CASE STUDY ON

WAL-MART STRUGGLES IN JAPAN

TYBMS MARKETING

NAME: PHEBE BABU VARGHESE

ROLL NO. 8055

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, 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) 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 Law prompted the emergence of convenience stores. Convenience
stores targeted small commercial zones.
In the 1990s, deregulations such as the ‘Large Scale Retail Store Location Law’, ‘category
killers’ and shopping malls in cities which had lost competitiveness, resulted in large
suburban shopping centres called Regional Shopping Centres (RSC

Wal-Mart in Japan
Wal-Mart Stores, Inc., the world's largest retailer and the largest corporation in the US,
entered Japan through the acquisition of a 6.1% stake in Seiyu, the then fifth largest retailer in
Japan, in 2002. 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.

Due to years of mismanagement, Seiyu remained a troubled firm even at the dawn of the 21st
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. 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.

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. 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. As of April 2007, Wal-
Mart had 2,750 stores in 13 countries worldwide (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. 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 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”, observed David Marra, a principal at management
consultancy A.T. Kearney Inc., in Tokyo.
 o Wal-Mart –The need for a localisation imperative

Japan is considered to be one of the world's most difficult markets to penetrate. 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, which plays a significant role in local communities. For Wal-Mart,
these factors have imposed difficulties to increase the economies of scale.
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. 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.”

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-Mart in China for $1
billion in 2006 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. 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.

o 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 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.