000 m 2. (> 1,000 m2)
9
Category killer is a term used in marketing and strategic management to describe a product, service, brand, or company that has such a distinct
sustainable competitive advantage that competing firms find it almost impossible to operate profitably in that industry.
10
Regional Shopping Centres are a building or set of buildings that contain stores and have interconnecting walkways that make it easy for people
to walk from store to store.

2
an HSBC study, 45% of luxury goods, sold worldwide are bought by Japanese consumers. 11 Japanese
consumers are also passionate about foreign goods. 12 This is evident in the analysis of the reasons for the
exit of Carrefour, the world’s second largest retailer. Carrefour was blamed for stocking too many Japanese
products, rather than the high-end French foods that shoppers wanted.13

In the new millennium, Japan is confronted with an aging society, which forms the target for retailers. The
Japanese government has implemented the Law for Buildings Accessible to and Usable by the Elderly and
Physically Disabled Persons (known in Japan as the ‘Heart Building Law’), so that the infrastructure is
accessible to all. The stores are designed to conform to the regulatory standards of local governments.
Amendments to the City and Town Planning Law, the Law on Improvement and Vitalization of City Centres
and the Large Scale Retail store Location Law are expected by 2007. These zoning laws are being
amended with an intention to decelerate the development of large-scale commercial centres in suburban
areas and preserve and promote the efficient use of urban infrastructure. However, it is predicted that sales
at large-scale shopping centres as a percentage of total retail industry sales, will continue to grow.14 The
decline in population and the increasing competition between different retail formats are also encouraging
Neighbourhood Shopping Centres (NSC)15 and Mail-order/ online shopping.

The Japanese retail market is characterised by its unique distribution channels (Exhibit II) and consumer
behaviour. These factors are a major challenge to the foreign players operating in the Japanese market.
The Japanese distribution channel consists of a strong local distribution network called ‘keiretsu’16. This is a
long and complicated network dominated by middlemen. Both foreign and domestic retailers, who are not
members of the distribution keiretsu system, are unable to compete with the keiretsu members due to the
price differential that exists between them. The keiretsu tend to keep retail prices high for non-members
through the retail price maintenance agreement between its members. Grounded in tradition, the mutual
trust and loyalty created through the distribution keiretsu is highly valued in the Japanese culture. The
members of the keiretsu are entitled to various benefits such as information sharing, financial support and
constant supply of merchandise (Exhibit III).

Japanese consumers are very choosy and like to have the best service possible. They usually expect
services like “free-of-charge delivery, less than six hours for delivery, delivery time designation, off-hour
handling, aid in product selection, unlimited warranty, and post-sale follow-up transactions” 17 from the
retailers. The abundance of small-scale mom- and-pop stores, which provide such customer services, is an
inevitable phenomenon in Japan.18 Because of traffic congestion and preference for fresh products,
Japanese consumers usually purchase from stores closer to their homes. Also, their extended family
structure requires them to keep a large assortment of goods at home. The local retailers stock a diverse
product range to satisfy this local demand.

11
Webb Martin, “French luxury lobby captain mulls Japan's brand fixation”, http://www.japanconsuming.com/?m=200702, February 6 th 2007
12
Matus and Dawn, “Making the sale: as more foreign brands set up shop in Japan, Hawaii's retailers may need to refine their pitch to Japanese
consumers.”, http://www.allbusiness.com/marketing-advertising/channel-marketing/322809-1.html, November 2002
13
Fackler Martin, “Wal-Mart, stalled in Japan, to try harder”, http://www.iht.com/articles/2005/10/30/business/walmart.php, October 30 th 2005
14
“Retail Sector Overview”, http://www.jrf-reit.com/english/sector/index.html, January 2006
15
Neighbourhood Shopping Centres are centres that range in size between 80,000 and 125,000 square feet. They serve an area within three to five
minutes driving time and generally have a supermarket as the anchor store. To support a centre with a supermarket anchor, a population of 10,000
or more is desirable.
16
Keiretsu refers to a large group of related companies that share common interests. Depending on their formation and principles, keiretsu are
commonly divided into two types: horizontal and vertical. The horizontal keiretsu are usually organized around a bank. The vertical keiretsu are
usually composed of a major industrial corporation and further subdivided into supply keiretsu and distribution keiretsu. Supply keiretsu are groups of
companies integrated along a supply chain dominated by a major manufacturer. The distribution keiretsu develop the web of relationships with their
downstream distributors and retail outlets.
17
Min Hokey, “Distribution channels in Japan Challenges and opportunities for the Japanese market entry”,
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename= Published/ EmeraldFullTextArticle/ Articles/0050261002.html, 1996
18
Ibid.

3
Besides the unique challenges posed by the Japanese retail market, foreign retailers confront further
obstacles such as government regulations and ever changing consumer demands. But Japan, with the
second highest GDP in the world will offer good returns if the retailers study the changing consumer lifestyle
and align their strategies accordingly.19 For instance, Wal-Mart Stores, Inc., one of the foreign retail giants in
Japan, has been implementing strategic plans to survive in the highly competitive Japanese retail industry
ever since its entry in 2002.

Exhibit II
Marketing Flows of the Japanese Distribution Channel

Source: Min Hokey, “Distribution channels in Japan Challenges and opportunities for the Japanese market entry”,
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0050261002.html,
1996

Exhibit III
Benefits for Members of Distribution Keiretsu
Technology and information transfer
A close-knit relationship is the major feature of distribution keiretsu. It is achieved by mutual information and
technology sharing through open communication. For example, certain manufacturers supply recent
technological developments in inventory management to other members. This proves effective while
responding to new market opportunities among the members.
Financial risk sharing
The mutual share holding of the distribution keiretsu members avoids hostile takeovers and enables the
firms to concentrate on their core activities. The manufacturers also provide financial assistance to the
members during hard times.
Stable supply of the needed merchandise
Through exclusive dealings, the keiretsu manufacturer provides constant supply of needed merchandise.
Because of the stability and security of the keiretsu system, the members enjoy a long-term partnership.
Source: Min Hokey, “Distribution channels in Japan Challenges and opportunities for the Japanese market entry”,
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0050261002.html,
19
“Retailing in Japan Report”, http://www.euromonitor.com/Retailing_in_Japan, October 2006

4
1996

5
Wal-Mart in Japan
Wal-Mart Stores, Inc., the world's largest retailer and the largest corporation in the US 20, entered Japan
through the acquisition of a 6.1% stake in Seiyu, the then fifth largest retailer in Japan, in 2002. 21
Established in 1963, Seiyu was involved in various business segments such as retailing and real estate.
During its initial years of operations, Seiyu remained a successful retailer with a variety of stores and
increased sales. In the early 1980s, it remodelled the existing stores and opened new ones, while in the
later half of the same decade, it expanded internationally. In the mid-1990s, economic difficulties, coupled
with a slump in consumer spending, rising competition in the retail sector and decreasing trend in the
property market led to Seiyu losing ¥18.7 billion in the year ending February 1995.22

Due to years of mismanagement, Seiyu remained a troubled firm even at the dawn of the 21 st century. For
Wal-Mart, acquiring a stake in Seiyu in May 2002 was an inexpensive and low-risk way to enter Japan. With
an initial investment of $46 million, Wal-Mart gained access to the second largest economy in the world. 23
Wal-Mart struck a uniquely structured deal, whereby it would gradually acquire control of Seiyu at a
predetermined price over the next five years. As part of the deal, Wal-Mart acquired 34% of stake in Seiyu,
by the end of 2002.24

Wal-Mart’s decision to enter Japan was questionable at that point of time because of the fragmented nature
of retailing in Japan. Although there was a gradual shift towards the value-oriented stores, the profits were
expected to take longer to realise, as Seiyu reported low-single-digit negative same-store sales for three
consecutive years from 1999.25 According to an analyst with JP Morgan, Wal-Mart’s Japan operations were
to be viewed in a long-term perspective, as it laid the foundation for future international growth. 26 As of April
2007, Wal-Mart had 2,750 stores in 13 countries worldwide.27(Annexure II). Before its entry, Wal-Mart
observed the Japanese retail market and conducted focus groups to understand the retail trends in Japan.
Meanwhile, the Japanese retailers sent their employees to visit Wal-Mart stores in the US, South Korea and
China. They were able to counteract by mimicking Wal-Mart’s method quickly and aggressively, back home
in Japan.

The chief economist at Retail Forward, a retail consulting firm, predicted that the biggest threat for Wal-Mart
will be from the domestic retailers. 28 It became true when the Japanese retailers outsmarted Wal-Mart by
slashing prices, restructured stores, launched ‘Made in Japan’ campaigns and started shrinking the supply
chain. Although Wal-Mart wanted to enter by adopting its highly successful US model (Exhibit IV), it had
trouble in implementing its “Every Day Low Price” (EDLP) - its USP, in Japan. Japanese consumers were
used to the traditional ‘chirashi’ offered by local retailers to attract the customers by weekly discounts on
selected items through advertisements. The Japanese consumers are said to compare the discount rates of
various retailers before they shop. On days other than the weekly discounts, the prices offered by these
retailers were relatively high. Wal-Mart’s offering of EDLP and ‘chirashi’ was in contrast to this traditional
20
Tkaczyk Christopher, “Fortune 500- Annual Ranking of America’s Largest Corporations ”, http://money.cnn.com/magazines/fortune/fortune500
/2007/index.html, April 30th 2007
21
Troy Mike, “Wal-Mart invests in Japan, buys 6% share of Seiyu”, www.findarticles.com/p/articles/mi_m0FNP/is_6_41/ai _84183445, March 25th
2002
22
Addae-Dapaah Kwame, Yeo Cindy, “Percentage lease agreement as a shopping center management tool: a panacea for Singapore’s retail
industry woes?”, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/1130170102.html,
November 1st 1999
23
“Wal-Mart invests in Japan, buys 6% share of Seiyu”, op.cit.
24
Millar Corinne, “Top 30 Grocery Retailers Worldwide, 2002”, http://www.siamfuture.com/RetailBusCenter/RetailIndus/topgrocer2002.asp
25
Same-Store Sales are sales in monetary terms generated only by those stores that have been open more than a year and have historical data to
compare the current year's sales to the same time-frame of the previous year.
26
“Wal-Mart invests in Japan, buys 6% share of Seiyu”, op.cit.
27
“Wal-Mart International data sheet”, http://www.wal-martchina.com/english/walmart/fastfact.htm, April 4th 2007
28
Rowley Ian, “Can Wal-Mart Woo Japan?”, www.businessweek.com/magazine/content/04_19/b3882063.htm - 61k -, May 10th 2004

6
method of weekly discounts. Its consistently low prices, made the Japanese consumers suspicious of the
quality of products offered. In Japan, shoppers associate low prices with low quality and wondered how a
retailer could offer a pair of jeans for $10. “In the Japanese consumer mind, they're seen as selling cheap
stuff at cheap prices- and that can be a problem” 29, observed David Marra, a principal at management
consultancy A.T. Kearney Inc., in Tokyo.

Exhibit IV
Wal-Mart’s Successful US Model

“We want everybody in town to succeed, and that's just the culture of Wal-Mart.”
-A Wal-Mart commercial on the air
History
Founder: Sam Walton
First Store: Rogers in the state of Arkansas in 1962
Philosophy: ‘Pile 'em high and then sell 'em cheap’

Secrets of Success
The key success factors of Wal-Mart include the following:

Distribution and Procurement

Wal-Mart set up highly automated distribution centres, cutting down on delivery time and costs. What Wal-
Mart expects from the suppliers is that all suppliers must have: competitive prices, financial stability, proven
success in the marketplace, and offer excellent products and/or services. In February 2002, Wal-Mart
created the Global Procurement Services, an entity to manage the company’s direct import business and
direct purchasing from suppliers. It enables Wal-Mart to buy cheaply in bulk. The Global Procurement
Team comprises of Supplier Alignment, Business Development, Global Transportation/Global Services,
Trade Relations and Intelligence, Quality Assurance and Ethical Standards. Wal-Mart maintains a huge
database having details of consumer preferences, shopping habits and consumer trends.

Associates
Wal-Mart is the biggest employer setting wage rates for all retailers. Workers are not plain employees but
"associates", eligible for a share of the profits and stock options in the company. This has created a
famously loyal and highly competitive workforce. The "associates" are encouraged to manage their own
areas.

Technology
RFID system - In April 2004, Wal-Mart started to implement radio frequency identification to track items
from manufacturers to distribution centres and then to the stores.
Satellite network- Wal-Mart has the world’s largest private satellite network. It links all operating units of
the company and General Office with 2-way voice, data and one-way video communication.
Retail Link - Retail Link provides information and an array of products that allows a supplier to impact all
aspects of their business. By using the information available in Retail Link, suppliers can plan, execute and
analyze their businesses - thus providing better service to their common customers. Retail Link is a website
that is accessible to any area within the supplier’s company.
SMART system - The SMART System is an integrated data management system for product receiving,
sales, ordering, and inventory tracking. It helps boost the efficiency of store administration functions such
as ordering and inventory control, by allowing instant information access at stores and the head office.
Products and Prices
Wal-Mart is the largest seller of toys, furniture, jewellery, dog food and scores of other consumer products

29
Rowley Ian, “Japan Isn't Buying The Wal-Mart Idea”, www.businessweek.com/magazine/content/05_09/b3922073.htm, February 28 th 2005

7
and the largest grocer in the United States. The world's largest retailer, Wal-Mart, prefers to sell a wide
range of goods with varied worth at discount rates. Wal-Mart also sells Private Label products. The
company has prospered by elevating one goal above all others: cutting prices relentlessly. The US
economists say its tightfistedness has not only boosted its own bottom line, but also helped hold down the
inflation rate for the entire country.
Source: Compiled by the author from “Wal-Mart's Success Also Brings it Business Woes”,
http://www.voanews.com/english/archive/2005-07/2005-07-07-voa50.cfm?CFID=158872354&CFTOKEN=53137966, July 7th 2005
and “Our Company”, http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=1

Direct sourcing, one of Wal-Mart’s major success factor also encountered a set back because of the age-old
keiretsu distribution system of Japan which prevented direct purchase from suppliers. Coupled with
expensive labour and land, Wal-Mart found it difficult to reduce costs and increase profitability. Also Wal-
Mart’s Japanese employees lacked spontaneity while inquiring about customer needs and hence were
unable to adapt to Wal-Mart’s ‘10 foot rule’.30

These barriers seemed to get swabbed as there was a change in the Japanese retail scenario with the
upcoming new discount stores even though the mom-and-pop stores constituted 58% of all the Japanese
retailers in 2002. Japanese consumers, who paid highest prices in the world, were now gifted with lower
prices and broader selection. Discount outlets such as the 100-yen shops flourished and the Japanese
youth began spending more time shopping on weekends at malls or discount outlets rather than in small
neighbourhood stores. Despite the change in consumer attitude, Wal-Mart faced further obstacles. The real
estate prices were high and there was limited retail space that made it tough to construct new stores and
Wal-Mart ended up with renovating the outdated Seiyu stores. Also, Japanese consumers are finicky and
the world’s most difficult to please. 31 Psychoanalyst Ken Ohira commented about such behaviour as a
‘psychological disorder’ of Japanese consumers with high purchasing power who demand top-quality and
branded goods but are also frugal in their spending.32 In spite of these mixed reactions, Wal-Mart
approached the market slowly to increase its yearly sales growth rate.

In 2002, along with Seiyu, Wal-Mart launched a five-year plan called ‘New Seiyu’ for the implementation of
best practices from the Wal-Mart model. But the Japanese economy reeled under deflation. As a result of
this the prices dropped leading to low capital investments, unemployment and increased non-performing
loans, thereby reducing the consumer spending. During this period, Seiyu expanded its business across
Japan but recorded a net loss of ¥90.8 billion for the year ended February 2003 (as of February 28 th 2003,
$1=¥118.177).33 (Annexure III). When Seiyu lowered unit prices, it increased the number of consumers and
the levels of spending per customer but the widely followed price reduction policy reduced its profit margin.

In 2003, Seiyu used the ‘Big 40th Anniversary Festival’34 for sales promotion. As a part of the New Seiyu
program, Wal-Mart store’s information system called ‘SMART System’ was gradually implemented from
August 2003. In the same month, Wal-Mart increased its hold in Seiyu by 37.8%. In October 2003, Seiyu
dropped the practice of chirashi but resumed it soon after, when a decrease in sales was observed. After a
year-long revamp measure, Seiyu posted a net loss of ¥7.087 billion (as of December 31 st 2003,
$1=¥107.11) for the year ended December 200335 with a decline in the sales of general merchandise and
apparel.36 According to Seiyu, the main reason was the inflexibility in merchandise assortment and
30
When the associates who are the employees of Wal-Mart come within 10 foot of a customer, the associates have to look in the eye of the
customer, have to greet and ask if any help is required.
31
Elustondo Maria, “Japanese market Update”, www.kamcity.com/library/articles/japan.htm, March 13 th 2002
32
Ibid.
33
“Seiyu Annual Report 2003”, http://www.seiyu.co.jp/english/pdf/annual/2003/all.pdf
34
Seiyu celebrated its 40th anniversary of establishment in a grand manner by organising promotional events.
35
Seiyu has changed the end of its accounting period from the last day of February to the last day of December. So the fiscal year 2003 was the 10-
month period from March 1st 2003 to December 31st 2003.
36
“Seiyu Annual Reports-2004”, http://www.seiyu.co.jp/english/pdf/annual/2004/all.pdf

8
marketing strategy due to unseasonable weather. In 2003, Japan witnessed an unusual weather with cool
summer, hot autumn and then a mild winter disrupting sales of seasonal clothing and other goods.

For Seiyu, 2004 was marked by extensive renovations. It started to implement Wal-Mart’s Retail Link whose
effects were expected to be realised after at least two years. From 2004, Seiyu initiated customer
satisfaction surveys called ‘Store Trak’,37 in all its stores to get feedback from customers and link them to
rapid improvements. Due to the Japanese consumers’ preference, it began to concentrate on the food
section and took utmost care of it. For example, larger space for food section with on-the-spot fresh
preparations and maintenance of hygiene were given importance.

In 2004, customer greeters at the store entrance were also introduced. To offset Japanese consumer’s
perception that low prices are linked with low quality, it started to offer costly goods also. For example, it
supplemented its $10 range of jeans with a $35 one for the less price-conscious customers. It also started
offering 100% cotton dress shirts for as much as $28, in addition to the cotton/polyester blends costing as
little as $8 it had specialized in so far. 38 Seiyu changed its product assortment by increasing the number of
brands displayed, introducing new Wal-Mart brands, differentiating them and increasing the safety
measures like displaying pictures of knives instead of real ones. Seiyu also extended its store timings with
stores open for 24 hours in a day. A ‘Supplier Hotline’ was established to address suppliers’ grievances. In
March 2004, 25% of the full-time employees were pushed into voluntary retirement as a part of its cost
cutting measure.39 Part-timers were encouraged.

In May 2004, programs for sales floor training and imparting other management skills were launched. In
June 2004, Seiyu divided its store network into six regions, to simplify and standardize store operations. In
October 2004, it implemented a new personnel system to groom its employees towards career
development. For the third consecutive year, Seiyu’s net loss widened with ¥12.3 billion (as of December
31st 2004, $1=¥102.73) for the year ended 2004.40 Seiyu accepted that it was unable to concentrate on sales
because of the transition from old methods to new technology. Other factors were lack of proper promotional
campaigns and unseasonable weather such as heat waves, typhoons and mild winter. By 2004, Wal-Mart
held a 43% stake in Seiyu.41Thus, the two year ‘Foundation-Building Phase’ of the five-year plan ended
(Exhibit V).

37
Store Trak is a customer satisfaction survey conducted by Seiyu to get customer feedback about the stores and identify customer preferences.
38
,“Japan Isn't Buying The Wal-Mart Idea”, op.cit.
39
“Can Wal-Mart Woo Japan?”, http://www.businessweek.com/magazine/content/04_19/b3882063.htm, May 10 th 2004
40
“Seiyu Annual Report 2005”, http://www.seiyu.co.jp/english/pdf/annual/2005/all.pdf
41
Rowley Ian, “Wal-Mart's Waiting Game in Japan”, http://www.businessweek.com/bwdaily/dnflash/dec2005/nf20051221_7745_db039.htm?
chan=gb , December 21st 2005

9
 Exhibit V
The New Seiyu Five-year Action Plan

Source: “Seiyu Sustainability Report 2005”, http://www.seiyu.co.jp/english/pdf/sustainability/2005/all.pdf

Seiyu considered the year 2005 as the ‘Practical Application Phase’ with the effective use of the systems
introduced by it. The hand held terminals for ordering, sales and inventory were introduced to minimise the
out-of-stocks. Seiyu began to introduce the automatic replenishment system that predicts future demand
based on analysis of past sales results and when the store inventory falls to a certain threshold, a product
order is generated automatically and the product is delivered to the store. It implemented a traceability
program by using ‘Quick Response’42 codes. Seiyu organised ‘Grand Sales’ events to attract customers.
Wal-Mart’s initial store revamping efforts were evident in its Seiyu supermarkets with its spotless floors and
perfectly arranged displays typical of order-obsessed Japanese grocery stores. Seiyu had wider aisles
compared to the usually cramped Japanese stores. It also stocked brand names unfamiliar in Japan, like
‘Simply Basic’ and ‘Sam's Club’. Similar to the manner in which lower prices are announced at the American
stores run by Wal-Mart, Seiyu’s stores had overhead signs with yellow smiley faces and the word ‘Rollback’
displayed in English. Seiyu also promoted modular shelves to display the best sellers in the most visible
location.

In conformity with legal requirements, Seiyu started to adopt People Friendly Store Development Standards
in 2005. The standards promoted store designs with accessibility for all, especially elderly and physically
disabled persons. It reduced escalator speeds from 30 per minute to between 20 and 23 per minute to avoid
tripping of customers while getting on and off escalators. During the same period, there was a boom in the
Japanese economy. There was an expectation that the consumers’ purchasing power might increase due to
rise in wages. Wal-Mart incurred a net loss of ¥17.7 billion (as of December 31st 2005 $1=¥ 117.69) for the
year ended 2005 as it wrote off losses from the disposal of slow-moving inventory which amounted to
42
Quick Response code is a new type of "two-dimensional" bar code used on products in Japan that can carry 100 times the information of
conventional product bar codes.

10
¥2.094 billion.43 During 2005, Wal-Mart announced a plan that would cost hundreds of millions of dollars to
overhaul half of Seiyu’s stores by 2010.44

Though, Seiyu expected to post its fifth consecutive annual loss in 2006, it was pressing forward with plans
to continue revamping its aging stores. In 2006, Wal-Mart increased its stake in Seiyu to 53%. 45 The first
move of Wal-Mart after holding direct control of Seiyu was the appointment of Edward Kolodzieski, the
former COO of Wal-Mart International as the Chairman and the CEO of Seiyu. Also, Wal-Mart involved a
restructured senior management team comprising executives from its US and other international operations
to oversee the remodelling program of Seiyu. In 2006, it focused on three things – “satisfying customer’s
needs, offering better services and providing quality products.” 46 Seiyu’s competitors seemed to have scored
over it in terms of quality, display and variety. This was revealed in a customer survey published in Nikkei
Marketing Journal, a leading business publication in Japan (Exhibit VI).

Exhibit VI
Reasons cited for shopping at various retail stores in Japan (in %)

Retailer Quality Display Variety/ Inventory

Ito-Yokado 16.9% 12.6% 36.1%
JUSCO 12.1% 9.2% 29.5%
Aeon Shopping Centre 7.9% 3.9% 34.4%
Seiyu 5.4% 3.3% 17.0%
Daiei 3.6% 3.0% 14.3%
Source: AoyamaYuko, “Why Foreign Retailers Fail in Japan: Carrefour vs. Wal-Mart”,
http://www.som.surrey.ac.uk/research/groups/globalizingretailseminar/Aoyama.pdf, July 17th 2006

Seiyu pledged to renovate stores that were opened just a year back and improve its displays to increase the
number of customers. Seiyu reduced costs and opened new stores while closing under-performing stores. It
remodelled 73 stores, improved floor layouts to cater to the local needs and closed 13 stores.47 (Exhibit VII).

Exhibit VII

43
“Seiyu Annual Report2006”,,http://www.seiyu.co.jp/english/pdf/annual/2006/all.pdf
44
Fackler Martin, “Wal-Mart, stalled in Japan, to try harder”, www.iht.com/articles/2005/10/30/business/walmart.php, October 30 th 2005
45
“Japan Fact Sheet”, http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=377
46
“Seiyu 2006 Results and 2007 Forecast announced today”, www.seiyu.co.jp/english/pdf/press/070216Engrelease_financial.pdf February 17 th 2007
47
Ibid.

11
 Number of Wal-Mart stores in Japan
Feb-07
392

Feb-06
405

Feb-05
404

Feb-04
404

Feb-03
398
388
Feb-02

Wal-Mart’s Japan Operations as on February 2007

Seiyu Supermarkets 293
Seiyu GMS (food & general Merchandise) 97
Seiyu GM (general merchandise only) 2

Source: “Seiyu Annual Report 2007”, http://www.seiyu.co.jp/english/pdf/annual/2007/all.pdf

The stores were remodelled based on customer opinions to suit local community. According to ‘Store Trak’,
customers had observed significant improvement in the aspects of assortment and accuracy as well as
speed of checkout. In August 2006, a ‘Distribution Centre’ handling apparel, food and general merchandise
was established in Misato city to supply merchandise to the stores in the metropolitan area with the help of
vendors. This centre was built based on expertise from Wal-Mart. The Misato City Distribution Centre is an
advanced distribution centre with a modern infrastructure, handling a range of items in different temperature
zones.

Even though Seiyu forecasted a profitable year, the net loss for the year ended 2006 amounted to ¥55.792
billion (as of December 31st 2006, $1=¥119.155).48 (Exhibit VIII). Seiyu complained that the loss was mainly
due to a change in ‘Japanese accounting laws’ 49 that required it to lower the estimated value of its stores
and land. According to Seiyu, the loss occurred as it wrote down the value of fixed assets.

Exhibit VIII
Sales and Profit of Wal-Mart in Japan (2002-2006)
48
“Seiyu 2006 Results and 2007 Forecast announced today”, op.cit.
49
In June 2006, Japanese Diet approved the Financial Instruments and Exchange Law (FIEL) to enhance investor protections and convenience,
while promoting cost-efficient transactions and financial innovation. The Japanese Diet is Japan's legislature that consists of two houses: the House
of Representatives and the House of Councillors.

12
 Sales Consolidated (billion yen)
1105.9 1091.5
997.1 960.8
906.2

2002* 2003** 2004 2005 2006

Profits Consolidated (billion yen)

Operating Profit Ordinary Income Net Income
16.5 10 9.5 12
8 2.9 3.2
0.5

-7 -6.1 -2.6
-12.9
-17.7

-55.7
-90.8

2002* 2003** 2004 2005 2006

* For the year ended February 20

**For the year ended December 2003(10 months)
Source: “Seiyu Annual Report 2007”, http://www.seiyu.co.jp/english/pdf/annual/2007/all.pdf

Wal-Mart –The need for a localisation imperative

Japan is considered to be one of the world's most difficult markets to penetrate. 50 But success in Japan is
important for Wal-Mart. Since entering Japan, it has moved cautiously to introduce its low-cost, high-volume
retail strategy into Seiyu stores. Hit with the exit from Germany and South Korea in 2006, any hasty move in
Japan may prove to be fatal for Wal-Mart. Despite an investment of $1 billion in Japan, Wal-Mart continues
to struggle with Japan’s slow, anti-competitive distribution keiretsu system. Largely because of the
demanding nature of Japanese consumers who prefer fresh products, Wal-Mart is forced to source most of
its products locally. The farms and fisheries from where Wal-Mart sources its produce are small, family-run
operations that frequently offer better deals on smaller orders, than on the larger ones. Moreover, Japan has
a variety of consumer preferences that requires local customization. This hinders efficient logistics, thereby
reducing profits. For instance, what sells well in Hokkaido, an island in the northern end of Japan is often not
preferred in Kyushu, an island in the south-west end of Japan. Many Japanese consumers also prefer the
traditional shotengai,51 which plays a significant role in local communities. For Wal-Mart, these factors have
imposed difficulties to increase the economies of scale.

50
“Wal-Mart, stalled in Japan, to try harder”, op.cit.
51
Shotengai is a Japanese word which means narrow shopping streets with specialty stores.

13
Wal-Mart is confronted with other drawbacks also. Its Japanese competitors are situated in better locations,
operate specialty stores and offer financial services such as extending credit to their customers. These
factors have given them an edge over Wal-Mart.52 According to the President of Atlantis Investment
Research, “Japan is not America and South Korea is not America. The global giants fail because of not
localizing their businesses.” 53

Wal-Mart has been launching American-style stores in some foreign markets with incompatible retail
traditions and cultures. Wal-Mart had encountered set-backs and risings in the international operations since
its entry into Mexico in 1991. When Wal-Mart entered Argentina in 1995 with wholly owned operations,
initially it had a negative effect when it failed to take into account the cultural differences between Argentina
and the US market. After its decade long operations from 1996 in China, Wal-Mart painstakingly discovered
that China requires to be going native. Wal-Mart’s acquisition of Trust-Mart54 in China for $1 billion in 200655
had showed a way forward. Wal-Mart acquired Wertkauf, a chain of 21 super markets in Germany in 1997 to
enter Germany and exit its German operations in 2006 with a loss of $1 billion.56 It was opined that Wal-Mart
misjudged the consumer and business culture, under-estimated Germany’s competitive market and
miscalculated the market trends Wal-Mart entered South Korea in 1998, and sold its operations in 2006 as
the ‘warehouse style’ environment was unacceptable to Korean shoppers.

Wal-Mart is very precariously poised in Japan. To look native, Wal-Mart has not re-branded Seiyu, allowing
it to continue with the same name. When Wal-Mart closed its operations in Korea and Germany, many
market players speculated that it might leave Japan because of Seiyu’s poor performance. But Wal-Mart
said that it is committed to Japan and forecasts a profitable 2007 with its core supermarket operations
starting to show recovery. Seiyu expected profit in six years, citing sales growth from 24-hour store
openings and shop renovations in the year ended 2006. It expected a net profit of ¥0.8 billion for the year
ending 2007.57

However, sales declined during the first quarter ended March 31 st 2007. A steady performance by food
products and general merchandise failed to offset lacklustre growth in sales of seasonal winter
merchandise. According to Seiyu, while comparing the results of the first quarter of 2006 and 2007, the net
losses in the first quarter of 2007 declined by the improvements in the ratios of gross profit. 58 During the first
quarter, consolidated net sales were ¥227.1 billion and the operating loss was ¥2.3 billion. The ordinary loss
decreased from ¥4.3 billion in the first quarter of 2006 to ¥3.8 billion in the first quarter of 2007. As a result,
net loss for the quarter ended March 2007 was ¥4.4 billion (as on March 31 st 2007, $1=¥117.79) which
includes the impairment loss of ¥47.5 billion.59 (Exhibit IX). During the first quarter of 2007, it remodelled
seven stores and began 24-hour operations in 11 more stores - expanding the 24-hour network to 273 out of
392 stores as of March 31st 2007.60 During the quarter, no new store was opened nor was any existing store
closed. “I am very pleased to see the efforts of our team to improve profitability,” 61 the chief executive officer
of Seiyu, Edward Kolodzieski commented. He added that the company will continue its endeavours to meet
diverse customer needs through store remodelling and by expanding its network of 24-hour stores. Similar
52
Izumi Sachi and Maestri Nicole, “Wal-Mart's Japan choice: Bulk up or pull out”, money.netscape.com/story/2007/03/23/wal-marts-japan-choice-
bulk-up-or-pull-out , March 22nd 2007
53
“Lost in the cultural translation”, op.cit.
54
Trust Mart is a Taiwanese owned chain of retail centres in China.
55
“Wal-Mart Acquires Trust-Mart For US$1 Billion”, http://www.chinaretailnews.com/2006/10/19/364-wal-mart-acquires-trust-mart-for-us1-billion/,
October 19th 2006
56
Wal-Mart incurred a loss of $1 billion in 2006 due to the sale of its business in Germany.
57
“Seiyu 2006 Results and 2007 Forecast announced today”, http://www.seiyu.co.jp/english/pdf/press/070216Engreleasefinancial.pdf, February 16 th
2007
58
“Seiyu Announces First Quarter 2007 Results”, op.cit
59
Ibid.
60
Ibid.
61
Ibid.

14
to the first quarter ended March 31st 2007, the company will continue to remodel larger stores in addition to
smaller ones. It is expected to open four new stores by the end of fiscal year 2007. According to the chief
executive of Seiyu, the company will look at global procurement opportunities, leverage technology and try
to improve economies of scale. He added, “We have customers who are willing to spend a lot more money
with us if we do a better job than we are doing today.”62

Exhibit IX: Consolidated results for the First Quarter 2007 (Billions of yen)

First Quarter Change on First Quarter Full year

2007 Preceding 2006 forecast
term 2007
Net Sales 227.1 (1.1%) 229.6 992.1
Comparative Store sales (0.7%) -- +2.1% +1.7%
Operating Loss (2.3) 0.5 (2.8) 10.6
Ordinary Loss (3.8) 0.5 (4.3) 4.0
Net Income (4.4) 48.4 (52.8) 0.8
Source: “Seiyu Announces First Quarter 2007 Results”, http://www.seiyu.co.jp/english/pdf/press/070425
Engrelease_final_HP.pdf, April 27th 2007

The Road Ahead

From 2006, Wal-Mart faced intense competition from domestic retailers through their merger and acquisition
strategies. Aeon Co., Japan’s largest super market chain aims at becoming one of the world’s top ten
retailers by 2010. As part of its growth strategy, it issued new shares and bonds in October 2006 to acquire
smaller rival retailers and to open new stores. In March 2007, Aeon announced its take-over of 15% stake
worth ¥46.2 billion (US $393.5 million) in Daiei.63 Daiei was a Japanese super market chain which collapsed
in 2004 because of bad debt for which Wal-Mart was also in the race of bidding. This new alliance will prove
to be yet another challenge for Wal-Mart while it aims to revive Seiyu. Meanwhile, other local competitors
are gearing-up with new strategies (Exhibit X).

Exhibit X
Some plans announced by Wal-Mart’s Japanese Competitors

Business Plan of Takashimaya Group

In fiscal 2005, the Takashimaya Group established a new long-term business plan called “Strategies for
Growth,” which covers the seven-year period from fiscal 2006 to fiscal 2012. The project involves various
activities such as constructing new stores and store revamp.

Uny tie-up with Itochu Shoji

In January 2006, Uny, Japan’s fifth retailer announced a business cooperation tie-up with Itochu Shoji, the
wholesale business chain. This move was to avoid take over bids by the larger retailers.

Isetan, Tokyu form retail alliance

Isetan and railway Tokyu Department Store, the two Tokyo-based department store chains will get involved
62
Pilling David, “A tough nut to crack”, www.ft.com/reports/investjapan2007, March 13 th 2007
63
“Japanese retailers Aeon and Daiei announce capital tie-up”, http://www.iht.com/articles/ap/2007/03/09/business/AS-FIN-COM-Japan-Retail-
Alliance.php, March 9th 2007

15
in the development of original products and integrate systems for sales management and customer data to
induce profits. This was announced in March 2007. Isetan’s alliance with the department stores owned by
railways is expected to improve its sales.

Daimaru and Matsuzakaya to merge

Daimaru, the fourth largest department store group in western Japan and Matsuzakaya, the seventh largest
in central Japan would merge operations to form the biggest department store chain in Japan by September
2007. The new company is created to have greater buying power and strengthen clout with suppliers. It may
also streamline distribution, reduce the cost of sales promotions, and improve profitability.

Business Reengineering Plan of Ito-Yokado Group

Ito-Yokado had undertaken a business reengineering plan initiative in order to respond to the changes in
consumer trends. The objective of the plan is to improve profitability, productivity and customer service.

Source: Compiled by the author from

(a) “Takashimaya Company, Limited Annual Report 2006”, www.takashimaya.co.jp/corp/english/annualreport/2006/annual.pdf
(b) “Itochu helps itself by helping Uny”, http://www.japanconsuming.com/?m=200604
(c) “Isetan, Tokyu form retail alliance”, http://search.japantimes.co.jp/cgi-bin/nb20070328a9.html, March 28th 2007
(d) “Daimaru and Matsuzakaya to merge in Japan department store deal”, http://www.iht.com/articles/ap/2007/03/14/business/AS-
FIN-COM-Japan-Retail-Alliance.php, March 14th 2007
(e) “Business Reengineering Plan of Ito-Yokado Group”, http://www.itoyokado.co.jp/company/investors/release /pdf/20050222e
_02.pdf, February 22nd 2005

According to Citigroup, Seiyu makes up 12% of Wal-Mart’s international sales. 64 To increase its business
performance in Japan, Wal-Mart is anticipated to speed-up its improvement programs. For the year 2007,
Seiyu’s three key initiatives for enhancing its sales are to strengthen merchandise portfolios to satisfy local
customer needs, to provide better and more convenient services to customers by offering the best store
hours and shopping environments and to provide ‘value’ that goes beyond the price with more quality-
guaranteed and fashion-conscious merchandise. According to Wal-Mart, it will operate with the commitment
to put every effort to make Seiyu stores more attractive places to shop at.

Seiyu is expected to increase the number of 24-hour stores and renovate outlets to attract customers and
push up sales in the country's ¥130 trillion retail market. It also has plans to gain leverage on the global
supply network of Wal-Mart Inc., which it believes will help enhance the value and quality of its
merchandise. In 2007, the Misato Distribution Centre will begin full-fledged operations by increasing the
number of stores covered.65

Seiyu plans to promote its employees with a global view through corporate culture apart from training of
skills and techniques such as food processing and merchandise display. It will continue to reduce waste and
power consumption as a cost–saving initiative. Being a ‘company with committees’ that separates
management’s decision-making and execution functions, it will continue with the improvement of internal
control system also.

Wal-Mart, which holds 53% in Seiyu, has an option to raise its stake to 66.7% by the end of 2007 to gain
market share in the world's second-largest economy.66 During the first quarter of 2007, Wal-Mart
International conducted a review code-named ‘Project Red’ in the US. According to analysts, the review was

64
“Wal-Mart's Japan choice: Bulk up or pull out”, op.cit.
65
“Seiyu 2006 Results and 2007 Forecast announced today”, op.cit.
66
Aoi Yasue, “After 5 years of losses, Seiyu sees 2007 profitable”, http://www.iht.com/articles/2007/02/18/bloomberg/sxseiyu.php, February 18 th
2007

16
conducted in the backdrop of Wal-Mart’s need to regain its status as a growth stock. One of the
recommended action plans is to sell off the Japanese operations. Shigeki Makino, an investment analyst
said, “Japan in general is over-retailed and overstored. 67 (Exhibit XI). As of 2007, Seiyu is valued at about
$1.16 billion and finding a buyer for turnaround will be difficult.68

Exhibit XI
Retailer Density

Country Outlets per Outlets per Million

Million Inhabitants (Non-
Inhabitants Food Retailers)
(Food Retailers)
France 2,158.5 3,714.1
Germany 1,265.6 2,947.9
Japan 4,232.2 6,582.0
United Kingdom 1,557.9 3,493.6
United States 848.2 5,011.8
Source: Euromonitor International, 2005
Source: AoyamaYuko, “Why Foreign Retailers Fail in Japan: Carrefour vs. Wal-Mart”,
http://www.som.surrey.ac.uk/research/groups/globalizingretailseminar/Aoyama.pdf, July 17th
2006

From May 1st 2007, Japan’s new Company Law which is a part of Financial Instruments and Exchange Law
(FIEL) came into effect.69 The law allows triangle mergers – foreign companies can use local subsidiaries to
acquire Japanese firms through stock swaps instead of cash. In this scenario, Wal-Mart is expected to look
out for buyout opportunities. A consultant at Bain & Co., said, “They know they need greater market share to
achieve their goals, and in terms of new stores, Wal-Mart will stay very open to opportunities for both
acquisitions and organic growth.”70 To expand its geographical spread, analysts said that Wal-Mart might
acquire Uny, a strong regional general merchandise retail chain. Michael Wheatley, a retail analyst at HSBC
in Tokyo commented, “Clearly, Wal-Mart needs geographical range in Japan, and acquiring a regional
supermarket such as Uny (based in Nagoya) would help balance its store formats. Seiyu's stores are mainly
close to train stations and do not fit Wal-Mart's big-box model of having stores in rural and suburban
areas.”71 However, analysts believe that Uny is more likely to disagree unless it faces a crisis.72

Annexure I (a)

67
McWilliams Gary and Zimmerman Ann, “How Wal-Mart Should Right Itself”, http://www.narse.org/breaking.htm, April 20 th 2007
68
Ibid.
69
“Japan Practice Corporate & Securities Mergers & Acquisitions”, http://www.pillsburylaw.com/content/ portal/publications/2007/4
/200741919165703/Japan%20C&S%20M&A%20Vol%200400%20No%204001%2004-25-07.pdf, April 25 th 2007
70
“Wal-Mart's Japan choice: Bulk up or pull out”, op.cit.
71
Sanchanta Mariko, “Wal-Mart unit in Japan suffers lacklustre sales”, http://search.ft.com/ftArticle?queryText=Wal-Mart+to+acquire+Uny
+in+Japan&aje=true&id=070131000745, January 31st 2007
72
“Wal-Mart staying the course?”, http://www.japanconsuming.com/index.php?paged=2, February 3 rd 2007

17
 Number and Sales of Retail Stores by Business Type in Japan

Source: “Reference: Number and sales of Retail Stores by Type of Business”, http://www.gs1jp.org/10.htm

Annexure I (b)
Sales by type of merchandise in department stores

Source: “Reference: Sales by type of merchandise in department stores”,

http://www.gs1jp.org/10.htm

Annexure I (c)

18
 Sales by type of merchandise in chain stores

Source: “Reference: Sales by type of merchandise in chain stores:”,

http://www.gs1jp.org/10.htm

Annexure II
Wal-Mart’s International Entry Strategies

Wal-Mart International - 2,750 total units on April 2007

Country Mode of Entry Date of Entry Retail JV Partner/ Company

Units Acquired
Mexico Joint Venture November 1991 889 Cifra
Puerto Rico Wholly owned August 1992 54 Wal-Mart Puerto Rico, Inc.
subsidiary
Canada Acquisition November 1994 289 Woolco Stores
Argentina Greenfield November 1995 14 -
operations
Brazil Joint Venture May 1995 299 Lojas Americanas
China Joint Venture August 1996 77 Shenzhen International Credit
Investment Company
United Kingdom Acquisition July 1999 336 ASDA
Japan Joint Venture March 2002 392 Seiyu Ltd.
Costa Rica Acquisition September 2005 139 Central American Retail
El Salvador September 2005 63 Holding Company
Guatemala September 2005 133
Honduras September 2005 41
Nicaragua September 2005 40
Source: “Wal-Mart International data sheet”, http://www.wal-martchina.com/english/walmart/fastfact.htm, April 4 th 2007

19
 Annexure III
Financial Summary of Seiyu from Fiscal 2002-2006
Financial Summary of Seiyu (Billions of yen rounded off to the nearest value)

For the year ended December December December 2004 December 2003** February
2006 2005 2003*

Net Sales ¥9,60,861 ¥9,97,103 ¥1,031,527 ¥9,08,292 ¥1,105,969

Cost of Sales 7,20,260 751,896 777,326 676,781 822,559

Total Gross Profit 2,40,600 245,206 254,200 231,511 283,409

Other Operating Revenue 35,269 37,483 36,253 29,301 33,748

Operating Gross Profit 2,75,870 282,689 290,454 260,813 317,158

Selling, general and administrative

expenses:
(i)Salaries and bonuses to employees 92,639 95,569 96,867 87,887 107,858
(ii) Provision for accrued bonuses 812 1,179 1,237 - -
(iii) Retirement benefit expense 3,698 4,444 5,998 - -
(iv) Provision for accrued retirement
benefits for directors 24 62 104 - -
(v) Rental expense 48,900 49,952 51,144 43,781 53,196
(vi) Amortization of goodwill 338 610 584 485 450
(vii) Other 1,26,235 129,638 124,966 118,582 139,092

Total selling, general and 2,72,648 281,456 280,903 250,735 300596

administrative expenses

Operating Income 3,222 1,233 9,550 10,077 16,563

Non operating income:

(i) Interest income 638 661 592 - -
(ii) Dividend income 89 113 177 895 1,105
(iii) Accumulated interest income of
marketable securities - - - - 243
(iv) Equity in earnings of unconsolidated
subsidiaries and affiliates 17 - 204 - 381
(v) Gain on sale of marketable securities - - - 185 -
(vi) Foreign currency exchange gain - - 235 589 -
(vii) Miscellaneous income 1,143 2800 1,486 - -

Total non operating income 1,888 3,575 2,696 1669 1729

Non operating expense:

(i) Interest expense 7,100 8,682 9,457 8,506 9,347
(ii) Interest expense on commercial
paper 201 935 922 - -
(iii) Equity in loss of unconsolidated
subsidiaries and affiliates - 24 - 195 -
(iv)Loss on sale of marketable securities - - - - 16
(v) Exchange Loss - - - - 64
(vi) Miscellaneous losses 423 1326 1,366 120 793

Total non operating expense 7,725 10,970 11,746 8821 10220

Ordinary Income/(Loss) (2,614) (6,160) 501 2,925 8,072

20
For the year ended December December December 2004 December 2003** February
2006 2005 2003*
Special gains:
(i) Prior period adjustments - - 366 - -
(ii) Gains on sales of fixed assets 2 36 3 - -
(iii) Gains on sales of investment
securities 49 1,765 5,746 3,123 173
(iv) Gains from early extinguishment of
debt 1,100 - - - -
(v) Compensation received for store
relocation - - 561 - -
(vi) Gain on cancellation of store
contracts - - - 580 -
(vii) Gain on termination of substitutional
portion of EPF - - - - 11,303
(viii) Other 198 228 200 - -

Total Special Gains 1,351 2,031 6,879 3703 11476

Special Losses:
(i) Prior period adjustments - - 427 - -
(ii) Losses on sales of fixed assets 61 303 120 - -
(iii) Losses on disposal of fixed assets 814 937 1,450 2,560 3,875
(iv) Provision for allowance for doubtful
Accounts 514 336 624 1,087 9,998
(v) Amortization of net retirement benefit
obligation at transition - 3,128 3,129 3,214 3,567
(vi) Special retirement benefits - - 4,078 2,411 -
(vii) Loss on write down of merchandise - 2,094 - - -
(viii) Loss on close down of stores - - - 719 1,022
(ix) Loss on write down of securities - - - - 40,415
(x) Losses on restructuring - - - - 38,088
(xi) Impairment loss 49,289 - - - -
(xii) Other 2,967 1,348 1,329 1,000 4,375

Total Special Losses 53,647 8,148 11,160 10991 101340

Gain/ (Loss) before income taxes (54,911) (12,278) (3,780) (4,363) (81,792)

Income taxes-current 1,650 2,271 2,231 1,369 2,561

Income taxes-deferred (769) 3,174 6,239 (954) (10,109)

Application to minority interests 0 49 66 401 (3,617)

Net Gain/(Loss) (55,792) (17,774) (12,318) (7,087) (90,845)

*The fiscal year is calculated for 12 months from February 28th 2002 to February 28th 2003.
** The fiscal year is calculated for 10 months from March 1st 2003 to December 31st 2003.
For the year ended February and December 2003, Other Net Non operating expenses are given under miscellaneous
expenses.
Source: Compiled by the author from
(a) “The Seiyu Ltd., Annual Report 2004”, http://www.seiyu.co.jp/english/pdf/annual/2004/all.pdf
(b) “The Seiyu Ltd., Annual Report 2006”, http://www.seiyu.co.jp/english/pdf/annual/2006/all.pdf
(c) “Release for the Consolidated Financial Statements for the year ending December 31, 2006”,
http://www.seiyu.co.jp/english/pdf/financial/2006_consolited_e.pdf, February 16th 2007

21