CASE: Walmart in Japan

Walmart’s Expansion into the Japanese market

Walmart is, in many ways, the quintessential American retailer, though this hasn’t stopped the company from expanding aggressively to overseas markets in recent years. Already the number one retailer in the three North American markets, Walmart began aggressive international expansion a few years ago. Walmart bought ASDA Group in Great Britain, making it one of the largest retailers in the UK, while also expanding in Asia, placing stores in Hong Kong, and setting up a successful joint venture in Mainland China. However, Walmart has not been able to achieve success with the Seiyu Group, a Japanese general merchandise and grocery store chain that came into the Walmart family in 2002. Walmart has spent a fortune in both time and money to turn around a once-dominant retailer and become a force in the Japanese market. Due to mistakes and missed opportunities, Seiyu’s market share has shrunk and losses have mounted. Walmart’s Japanese protégé has become a favorite target for shareholder criticism and a blot on the company’s international reputation. How did this happen?

?Seiyu (The Seiyu Co., Ltd.) is older than its partner, Walmart. Founded after World War II as part of the Saison Group, the company was linked up with the Seibu railway company, helping to provide a ready stream of customers to its stores. While not a well-known conglomerate like Mitsubishi or Nissan, Seiyu was part of a group of linked firms with Sumitomo Bank as the primary shareholder. This arrangement ended only when Walmart bought out Sumitomo’s equity in Seiyu.

?Seiyu expanded heavily in the 1980s, but when the bubble economy burst in the mid-90s, and land values dropped at the same time, Seiyu started to have financial problems. Even before Walmart bought a stake in Seiyu, the retailer had been struggling, though its core grocery was profitable. In an attempt to reach new markets, Seiyu was expanding into newly built residential areas and experimenting with new types of stores such as The Mall, Mizuho 16, a small complex with a Seiyu-managed store as the anchor and numerous other retailers renting space, and Livin, a department store with groceries on the bottom floors, a common practice in higher-end Japanese retailing. Seiyu was also rebuilding and remodeling several stores a year, though it simply did not have a capital to move as fast as it needed to. Seiyu was a firm that had expanded too much in the heady days of Japan’s bubble economy. The company had lost sight of its core business and was no longer nimble enough to fight off rivals. Seiyu was suffering declining sales, declining profits, and declining brand prestige. Many consumers seemed confused as to what exactly Seiyu offered them. It was just one more name in a crowded retail field, a name that many consumers did not feel a particular draw to. In a recent poll, only 5 percent of those asked responded that the reason they shop at Seiyu was quality.

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?While Seiyu was struggling, competitors were moving up in the industry. In 1990, Seiyu was the third largest retailer in Japan. The top two spots were occupied by Daiei and Ito Yokado, respectively, both grocery and general merchandise stores like Seiyu. By 2003, Seiyu had been knocked out of the top five, while Daiei, Jusco/AEON (another grocery and general merchandise store), and Ito Yokado remained. The first and fifth spots, respectively, were held by convenience store chains Lawson and Seven-Eleven (Seven and I holdings owns both Seven-Eleven convenience stores and Ito Yokado).

?In 2002 Seiyu was thrown a lifeline in the form of capital investment from Walmart. After some years of financial trouble, a tie-up with the biggest retailer in the world must have seemed like a windfall. Indeed, looking at media reports from the time, there were many voices urging caution but predicting that with the right moves, Walmart and Seiyu could make money in Japan. Seiyu’s financial troubles also gave Walmart more of a free hand to make drastic yet necessary changes.

?The two companies seemed to be a good fit. Both were general merchandise stores. Both had built extensively in the suburbs. Seiyu and Walmart both tried to undercut the competition in price. Walmart had what many were seeing as a golden chance to enter Japan with a well-established partner. It could thus forgo the risks that plagued firms like Ikea and Carrefour, who had decided to go it alone in Japan.

Japanese Consumer Behavior – A Greater Challenge than Expected

Japan and the United States are very different places. Japanese shoppers behave differently, have different preferences for goods, and have different attitudes about what they want from a retailer than their American counterparts. For the Japanese consumer, price is not the sole determinant of value. For the Japanese consumer, fresh fish is as important as bulk toilet paper, and packaging is nearly as important as product. It seemed that Walmart understood the financial risks of its tie-up with Seiyu, but looking at its action over the next few years, it is far less clear that it understood the fundamentals of the Japanese retail market.

Everyday Low Prices in Japan?

Japan has often been called a mass luxury market. Louis Vuitton, the famous French purveyor of purses and fancy shoes, makes nearly one third of its total sales in Japan. Japanese consumers have a taste for the luxurious, though it has also been shown that on some goods Japanese consumers are practically giddy about saving money. This fact must be mentioned with a caveat; though Japanese consumers like saving money, they are still picky about quality. They will not buy cheap goods, especially if the goods are perceived as an inferior substitute. As the old saying goes, “yasukarou, warukarou” – “if it’s cheap, it’s bad.” With Japanese cuisine, how the food is presented is as important as what it tastes like, perhaps even more important because bad looking food will not be consumed. Pricing is one aspect of presentation. Warehouse stores and Walmart’s deep discounts on national brands are key to the company’s success in the United States. It is important to ask whether this low-cost leadership strategy is fundamentally sound in Japan. Management slips and consumer misunderstandings may have played a part in Walmart’s eventual woes. But perhaps the most important question to ask is “Will ‘Everyday Low Prices’ work in Japan?”

?The Japanese attitude toward price and quality carries over to groceries, but it applies to other goods as well. Walmart carried a serious risk in Japan by being too cheap. Seiyu and its new partner were spending huge amounts of money to rebuild and renovate stores, making them more attractive to Japanese consumers, but they still had to convince consumers that they were getting a great deal, namely the best products for a price that they cannot believe. This has been a problem from a retailer. As former Seiyu president Masao Kiuchi lamented: The lower price on sashimi doesn’t mean that it’s a few days old, but that Walmart got a better price on it.” Sadly, many Japanese consumers cannot help but the suspicious of items, especially food items, priced in the bargain range.

Reading Japanese Customers

One of Walmart’s first mistakes was to step on the toes of a powerful stakeholder group in Japan: housewives. One of the reasons for Walmart’s spectacular success in the suburbs in America is the car society and the shopping habits it engenders. Suburbs Americans will drive the car to the nearest strip mall or supercenter and stock up on goods and groceries for the week. They have a space in their homes to stock cheap goods in bulk, as well as cars to transport heavy loads. In Japan, especially in urban areas, shopping spread throughout the week and is often done by bicycle or on foot. For several items, especially fresh grains and vegetables, Japanese consumers go shopping an average of once every other day. Housewives compare prices before they go out by looking at daily newspaper inserts called chirashi.

?In 2004, citing its famous slogan “Everyday Low Prices,” Walmart had Seiyu cut out the chirashi. In the United States, consumers associate Walmart with lower prices (15 to 20 percent lower) than the competition. In Japan, consumers still wanted to see the deals in print – they did not trust Seiyu to deliver the lowest prices without some sort of authentication. Without being able to compare prices, housewives were confused and simply went elsewhere. After a marked drop in sales, Walmart was forced to resurrect the chirashi.

Private Brands

Another major arm of Walmart’s Japan strategy is the aggressive introduction of private brands. In the United States, Walmart is famous for exclusive store brands, like Sam’s American Choice Cola, that are inexpensive and perceived as a good value by United States consumers. Seiyu is putting more and more Walmart goods on its shelves in the hope of attracting price-conscious consumers. Other Japanese retailers have also started down this path. Seven and I Holdings (Ito Yokado and Seven Eleven’s parent company) and Jusco/AEON have begun to offer many generic items like laundry detergent and snacks. The recent economic downturn has provided further impetus to Japanese retailers to speed the introduction of private brands. According to a recent article in the Nikki Marketing Journal, nearly 70 percent of markets. This is a dramatic increase from even a few years ago. Since Walmart has introduced its private brands all over the world, the firm should be clearly ahead of the game in developing its own brands. But will these global Walmart brands fit Japanese tastes? If Seiyu misreads recent consumer trends concerning private brands, it may wind up attracting fewer shoppers, not bringing in new ones.

Saying Yes to Japan

To its credit, Walmart has stayed the course in Japan, believing that it can make Seiyu work. This is not simply stubbornness; Walmart has shown in both Germany and South Korea that it knows when to quit. Walmart has also shown that it knows how to adapt. In Seiyu, Walmart sees real opportunity. However, the company has not had full operational control for its entire sojourn at Seiyu. It was not until 2006 that the Japanese chairman of Seiyu stepped down and Walmart was able to place its own man, Edward Kolodzieski, at the helm. Walmart did not even make the company a wholly owned subsidiary until 2007. Looking at these facts, Walmart has been in full control of Seiyu for a relatively short period of time. Since gaining a free hand at Seiyu in the last two years, Walmart has moved aggressively to perform triage on Seiyu as the red numbers continue to add up. Yet many of the problems outlined above remain. Question still remain about Walmart’s understanding of the Japanese shopper and the Japanese market. Walmart has raised eyebrows by pressing forward in remaking Seiyu in the American Walmart’s image and by adopting many radically different strategies from its rivals.

?Walmart continues to rebuild and remodel Seiyu stores, hoping to make them more attractive to Japanese consumers. However, many of the remodeled stores look like Walmart stores back in the United States. It remains to be seen if this is a style that will appeal to picky Japanese consumers. Another big change at Seiyu reflecting Walmart’s influence is the introduction of private brand goods.

?Going back to chirashi, Walmart finally embraced the paper leaflets. Showing its continued desire to be the lowest priced retailer and to make sure that “Everyday Low Price” survive in Japan, Seiyu announced that it would now honor the chirashi of its competitors, as well – a marketing coup designed to make sure that when customers think of low prices, they think of Seiyu.

What about the Future?

Seiyu again failed to post a profit in 2008, though some stores were starting to show an increase in year-on-year sales. There was a new CEO at the helm and the company seemed optimistic. However, the fact remained that Walmart had embarked on year seven of its tie-up with Seiyu and still had not made money from its investment.

?The Japanese economy, though still the second largest in the world, is not as affluent as it once was. Consumers may be willing to accept cheaper substitute, assuming they still meet the basic standard of quality. It would seem that the global recession and Japanese consumer’s appetite for saving may still mesh well with Walmart’s private brand strategy. Walmart is America’s low-price leader. It has worked hard to transplant this image to Japan, as well, even going so far as to honor competitors’ coupons. With the current financial troubles hitting consumers hard, Walmart and its “Everyday Low Price” should be an optimum position to gain on its rivals in the coming years.

?However, Japan is a fickle market, and although rising prices on well-known national brand foods and consumer goods was the story in the first half of 2008, the second half of the year seemed set to be dominated by the much cheaper private brands. Only time would tell if this was a long-term trend or a temporary reaction to the global recession

?We have seen Walmart and Seiyu make mistakes and miss opportunities. The economic crisis has given the company a good chance to increase sales and market share, assuming that it has learned from its mistakes. In a company that increasingly sees itself as a global entity, failure in Japan would be a huge blow. Staying the course in Japan longer before admitting defeat would be even more painful.

Questions

1. Which market entry strategy did Walmart choose to enter the Japanese market?

2. What challenges did Walmart meet in Japan?

3. How does Japanese consumer behavior differ from Western consumer behavior?

4. Should Walmart change its pricing policy in Japan?

5. What effect will economic downturn have on Walmart’s business in Japan?

6. Are there other American retailers that are successful overseas? Please name some and point out their international marketing strategies.

7. What future strategies should Walmart apply in the Japanese market?

Answer rating: 100% (QA)

1 Walmart chose to enter the Japanese market through a joint venture with a local company Seiyu This allowed Walmart to leverage Seiyus existing infra... View the full answer