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JAPAN’S DEPARTMENT STORES UNITE TO SURVIVE

By Curt Hazlett

Early-arriving shoppers may be greeted with yawns at most of the world’s department stores, but not in Japan. There, custom demands that managers form a double greeting line as the front door is unlocked, then bow deeply to the first customers who enter the store — a sign of respect in a country that reveres such ceremonies. Japan’s department stores have earned a reputation as temples of customer service.

But change is coming fast to these bastions of tradition. Department store sales have fallen for 10 consecutive years, forcing their executives to rethink their strategies and even their business models. In March alone, six of Japan’s biggest department stores announced mergers intended to create efficiencies and to position them for a new era of competition.

The first announcement came on March 14, when Osaka-based Daimura, considered one of Japan’s most forward-thinking department stores, and Nagoya-based Matsuzakaya Holdings said they would form Japan’s largest department store group, with combined sales of $9.6 billion. Three days later Hankyu Department Stores and Hanshin Department Stores, both of Osaka, announced their own alliance, and a week later joining them were Tokyo’s Isetan Co. and Tokyo Department Store Co.

These mergers marked a radical but necessary departure for companies that have prided themselves on independence, even to the point of sacrificing potential economies of scale. “They basically want to build up national operations and put more pressure on their suppliers,” said Hendrik Meyer-Ohle, an associate professor in the department of Japanese studies at the National University of Singapore, who has studied Japanese retailing extensively and who lived in Japan for six years. “Stores have been operating as single units, so there hasn’t been much integration among them. They have been in charge of their own suppliers and have not centralized their operations, and now they need to get larger and get some scale.”

Western-style department stores in Japan got their start in the early 1900s, but many have much deeper roots. Matsuzakaya, for instance, began as a retailer of kimonos in 1611. In the 1920s department stores exposed the Japanese to the latest Western culture. As they expanded, department stores embraced change even as they reinforced the tenets of Japanese culture. Matsuzakaya’s Ginza store in Tokyo broke with tradition in 1924 by allowing street shoes to be worn indoors, yet, like its competitors, it has always offered a dizzying array of traditional Japanese goods and clothing.

Through it all they have purveyed luxury and prestige. “Department stores are very much about ‘Japaneseness’ and about selling the right behavior of the Japanese,” said Meyer-Ohle.

The department stores’ troubles first surfaced during the speculative fever of the 1980s. Buoyed by strong sales, many overexpanded and took on heavy loads of debt. When the bubble burst and consumer spending dried up, they struggled to keep their footing. One of these, the 170-year-old Sogo chain, went bankrupt in 2000 after running up some $6 billion in debt, much of it in real estate. Three years later it merged with the struggling Seibu Department Stores.

Compounding the difficulties has been the emergence in Japan of specialty stores, which over the past decade have filled the gap between the full-service department stores and the less-expensive general merchandisers, many of which have opened stores in shopping centers.

Add it all up and you have a dismal decade for department store operators. The Japan Department Store Association’s 96 members, which together operate 277 stores, says their combined sales fell 0.7 percent last year, to $64 billion, the tenth year of slowly declining sales. The association attributes the decrease in part to poor weather during major shopping seasons but also acknowledges that there were bigger factors: changing consumer habits, the rise of shopping centers and poor management among the stores themselves.

Indeed, the ascent of shopping centers appears to be a central issue. The centers, filled with specialty shops, report robust sales, but department stores are not there to participate. “A Japanese department store is quite a different animal than an American department store,” said Meyer-Ohle. “They are large urban stores in downtown areas. If you look around Japan, there are very few department stores anchoring shopping centers — very few.”

And the competition seems sure to intensify. High-end shopping centers are beginning to emerge in Tokyo and other cities, and most have strong lineups of luxury brands. Analysts say even more consolidation is necessary if the department stores are to prevent their markets from being carved up further. In fact, some analysts say the nearly 100 department stores could someday number fewer than 10.

They also need to learn how to differentiate themselves from the competition, says Meyer-Ohle. “The department stores have been quite the same in terms of their efficiency and management and the composition of their assortments,” he said. “There weren’t many differences. But recently, differences have opened up, and some of the stores have come up with new concepts that seem to work.” One example is Isetan’s Tokyo flagship, which created a separate store for men’s clothing in 2003 and has performed well.

“The weaker chains are now getting together with the stronger ones,” Meyer-Ohle said. “In the Matsuzayaka-Daimura case, Daimura has been much more profitable and has come up with a concept to renew its stores. Matsuzayaka must renew its main store in Ginza, and it has to work. It has to get the store going again, and it needs a strong partner to make it work.”

The industry “is basically saying that only markets of 1 million people are viable for department stores,” said Meyer-Ohle. “and the number of those markets is getting fewer.”