How the pandemic has increased the stakes for Japanese retailers

This article is part three in an FT series examining the future of retail

Japanese billionaire Hiroshi Mikitani is fond of deals that solidify his reputation as the foremost e-commerce evangelist in a country that has been slower than many to embrace him.

Rakuten, the Mikitani company founded in 1997 and part of Japan’s largest online retailer, has acquired stakes in the Viber messaging app and the US coupon and cashback site Ebates.

This is a record that explains why his latest transaction generated such interest. Instead of investing money in a new app, Mikitani agreed at the end of March to sell an 8% stake in Rakuten to Japan Post, the former public postal service and a powerful symbol of the brick and mortar role in the country’s $ 5 billion economy.

Entering more than a year into a pandemic that has caused the biggest shock to the retail industry in decades, the deal has been seized as proof that it is too early to cancel the role of a network physical stores to reach Japanese consumers.

Along with this investment, Rakuten will significantly expand its delivery network and introduce its brand to older buyers who use post offices. Japan Post, on the other hand, can leverage the online retailer’s expertise in payments and the use of customer data.

“The essence of this deal is for Japan Post, which has the largest retail branch, to partner with Rakuten, which operates the largest digital company,” Managing Director Hiroshi Takasawa told the Financial Times.

While the deal is a reminder that the country’s brick-and-mortar retail roots run deeper than in other major economies, no one disputes that the pandemic has changed the way Japan shops.

Akio Yoshida, chairman of Aeon, Japan’s largest supermarket chain, was unequivocal when speaking to investors last month.

“The expansion of Covid-19 has dramatically altered the behavior, mindset and value of consumers,” he said. “Digital technology has now permeated every part of our lives.”

Flat foot

This presents a radical challenge for an industry that employs 7 million people and which over the past decade has straddled a very divided customer base: a large senior population high in physical shopping and a cohort of buyers. younger and more digitally savvy.

Hiroshi Mikitani, founder of Rakuten

Hiroshi Mikitani’s sale of a stake in Rakuten to Japan Post is a symbol of the power of brick and mortar retail © Keith Bedford / Bloomberg

Demographics are one of the main reasons a country synonymous with technological innovation has been slower to adopt e-commerce.

The Web will account for nearly 11 percent of retail sales in Japan by the end of this year, according to an eMarketer study. In contrast, the consulting firm predicts that online sales will account for 52 percent of the total in China by the end of the year, 15 percent in the United States and 13 percent in Western Europe.

But as Japan imposes another state of emergency in a bid to keep the rate of Covid-19 infections low ahead of the Olympics, retailers are unsure how far-reaching the effects of the pandemic will be.

There are signs that some fear being caught off guard as new habits become permanent. Nowhere is this clearer than in the case of Isetan Mitsukoshi, a 348-year-old department store operator who sells everything from luxury bags and bedroom furniture to traditional sweets.

FT Series: The Future of Retail

Articles in this series will focus on:

Walmart vs Amazon: the battle to dominate the grocery store

How China is shaping the future of shopping

Can Online Markets Live Up To Their Hype?

When the government first declared a state of emergency a year ago, the company was forced to quickly develop new habits. Staff turned to Zoom video calls and the Line messaging app to respond to a deluge of requests from customers wanting to be able to purchase backpacks online in time for the start of the school year in April.

The group has since developed its own smartphone app that theoretically makes all 1m products sold at its flagship store in Shinjuku available online. The app also allows customers to virtually consult their sales staff.

“We felt that we could offer services that are not available on Amazon or Rakuten if our stylists can offer advice to customers who seek such encouragement before making the decision to buy something. [online]Said Tomohide Sanbe, a senior executive at Isetan Mitsukoshi.

“We are at a point where we have to re-consider the meaning of our existence,” he added.

Yuko Shimomura, who works at a brokerage firm in Tokyo, said the Covid-19 crisis had changed the way he shopped.

Japan e-commerce sales

“I don’t mind going physically to department stores, but I find better deals online,” said Shimomura, who is in his 40s.

Approaching the end of the game

It’s not hard to find skeptics who believe the efforts of people like Isetan will prove too little, too late as the web expands its grip on consumers.

“Management has underestimated the pace of the digital shift due to its reliance on physical stores,” Sho Kawano, co-director of Japanese equity research at Goldman Sachs, said of Isetan. “The situation would have been radically different if Isetan had stepped up his digital efforts 10 to 15 years ago. He’s nearing the end of the game. “

Traditional department store Isetan Mitsukoshi was forced to adapt to online demand for school backpacks last year © Noriko Hayashi / Bloomberg

Even before the pandemic, a mixture of complacency and intransigence from some mainstream retailers had created an opening that digital competitors such as fashion site Zozo and flea market app Mercari had seized. Since the crisis, they have fared even better.

Shares of Mercari, which went public in 2018, set a new record earlier this year as younger generations of Japanese consumers used the app to sell second-hand clothes, handbags and other accessories. . Revenue jumped 41% to a record 28.6 billion yen ($ 261 million) in the first three months of the year.

The popularity of Internet fashion empire Zozotown, owned by operator Yahoo Japan Z Holdings, has also exploded.

Unlike these online specialists, physical stores remain at the heart of Ito-Yokado, one of Japan’s largest supermarket chains. Galvanized by the crisis, however, the company is testing a new approach designed to bridge the gap between its 132 stores and e-commerce operations.

Rebased stock price line chart showing divergent fortunes in Japanese retail

In September, just as Yoshihide Suga took office as Prime Minister with a promise to revive the economy, the company launched a delivery service providing 400 varieties of fresh vegetables, fruits, meat and fish directly to people’s homes. elderly people ringing their orders. by telephone.

“We’re going to see more of a world merging online with offline and it will take varied coordination between online supermarkets, delivery services, physical Ito-Yokado stores and convenience stores,” Futoshi Shibata, senior executive said. in an interview.

As the crisis disrupts traditional retailers, there is one company offering encouragement.

Record profits

Fast Retailing, the owner of fashion chain Uniqlo, has been hailed as a rare example of a company able to grow its online sales while harnessing technology to intelligently operate its now ubiquitous stores..

Uniqlo same-store domestic sales increased 5.6% between September and February from a year earlier, while online sales increased 41%. Fast Retailing, which has a market cap of $ 86 billion, expects record annual profits this year.

This unlikely result, analysts say, is due to Uniqlo’s efforts in its online and physical operations. Robots now dominate its warehouses, speeding up the selection of goods for delivery. He launched his own cashless payment app, his latest effort to harvest more valuable data about his customers.

“Whether it’s online or offline, customers ultimately want to buy the products they want at their convenience,” said Xiaozhou Wang, an executive in charge of Fast Retailing’s global e-commerce efforts. “People want to try on their clothes and we need a physical connection with our consumers. But online also has its merits as it is open 24 hours a day and you have more customer information. “

Few of us doubt that Japanese consumers in the long run will move their shopping online more. But as the industry faces its worst losses in decades, the message from shoppers to retailers about future success is ruthless: get better online and in-store if you want our business.

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