Wal-Mart appears content to work in the shadows in Japan

By Ken Belson
NY TIMES NEWS SERVICE, AKABANE, JAPAN
Sunday, Dec 14, 2003, Page 12

It's 8:15 on a Friday morning and about 50 managers of the Seiyu supermarket chain are assembled on the second floor of their headquarters in Akabane, 30 minutes from downtown Tokyo. Surrounded by signs listing hot products, new promotions and performance rates, many of the chiefs have already been at work for an hour.

Powered by coffee, tea and Diet Coke, they begin their daily pledge of allegiance, just as their counterparts do in Bentonville, Ark., home of Wal-Mart Stores, which owns 38 percent of Seiyu.

"Give me an S!" a Japanese boss shouts.

"S!" comes the reply.

And so on, until the group spells "S-E-I-Y-U."

"Who's No. 1?" he asks.

"Customers!" they reply, punching the air with their fists.

The routine is one of the small ways in which Wal-Mart is revamping the struggling Seiyu, Japan's fourth-largest retailer. Unlike Toys "R" Us, Costco and other outside rivals that opened their own stores here, Wal-Mart has spent US$513 million for a chunk of Seiyu, whose name still adorns its 400 stores.

The logic is simple: By working through a local partner, Wal-Mart is hoping that it can better navigate Japan's serpentine and costly network of suppliers, which has long frustrated other foreign investors. The company also avoids having to build stores and can take advantage of Seiyu's well-recognized brand.

But as it dips its toes into Japan, the world's second-largest economy, mighty Wal-Mart is confronting something it seldom encounters: skeptics who doubt that it can succeed. The retail market in Japan is dominated by powerful manufacturers and wholesalers whose high prices have made the country an inhospitable place for foreign dis-counters. And Japanese consumers are famously finicky -- as other US retailers who have simply imported goods with little regard for local tastes have learned the hard way.

Further complicating matters, Wal-Mart must repair a chain whose sales peaked a decade ago. Seiyu, which also sells housewares, appliances and general merchandise, has a debt-to-capital ratio that is more than twice the industry average in Japan. In the half-year that ended in August, the retailer lost ?8.4 billion (US$77 million) as sales slipped 3.9 percent from the period a year earlier. The company expects to lose Y10 billion for the full year.

To Wal-Mart, though, Seiyu is a risk worth taking. Japan's dense supplier network and expensive labor and land give the US discounter a chance to cut costs and bolster profitability. The company's "everyday low prices" may also prove a hit with the increasingly bargain-conscious Japanese consumer, analysts said.

"Wal-Mart has a lot of work to do, but their timing to be in Japan is really good," said Hidehiko Aoki, a retail analyst at Goldman Sachs in Tokyo. "They can bring a new retail model to Japan."

To that end, Wal-Mart has unveiled a five-year plan to reduce the hours worked by full-time staff members by about 40 percent, partly through early retirement and increasing the percentage of part-time workers to 85 percent from 70 percent. The company is computerizing the chain's operations, remodeling aging stores and trying to do what it has done so effectively in the US: persuade manufacturers and wholesalers to cut prices so Seiyu can pass along the savings to consumers.

If all goes well, Wal-Mart can use its option to raise its share in Seiyu to 50 percent by 2005 and to 66.7 percent two years after that, giving it further management control. It is then, analysts say, that Wal-Mart will consider opening stores under its own name.

The company is also quietly teaching Seiyu's employees to sell the Wal-Mart way. That means using data to analyze sales, not just following store managers' hunches. To reinforce the lesson, Wal-Mart is putting store managers through weeklong training sessions and has flown hundreds of Seiyu workers to Arkansas.

"Japanese might think what we're doing is very tough, but they have to realize that this is the world standard," said Seiyu's chief executive, Masao Kiuchi, who, like many Wal-Mart managers, arrived at the morning meeting in an informal open shirt and no jacket.

After Kiuchi wrapped up the meeting, dozens of managers headed back to their desks to pore over spreadsheets on their laptop computers. Seiyu pools data from all of its stores so that everyone from clerks to suppliers can see what is on the shelves, what is selling and when.

While the company is squeezing savings out of Seiyu's operations, it is also refurbishing the chain's older stores.

Wal-Mart chose the three-story Futamatagawa store outside Yokohama as a test case, spending roughly US$7 million to renovate the building. The entire first floor has been devoted to food; clothing and household goods have been moved upstairs. The aisles have been widened to allow two carts to pass, and a deli counter with prepared foods is now open until 11pm for commuters returning home late.

Bowing to local tastes, Wal-Mart has also installed a small fish market, where workers slice slabs of tuna for customers. Nearby, baskets of vegetables and fruit sit on casters so workers can roll them into and out of the storeroom instead of unloading boxes in the aisles.

The new layout appears to be a hit with customers. Food sales and traffic have risen 50 percent since the store was remodeled in June, taking business from three major supermarkets nearby.

Still, Wal-Mart has learned that the Japanese, like consumers elsewhere, are creatures of habit.

The company had stopped stuffing mailboxes with circulars to publicize twice-a-week sales. Wal-Mart argued that because its prices were already the lowest every day, there was no need to have special sales. But homemakers are addicted to circulars, using them to dart from store to store in search of deals. So, after some complaints, the circulars returned, to the relief of customers.

"I only come here once a week," said Hisako Ito, a homemaker who heads to neighboring stores for other bargains.

"I still go to cheaper places by car to get meat and other things," she said.

More and more shoppers, though, seem to be warming up to the Wal-Mart-style bulk discounts, which are available every day. Soda is a case in point. One aisle in the Seiyu store is now a wall of Coke and Diet Coke, stacked with cans, six-packs and cases. All cans are ?198 each, or about 15 percent below the suggested retail price. Soda sales have tripled since the discounts were introduced.

Other Wal-Mart tactics are translating well, even if the corporate lingo isn't. Few shoppers recognized the word "Rollback" -- Wal-Mart's jargon for featured discounts. But big signs nearby were unmistakable: Cans of Campbell's Soup were marked down 21 percent, to ?195 yen, with the prices posted in big letters.

"Customers don't know the name `Rollback,' but they know that prices are being discounted," said Kazuo Funakoshi, 49, the store manager.

Funakoshi, acknowledging that shoppers in Japan, like those in the US, fret about a flood of cheap imports, said that less than 1 percent of the 50,000 products in his store were imported from Wal-Mart's network. And those that were on display were getting a mixed welcome.

Some of the 1.2 liter cans of grapefruit juice being sold under the Great Value name, for example, were dented and had labels ripped, a no-no in Japan, where presentation counts for a lot. The cans were also too big for most Japanese refrigerators, so shoppers were invited to buy clear thermoses, too.

One customer, typical of the finicky, grumbled that she didn't "trust the English label."