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Retailers eathering Japan's economic woes

By Susan Thorne

Two years into its most serious recession since World War II, Japan's economy appears to be stabilizing, although it may be too early to talk of recovery. In the meantime, well-positioned retailers and mall developers are finding opportunities there despite (or sometimes because of) the current economic climate.

The influx of U.S. brands may be
helping to boost Japan's retail sales.

Japan's 2,445 shopping centers nationwide rang up sales of $183 billion in 1997, out of a total retail market of $1.1 trillion, according to ICSC Asia. During the same period, the United States' 43,000 centers brought in sales of just over $1 trillion, out of a $2.6 trillion total market (see chart, page 228). Japan's population is about half that of the United States.

Japan's economy has been sluggish since the early 1990s, when the bubble of overinflated property rates burst, according to a report from Arthur Andersen, the international business consultancy. Matters came to a head in early 1997, when a high national deficit led the government to cut spending and increase taxes, pushing the economy into recession. Sharp declines in the value of real estate and equity investments followed, and by late 1997 Japan was making headlines around the world as loan defaults brought crises and closures of Japanese banks and equity trading institutions. The country's gross domestic product (GDP) dropped 0.7% in 1997 over the previous year -- the largest such decrease in 50 years -- while corporate bankruptcy liabilities grew 33% to roughly $69 billion, Andersen data show.

Herbert S. Miller, president and chairman of Washington, D.C.- based American Malls International, which has operated outlet malls in Japan for four years, said several events happened simultaneously, leading to the crash.

"The Japanese had an overbloated real estate market -- probably 10 times the real value -- and as a result their recession was much worse than for us [in the United States in 1990-91]," he said. Then the information revolution, together with the globalization of business and finance, delivered a double whammy to a society that had an isolated, protected economy and rigid linear structures, he said.

"All of a sudden, everything became global there -- the real estate, insurance, retail and the stock market, and they all had to adjust and become globally competitive," Miller said. It is that massive readjustment that is causing widespread financial and economic problems in Japan at present, he pointed out, and the situation has been exacerbated by the financial meltdown in the rest of Asia.

The usual quick fix from government is no longer available. Many big businesses had always been bailed out by the government in times of crisis, Miller said, "but this time, their government was in such a mess that it couldn't."

A serious problem for developers is the difficulty in obtaining financing. "The credit crunch," Miller said, "has never been so severe."

In the retail/shopping center sector, the economic crisis has decreased the demand for retail merchandise and for services related to mall development. The Andersen study dates adverse impact on retailers' operating results from the time of a government consumption tax hike in April 1997. The report found that 381 leading retailers saw an average fall of 16.8% in their pretax profits for fiscal 1997, and department stores overall suffered a 30% drop.

The decline carried over into 1998. Year-over-year retail sales fell 4.4% nationally compared with 1997, according to information furnished by the Takenaka Corp., Tokyo, a leading general contractor involved in shopping center and retail development. Department store sales declined 4.8% and supermarket sales 4.0%. One of few retail categories to improve was the convenience store sector, which saw increases in both sales and profits.

"In general the retail sector has been seriously affected by stagnating levels of consumption," said Masahiro Hioki, deputy senior manager in Takenaka's office of project development in Tokyo.

Yet Japan remains the world's second-largest national retail market, he pointed out, and the current situation offers some advantages for foreign interests.

"Land prices are still falling, Japanese retailers are weakened, and if the government finalizes the new Large Scale Retail Law [legislation that would facilitate big-store development] this spring, there should be even more solid opportunities for foreign retailers to expand in this market," Hioki said.

U.S. brands strong

Some are already doing so, as the rapidly growing Japanese operations of The Gap, HMV, L.L. Bean, Pier 1, Eddie Bauer, Disney and Starbucks demonstrate. Minao Kobayashi, senior manager of marketing and promotions for Disney Store Japan, Tokyo, said that despite the tough economic conditions, U.S. brands such as Toys 'R' Us and Tiffany are doing better than the average.

"One of the reasons is that global brand power is stronger than a Japanese brand," he said. "A second reason is that the Japanese consumer is looking for new elements, new products like U.S. brands."

Young people in particular want the novelty of those brands, unlike the older generation, he said.

The greater value-consciousness of Japanese shoppers in the current economic slowdown may actually be boosting sales of U.S.-branded merchandise, Kobayashi suggested, because shoppers perceive those products as having a higher quality for the price.

"With U.S. brands, the Japanese consumer feels it is a good deal -- not in absolute price but in better value." Disney launched 10 new stores in Japan in 1998, bringing its total to 77, and plans eight new units per year in 1999 and 2000.

"We are fighting with a bad economy, but our performance is still stronger than regular Japanese companies," Kobayashi said.

Development of shopping malls continues as well, said Seth Sulkin, president and CEO of the Pacifica Corp., a Washington, D.C.-based retail developer with a focus on Japan.

Japan currently has 1,254 centers of less than 10,000 square meters (about 100,000 square feet); 1,042 centers between 10,000 square meters and 30,000 square meters (100,000-300,000 square feet); 105 centers between 30,000 square meters and 50,000 square meters (300,000-500,000 square feet), and just 44 centers over 50,000 square meters, according to ICSC Asia.

Despite economic woes, developers such as Takenaka Corp. are finding opportunity in Japan.

Many developers have been forced by the crisis to be more flexible and to adjust lease rates downward, especially for attractive tenants. Regional and super-regional malls have few vacancies, he said, because there are so few good centers.

"For the best sites, real estate prices are actually going up. The best location is still tough to get."

Paradoxically, 1999 and 2000 will see a boom in shopping center construction, in part because of declining land prices. Also, many developers are accelerating construction and the opening of new shopping centers because it is feared that new zoning rules to be enacted Feb. 1, 2001, will tighten land-use control. Pacifica is opening Japan's largest shopping center, a power center with 1 million square feet of gross leasable area (GLA), later this year at Fukuoka. Tenants will include the first Costco Wholesale and Virgin Cineplex in Japan.

American Malls International opened an outlet mall last November (the first U.S.-owned shopping center in Japan, Miller said) in a failed department store in the Tokyo suburbs. The company has plans for up to eight more malls with an entertainment component in rural areas near major Japanese cities.

Fixing the problem

But such success stories are the exception rather than the rule in the current retail situation. What is needed to correct Japan's economic problems, and how long will this take? Sources are cautiously optimistic. Miller said he feels that forces are already at work that will transform Japan's system.

"I think over the next two to three years as globalization continues, you'll see a totally new country," he said. "The turning point should come 18 months to two years from now." A switch to a real two-party government would improve the situation further, he said.

Sulkin said the economy has not bottomed out, and the weak stock market will take months to sort out. In the meantime, "the good companies are going to continue to grow and to grab market share from the weak. For whoever has cash, there are great opportunities to buy stores and companies."

The Andersen report views Japan's difficulties as requiring sweeping change to the retail operating environment, particularly correction of inefficiencies in distribution. "Costs will have to be reduced. Japanese retailers need to improve productivity per unit of floor space, per employee, and per unit of capital investment," the analysis asserted.

Restored consumer confidence is critical in getting things rolling again, said Jay A. Scansaroli, managing partner with the worldwide retail industry practice of Arthur Andersen.

"That confidence comes from a high level of disposable income, economic growth, high employment and low inflation -- the same factors that are driving prosperity in the U.S. Japan is not different -- it's going to happen."

A key indicator of restored confidence in Japan will be an increase in department store sales, Scansaroli said. For the present, he said, "things may be leveling off, but while the worst of the slump appears to be past, it is too early to say that things are really improving."