Japan's Retail Revolution: The Resilience of Main Street and the Impact on Wal-Mart

1. Japan's Retail Revolution– why Wal-Mart isn't closing down Main Street there –most PHOTOS DELETED Michael Smitka Washington and Lee University ––– Virginia Association of Economists March 27, 2008 Lexington, Virginia © 2008 Michael Smitka

2. Fulbright Project • Book on modern Japanese economy • Target audience undergraduate Japan classes • Context: “lost decade” • avg growth 0.9% during 12 years 1992-2003 • Two underlying themes • Lotsof change despite slow growth • Demographics and its impact • Issues • Finding examples interesting to non-economists! • Teaching economics in the process

4. Retail Change • Post-WWII • Poverty • High density residences • Poor transportation • Retail sector • Department stores from prewar era • Lots of very small mom-and-pop stores • Grew organically around town centers, train stations • Shotengai “shopping streets” (商店街) • Supported by host of wholesalers

5. Rise of GMS (Daiei) • Growth of general merchandise stores • Daiei, known for discounts • In early stores, cheap goods piled on tables • Large Retail Store Law • Earlier 1937 law aimed at dept stores • Strengthened 1972 • Amended 1979, 1982 to plug loopholes • Severely restricted new large-format stores • No new “supermarkets” in entire Kyoto Prefecture

6. Rise of suburbs • Influx from countryside, esp. late 1960s • Land reform plus rent control (借地法、借家法）made redeveloping urban areas hard • Planning process for realigning roads etc around outlying stations slow, rigid • Suburbs thus tended to “leapfrog” to outlying areas without infrastructure • People moved from station to bus • Little foot traffic for shopping streets

7. Increased mobility • Car ownership widespread in rural areas by 1980 • Cf. US where in 1930 some 30% of farmers already owned vehicles • Expansion of suburban car ownership was 1980s and 1990s • Full-sized cars & “kei” minicars (軽自動車)

8. End of Large Store Law • 1992 revision streamlined approvals • Maximum time for each step specified • Bursting of bubble freed real estate, esp in suburban areas • Abandoned factories, warehouses • Rise of roadside retailers • Exemplar: Yamada Denki • Cf. Best Buy or Circuit City • No stores at stations, largest specialty retailer in 10 yrs!

9. Demographics • 20% of population over age 65 • Single-member households largest category • Different food and consumption needs • Different time constraints • Example: bread! • young now spend more on it than on noodles – and noodles than rice

10. Other innovations • Convenience stores • 7-Eleven franchise chain • Hugely profitable • bought out US Southland Corp • Innovative logistics, IT • Early adopter of POS systems • Careful tracking sales by time of day, weather, etc • Take-out food changed at least 3x daily! • Now 4 huge chains • And new entry continues: ¥99 Shops that specialize in single-person food quantities all at a fixed price

11. Large-format retailers • Aeon • Jusco GMS, others through M&A • Food supermarkets • Ministop convenience stores • Seven & I • Ito Yokado GMS • 7-Eleven convenience stores • 2 department store chains (M&A)

12. Specialty retailers • Lots of categories, some different mixes from US • Mens clothing • Severely hurt dept store profitability • Home centers • Shoes • Drugstores • Electronics • Some through franchises, some only roadside

13. Shopping malls • Post-bubble phenomenon • Needed cheaper land • Several early ones in rural areas • Go to a small town where local retailers view as drawing customers / won’t use Large Store Law • Near large town and crossroads, of course • Others in new areas (landfill around Tokyo Bay) • Now everywhere • But parking on the roof to save on land!!

14. What of Wal-Mart? • Late in the game • Others had picked locations outside city centers • IT very well developed • 7-Eleven most sophisticated system anywhere? • Wholesalers reorganized • Food wholesalers aiding and abetting growth of large food supermarket chains

15. The Big 5 • Wal-Mart • Bought failing Seiyu chain • Small, old stores adjacent to train stations • Poor road access, and poor reputation • Has invested $6 billion and still losing money • Carrefour - exited • Tesco - a few small-format food stores • Metro - 2 stores, strategy unclear • Costco - a handful of stores, carefully located, same format as elsewhere. Seems to be OK

16. Foreign successes • Denny’s established the roadside family restaurant genre • McDonald’s….! • Ikea draws from wide area… • Lots of luxury good stores • Now setting up stand-alone, further undermining department stores

17. Mom-and-pop? • Going, going … gone!? • Small and Medium Enterprise Agency has many projects • But very little success • Patterns of movement now different • Hours of shopping are now different • Rural population in rapid absolute decline • Shutter-gai: streets with all stores are closed • But a few with a good location, or theme, or… • Not amenable to replication • And overall market in decline

23. Retail Size Distribution: Establishment Retail Size Distribution

24. Retail Size Distribution: Employment

25. Retail Size Distribution: Sales