Japanese Retailing Through the 1990s: Retailer Performance in a ...

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British Journal of Management, Vol. 15, 73–94 (2004)

Japanese Retailing Through the 1990s: Retailer Performance in a Decade of Slow Growth John Dawson and Roy Larke University of Edinburgh Management School, 50 George Square, Edinburgh EH8 9JY UK and University of Marketing & Distribution Sciences, 3-1 Gakuen Nishimachi, Nishi-ku, Kobe, 651-2188, Japan email: [email protected] [Dawson]; [email protected] [Larke] The development of Japanese retailing through the 1990s is used to illustrate the applicability of a Europe-based growth model in a recessionary market. Through the 1990s the Japanese economy suffered low growth and periods of recession, after strong growth through the 1980s. Retail sales in the 1990s increased only slightly whilst floorspace developments begun in the 1980s and the result of retailer expansion strategies generated increased retail capacity. Large retailers pursued strategies of opening more stores in order to generate sales, but this proved disastrous and resulted in lower productivity, high levels of debt, low levels of innovation and consequential need to restructure. General merchandise and department-store retailers were slow to see the need to restructure and innovate. In contrast, three groups of retailers obtained competitive advantages from the recession, namely retailers who responded quickly to emergent market segments, foreign retailers and e-retailers. The strategic responses to recession and the reasons behind these responses are illustrated and suggestions made on how the experiences of the 1990s will affect development in the early 2000s. Implications of the retailers’ behaviour are indicated for retailer strategies, the restructuring of the sector and for research on strategy and structural change. ‘Some people say there are just too many stores, but the truth is that there are too many stores that are not giving people what they want’. Toshifumi Suzuki, Chief Executive Ito Yokado (Asahi Newspapers, 2001)

Introduction1 The Japanese domestic economy grew rapidly in the 1980s. Through the 1990s it was close to or in recession. Whilst there were brief periods of slow growth during the 1990s nonetheless, GDP was lower in 1999 than in 1997 and increased by only 7.3% between 1992 and 1999.2 Several substan1

This research reports results from analyses of a wide range of published data sources, governmental commentaries, the reports from companies and a programme of interviews with retailers, government officials and advisors since the mid 1990s. r 2004 British Academy of Management

tial fiscal interventions, through tax cuts, sought to stimulate consumer demand but none had more than a very short-term effect. Retailers, in common with other consumer goods industries, flourish in growth economies when there are opportunities for expansion, consumer spending is increasing and there is mild inflation. These economic conditions provide the economic slack that facilitates innovation (Noria and Gulati, 1996; Loasby, 1998). The application of innovation to generate growth in sales is the major strategic objective of retailers. A growth market provides opportunities to implement new ideas and to develop the retail firm. A recessionary market closes these opportunities.

2 The contribution of retailing to GDP was lower, at current and constant prices, in 1999 than in 1994.

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Retailer growth in a recession with deflation, which is the Japanese situation, is difficult and requires different strategic and operational abilities to those used in periods of growth. Innovation in recession is particularly difficult. The link between innovation and sales growth as the engine driving retail development has been advocated elsewhere (Dawson, 2001) and the logic of the relationships has been explained in respect of the restructuring of retailing in Europe. The hypothesized general process is summarized in Figure 1, showing the processes and components of two cycles that create growth. The importance of innovation is highlighted and productivity has to be interpreted as relating to all assets of the retailer not only the traditionally measured one of salesspace. Although the model has been explored in a European context it is not clear if it is valid in an Asian context and under conditions of recession. This paper considers retailing in Japan during the 1990s – a period of recession and deflation. The paper has four objectives. One objective is

to consider the model outlined in Figure 1 applied to a non-European economy with extended periods of slow or no growth in retail sales. A second objective is to analyse the changes in Japanese retailing through the 1990s and provide a new interpretation of the performance of key retail sectors through the period. A third objective is to consider the strategies of retailers and how selected groups of retailers have coped, or failed to cope, with a long period of low growth in spending. A final objective is to provide suggestions on how the experience of the 1990s may influence Japanese retailing through the first half of the 2000s.

The literature on retail change in recession Literature on the Japanese distribution system is extensive in volume, but rather limited in scope. Japanese sources have taken pains to show that the distribution system in Japan has significant

Managerial Technology

ideas and knowledge

Innovation

Productivity growth Marketing paradigm

Power and trust

Increased customer service

Retailer control of channels

Consumer literacy and confidence

Globalization

Increased retail sales

Figure 1. The cycles of channel control and customer service that link innovation to sales growth in the retail system Source: Adapted from Dawson (2001).

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Japanese Retailer Performance in the 1990s cultural and operational objectives that differ from Western models. This has generated a widespread interest in Japanese distribution, but largely through the need to investigate that assertion itself. Concentration of research on the fragmented nature of the overall structure of the system, with the large number of small commercial enterprises exceeding even the number in the United States, has caused the field to be somewhat devoid of broader-based empirical investigations. In addition, Japan’s rather archaic and politically sensitive commercial practices have caused many otherwise globally-inclined retailers to ignore the market altogether with the result that a major strand of research in retailing, namely that associated with internationalization, is largely missing in the Japanese context. In recent years, the research literature has turned more towards China as the focus of structural change and internationalization of distribution in Asia, and references to Japan have become less common. This is unfortunate, because there are two features of Japanese retailing that remain highly relevant to Japanese and non-Japanese retailers. First, Japan, whilst being the secondlargest economy in the world, still has a relatively underdeveloped and unsophisticated retail marketing system. In part because of the recession, the cost of entry into the market has fallen significantly in the 1990s providing opportunities for non-Japanese retailers. These foreign retailers are often more innovative than Japanese companies in terms of marketing, particularly branding and merchandising, and in sourcing and relationships with suppliers, and so potentially could stimulate change in the system. Second, Japan presents us with perhaps the first case of retailing in an advanced industrial economy that has endured a long period of stagnant economic development. There is much to be learned from how the retail system and strategic decisionmakers in retailing have responded to economic decline. The tradition-based nature of the retail system adds to this interest as both a possible contributing factor and a cushioning one. Many Japanese would argue that the breakdown of traditional business practices is at least partly to blame for the structural problems that the industry now faces. Others would argue that it is the perpetuation of these same practices that is the key problem in itself and that the correct way forward for Japanese retailers is to seek greater

investment in innovation, so changing the nature of relationships in the system. Retail change is a major research field, but has been considered in the context either of growth economies or of economies in transition from central planning regimes to markets. The few studies of retailing in recent short-term recessions in USA and Europe are shallow and mainly exhort retailers to pursue a strategy to control costs (Piercy, 1983; G. Simmons, 1981; M. Simmons, 1983). Longer-term studies (Barger, 1955) and those of the recession of the 1930s (Braithwaite and Dobbs, 1932; Jefferys, 1950; Smith, 1948) are more analytical but are concerned with distribution systems that were fundamentally different in structure than those of today. A number of studies, reviewed in Dawson and Kirby (1979) have related the birth and death of small-scale retailers to broad-scale economic change. Other studies have attempted to link the cost structure of the distribution chain to macro-economic factors and so identify where cost efficiencies could be gained (Bucklin, 1972; Cox, 1965; McClelland, 1967). Douglas (1975) and Bakkenist and Beutick (1957) have reviewed cost structures in the context of retail change but within a growth economy. None of these studies is recent. A few company studies, for example Bradley and Taylor (1992, p. 14) consider retailer strategy in recession, pointing to the opportunities for acquisition presented by corporate failure in the sector. The vast majority of research on retail change in developed economies, over the last 30 years, however, has assumed an underpinning of economic growth and so is perhaps of limited relevance to Japan through the 1990s. Kono and Clegg (2001, pp. 210–213) indicate some general reasons and consequences of the recession in Japan, but largely ignore retailing and deal with the issues underpinning recession in only a very general way. It is therefore particularly instructive to consider retail change in Japan through the 1990s, when these underpinning processes of growth have been absent.

An economy of plenty moves into recession The move from ‘Bubble’ to recession Through the 1980s Japanese consumers bought products in large quantities, often at high prices.

76 Purchasing of household durables, fashion in its many guises of clothes, electrical products, toys and jewelry and spending on gifts increased substantially, year on year (see Nikkei Ryutsu Shinbun, 1989). Consumers owned increasing quantities of goods. Household formation was active and spending on household durables was generated by these new households. Much was written on the Japanese ‘economic miracle’ of the 1980s (Dore, 1986; Morishima, 1984; Nihon Keizai Shinbunsha, 1990; Nishiguchi, 1994) with a number of studies addressing retailing and consumer related aspects through the 1980s (Batzer and Laumer, 1989; Czinkota and Kotabe, 1993; Dawson, 1989a, 1989b; Kakeda, 1994; Maruyama, 1992; Ueda, Fujii and Takeuchi, 1993). Large retailers expanded their store networks, and although the number of small retailers declined slightly, in general the consumer boom encouraged the large firms to try to make heavy investment in sales space (Larke, 1992, 1994; Larke and Dawson, 2000). Between 1982 and 1991 retail sales increased by 52% and sales space increased by 15% to almost 110 million square metres. The Large Scale Retail Store Law (LSRSL),3 however, limited the increase in sales space to some extent, requiring retailers to undertake an extended process of seeking permission for new stores (see Dawson and Sato, 1983; Kaikati, 2000; Larke, 1994, pp. 104–126; Suzuki, 1993). The LSRSL enabled an expansion of retail space in a relatively orderly way, although lagging the market. Retail competitive processes were muted as sales growth outpaced capacity. The new store development of the 1980s included not only large GMSs4 and department store development but also the expansion of specialist chains and small designer-brand units. A feature of the 1980s boom was the substantial involvement of public policy agencies in the development of retailing. The MITI vision documents (MITI, 1989, 1995) provided a framework for government legislation such as the LSRSL, the Specific Commercial Accumulation Facilities 3

The Large Retail Store Law has been in force in several forms since the 1930s. Most recent legislation was enacted in 2000 under the new name Large Store Location Law. 4 GMS is used to refer to General Merchandise Store in a Japanese context. These GMSs have a wide product range and are the Japanese equivalent to European hypermarkets and American super-centers.

J. Dawson and R. Larke Law (MITI, 1991) and others that aimed to further encourage the continued existence and welfare of smaller distribution companies. The LSRSL illustrates several aspects of the general nature of Japanese business practices at this time in which political and commercial imperatives are intertwined (EPA, 1986; Goldman, 1991; Miwa, 1991; Suzuki, 1993; Tajima, 1984; Tsuchiya and Riethmuller, 1997; Uno, 1985). One objective of the Law was political in the support it gave to the electoral base of small retailers who were major supporters of the ruling political party, the Liberal Democratic Party (LDP). The legislation also existed to protect these small-scale retailers, of which there were some 1.5 million, from the full pressures of market competition. In a bureaucratic style commonly used in Japanese culture, permission for new retail developments required a consensus from a range of interested parties, including competing retailers. The period between planning a project and its opening was therefore many years. Intra-type competition amongst large stores was subdued because relatively few new large stores were developed compared to the growth of the market. Profits were obtained without the need for innovation because capacity was insufficient to meet the growth in demand. Tradition was more important than innovation. Inter-type competition between protected traditional small stores and large stores was similarly subdued. In the sectors where new stores were relatively free to be developed, small convenience stores, chains of small specialist shops and superspecialist designer brand units, competition was much stronger and innovation was present (Nikkei Keizai Shinbunsha, 1989, p. 363; 1996, pp. 181–9). In general, however, the public policy framework was designed to enable not only small retailers to remain in business but also the few large retailers to make substantial profits from their slowly-growing store networks. The banks that provided investment capital secured their loans on property within a highly constrained property market. Other practices were less formal in nature but had much the same effect. Business practices employed by members of supply chains included complex rebate systems, loan employees, free return of unsold goods, long payment periods, and ostracism of companies that did not cooperate within the system (Ejiri, 1983; Miwa,

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Japanese Retailer Performance in the 1990s 1991; Shimaguchi, 1977; Tajima, 1994). Philips (1995, p. 151) has termed this ‘semi-collusion’. Such close cooperation between business partners in other advanced countries would have been deemed anti-competitive, not least as these practices were based on personal and social relationships rather than formal economic principles (Shimaguchi, 1977). In Japanese eyes, rather than being overtly corrupt, such practices were seen as protecting the markets of all players within the channel, including employees and consumers (Herbig, 1995, pp. 10–13) with suppliers remaining as the ‘natural’ channel captains. Competition was managed and in consequence, levels of innovation were low. Consumer activism was weak (Fields, 1988, pp. 109–14; van Wolferen, 1989, pp. 52–3), and there was a widely held desire to avoid so called ‘kato kyoso’ or ‘excessive competition’ (Fields, 1988, pp. 120–123) – essentially strong price competition. Generally, this was seen as any competition that would force a company to lose money or risk losing business where competition control, whether formal or informal could guarantee the mutual benefit of channel members. This cartel like structure is easily criticized from a Western point of view, but is an enduring and normal aspect of Japanese business. It is also one that demands more research in terms of the differences in business paradigm as practised in Japan compared to the Western model. While corporate interests were placed above those of the consumer, it is hardly surprising that Japanese interests were held above those of outsiders. American and European administrations saw these relationships as both anticompetitive and as non-tariff barriers or structural impediments to potential entrants (McKinsey, 1983; MITI, 1990; US International Trade Commission, 1993; Wilkinson, 1983, pp. 200– 230). Japanese would no doubt argue that practices applied not only to overseas entrants, but also to domestic competitors. More importantly for our understanding of what happened in the 1990s, these practices were serious impediments to retail innovation.5 Managerial practices used traditional principles with traditional atti5 In the same way public policy to limit hypermarket development in Europe in the late 1970s limited competition and resulted in reduced levels of innovation and investment in existing protected large stores, for

tudes. Technology was used to reinforce existing systems and practices, not as a vehicle for innovation. In terms of Figure 1 the catalysts for innovation were absent. New economic conditions for the 1990s At the start of the 1990s the business environment for retailers changed in several ways. First, revelations in 1991 that senior politicians had received financial inducements from a major publishing company created the first widespread anti-corruption moves in Japan since the country achieved economic prosperity (Chowdhury, 1989; Far Eastern Economic Review, 1992). Political corruption is a problem with which Japan continues to battle, but after 1991 there was less acceptance of the more traditional ‘money for favours’ politics on which some senior politicians were brought up and which underpinned adjustments in the LSRSL in the 1980s that in effect maintained the status quo. A second major change was the collapse of the bubble economy that had been based on growing property values through the 1980s when the Japan to USA ratio of land asset values rose from 1.5 to over 4. The property market and the stock market collapsed in 1990. The residential land value index fell 22.7% in the period 1991–2000. The fall was even more marked in the six largest conurbations where residential land prices fell by 60.1% in the same period.6 The decrease continued to the end of the decade with data from the National Tax Administration Agency showing commercial land prices falling by 12% during 1999 although residential values were falling more slowly. The security for the bank loans for store development in the 1980s was therefore downgraded. Third, pressure from the USA to open Japanese markets to imported products, potentially sold by foreign retailers, reached new levels of intensity (Itoh, 1991; MITI, 1990; Punke, 1989; US International Trade Commission, 1990). As a direct consequence of this pressure, example Franc¸ois and Leunis (1991) and Dawson (1982) have analysed this in Belgium. 6 In Tokyo the average price of residential land in 1990 was f514,200 per m2, and by 2000 was f232,400. In Osaka it fell even more from f534,400 to f206,700. Whilst at peak values there were relatively few transactions the high values were used as collateral for bank loans for new developments.

78 substantial amendments were made to the LSRSL in 1991 to make the opening of new stores as lenient as it had ever been in modern Japan. Riding the wave at the end of the bubble economy and perhaps a little desperate for floor space, large retailers were quick to boost their investment in new, large stores. Reviewing the economy in 1991, Mimura (1991, p. 33) indicated the MITI view that ‘Already the plan to ease restrictions has prompted retailers, who are also presently buoyed by continued expansion of consumer spending, to open new stores and to expand sales floor area at existing stores’. This opportunistic strategy to increase capacity was to sow seeds for the ultimate bankruptcy of some retail companies by the end of the decade. Finally, the Kobe earthquake of 1995 disrupted several sections of the economy, causing a sudden fall in GDP. The general slowdown in the economy, and the trigger effect of this sudden disruption, resulted in unemployment. Recruitment fell rapidly, and the official employment rate, while still low by Western standards, rose to its highest level since 1945. For the first time, modern Japanese consumers feared losing their jobs. Berggen and Nomura (1997) argue that the change in personnel practices resulted in widespread changes in social attitudes, including an increased propensity to save and a reduction in new household formation. Consumer confidence was badly shaken by this combination of factors and not surprisingly failed to recover through the 1990s. The fear of unemployment was possibly the single most important factor depressing consumer confidence in the 1990s. Consumers saved more and switched incremental spending into services rather than products in order to secure their future in health and financial terms. Consumers reacted to the changed environment of the 1990s by curtailing their retail spending and slowing their replacement rate for products. At the same time government provided less support to retailers as it extracted itself from some involvement in the market. Abegglen (2001) claims that deregulation of retailing was complete by 2000. It is true that the LSRSL was abolished, and replaced with the new Large Retail Store Location Law, and that the new law does not specifically aim to curb the activities of largeformat retailers in order to protect small independents, but it is now equally clear that this

J. Dawson and R. Larke change was not a form of deregulation, rather a change in store development criteria. The number of large store applications which have been successfully submitted since the change in June 2000 has dropped significantly compared to before that date (see Store Japan Weekly, 2002). Indeed, the retailers, released from the governmental constraints in the early 1990s responded by opening more capacity in similar formats to existing capacity, using debt financing supported by property assets. Between 1991 and 1999 retail sales increased by only 1.1% but sales space increased by 21.8%. Despite the slowdown in overall sales there was a major increase in floor space as the projects, initiated earlier in the lengthy development cycle, were completed. This was added to by the new space developed with the loosening of the LSRSL. Many of the informal traditional practices were maintained with management concentrating on expanding space rather than improving productivity and reforming behaviours. Innovation remained low, with simply more stores of the same type being built. Over a relatively short period, trading conditions for retailers thus changed from rapid growth of sales and slow growth of space to the reverse position. Retailers were exposed to greater competitive pressures with less help from government. In addition much of the expansion in space they undertook was on the basis of loans underwritten by property values that were falling. By the mid-1990s, retailers, perhaps for the first time in the recent history of Japan, had to compete seriously for customers. But the large firms were ill-equipped for this competition, having achieved little in the way of innovation through the 1980s and having simply built more stores to the same model through the 1990s. The lack of innovation placed them in a position in which price competition was the only form available to them, and a wholly unfamiliar one at that. This sustained the retail price deflation, limited still further opportunity for innovation, reduced consumer interest in buying, and maintained the falling trend of retail sales value. Table 1 shows the extent to which consumer spending stagnated during the 1990s despite rising incomes up to 1997. Retailers have been unable to persuade consumers to spend money. The savings ratio rose to 30% in 1998 and only eased slightly in 1999.

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Japanese Retailer Performance in the 1990s Table 1. Consumption, retail sales and retail space in Japan, 1991–1999 Monthly Household Accounts Yen

1991 1995* 1999

Income

Expenditure

Savings

529,053 551,409 554,029

333,061 337,774 333,740

80,118 83,980 90,626

Savings as % of income Consumer prices Retail Sales Retail Stores Sales space 1995 5 100 million Yen Sq m

15.1 15.2 16.4

98.1 100.0 102.2

142,291,133 143,325,065 143,846,186

1,605,583 1,499,948 1,406,905

109,904,497 121,623,712 133,878,548

Note: *Retail Store numbers and sales space for 1994. Sources: Management & Coordination Agency (2000), MITI (2000a).

Although the conditions of the 1990s represent a new economic environment it must be remembered that the changes were at the margin, albeit a substantial margin. Retail sales per person did not rise; they stagnated at the high level of the early 1990s. Many features of Japanese retailing are the legacy of several decades of expansion culminating in the early 1990s. Japanese society, and the retailing that it supports, is a stable high consumption system with a substantial baseload of sales volume. Per capita consumption is high on international comparisons. Across the larger national economies, Japan ranked number one in consumption per head in 1992 in total and number two behind USA when purchasing power parity adjustments were made (Whitley, 1995). The crisis for retailers was their failure to make sales continue to grow during the 1990s. Consumer expenditures have been transferred from retailing to other areas, particularly housing and social services. Housing costs remain high, with average house prices at five times average income in the late 1990s (ten times in Tokyo despite the fall in value). Inefficiencies in the rental market and high prices resulted in a thin market compared with USA or UK. Spatial mobility in the labour market remained very limited. Consumers were locked into local economies, supporting local retail provision with products from Japanese suppliers. Saving remains essential to pay large life-stage social expenses associated with family development, for example, school costs, wedding costs, parental support and retirement security. Retailers therefore were competing for consumer spending with non-retail areas and with the consumer’s strong desire to save in order to reduce their future risks. These non-retail demands rose as consumer confidence fell in the continued stag-

nant conditions of the 1990s. Most retailers failed to stimulate consumers with innovation and so the sector failed in its competition with savings.

Retailers’ responses to new operating conditions Falling productivity and profitability Despite the problems of the retail sector, there were still, in 2000, 1.4 million shops in Japan. Over a million shops were operated by small, single-store businesses. Although the gross rate of decrease in shop numbers was approximately 50 000 per year through much of the 1990s, this was offset by new small store businesses opening at a rate of approximately 20 000 per year. Table 2 illustrates Japan’s retail shop openings and closures. Among small firms the birth rate is high, although by the late 1990s it was half that of the early 1980s. As seen in Table 1, despite the decrease in number of shops, the amount of floor space, particularly in the GMS chains, increased through the 1990s. With only the slight increase in sales so there was a fall in space productivity measured as sales per square metre, from f1.17 million in 1991 to f1.08 million in 1999. The only sectors where space productivity rose were those in which innovation in the 1980s was carried through to the 1990s, for example convenience stores. There was also a fall in profitability. Figure 2 shows net profit as a percentage of net sales for three size groups of retail business. The mediumsized firms benefited most from the governmental intervention to boost consumer spending in 1995 but the benefit was short-lived. By 1998 the whole sector was showing negative profitability.

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Table 2. Numbers of new retail stores and closed retail stores, 1991–1997 New stores

1991–1994 1994–1997

Closed stores

Incorporated businesses

Small businesses

Incorporated businesses

Small businesses

76,957 83,116

58,534 58,247

60,402 77,696

166,374 173,326

Source: Compiled from MITI (2000b).

2

Net profit as percentage of sales

1.5 1 0.5 0 Large firms: capital >1000mil. Yen Medium-sized firms: capital 100-1000 mil.Yen

-0.5 -1

Small firms: capital