| A : |
Distribution channels in Japan are changing greatly, aren’t they?
|
| B : |
Yes, that’s right. Traditionally, goods were supplied from manufacturers to retailers via a number of wholesalers before being sold to the consumer. However, this pattern is now undergoing drastic change.
|
| B : |
Increasingly, retailers are sourcing merchandise directly from manufacturers and overseas for retail directly to the consumer, cutting out wholesalers and other middlemen.
|
| A : |
By sourcing and selling directly and cutting out the middleman, they can make a greater profit and sell more cheaply to the consumer, right?
|
| A : |
Can you give some examples?
|
| B : |
One example that springs to mind is that of American toy retailer Toys “R” Us, whose Japanese stores source directly from Japanese toy manufacturers for sale directly to customers. Another example is that of Fast Retailing, the company behind the Uniqlo brand, which outsources, mainly to China, the production of products that it designs in-house. These products are then brought back for sale directly to customers at its stores in Japan. This is an example of an SPA, or specialty store retailer of private label apparel, which is a specialist retail outlet chain with its own brand of clothes designed in-house. Gap Chairman Donald Fisher first coined the term to define his own company. It subsequently gained in currency, and is now interpreted more broadly to include the direct-run stores of apparel makers and manufacturer-retailers. In essence, it refers to specialist retail chains with the capability to improve efficiency and respond swiftly to demands through control of the entire process, from procurement of materials, planning and development, to production, physical distribution, inventory control and store planning (i.e. supply chain management, or SCM).
|
| A : |
Can you give another example?
|
| B : |
A prime example is Otsuka Kagu, a large fabless furniture retailer (i.e. a retailer without any factories) that sources directly from furniture manufacturers in Japan and overseas for sale directly to the buyer.
|
| A : |
Why has this phenomenon of bypassing the middleman arisen?
|
| B : |
Firstly, consumers are changing. During the era of mass production, mass sale and mass consumption, products were designed and produced by manufacturers, and bought as they were by consumers. As needs have diversified and tastes have differentiated, however, consumers have ceased to be satisfied with products designed and produced by manufacturers, and have begun to demand products suited to their own tastes. Unless they accurately grasp consumers’ needs and produce products that meet them, therefore, manufacturers’ products will not sell. Because of the presence in between them of wholesalers, information that should have passed from retailers (especially bulk retailers) to manufacturers failed to do so. By cutting out the wholesale middlemen, it has become possible for information from consumers to flow smoothly from retailers to manufacturers. The second reason is that consumers have grown smarter, and have begun to demand products that are both cheap and of good quality. If, say, something was sold to the consumer in the past for 100, then the cost to the retailer would have been in the region of 65 to 70, the cost to the wholesaler would have been 50, and the cost to the manufacturer would have been 35. Under this traditional pricing structure, however, it is now impossible to develop products that meet consumer needs. Consumers have grown more demanding regarding not only cost, but also other factors such as quality, design, packaging and quality of materials. This has eliminated the margin for middlemen, who have also begun to be bypassed because of the need to improve the flow of information described above. And the third reason is consumers’ increasing cost awareness. Consumers now demand good quality products that are bit cheaper. As retailers cannot retail cheaply enough to meet consumers’ needs through the traditional long distribution channels, they have naturally had to set about sourcing directly from manufacturers and overseas and selling direct to the customer as a means of ensuring their own survival.
|
| A : |
The recession has also played a part in shortening distribution channels, hasn’t it?
|
| B : |
An apt illustration of these depressed times has been the rise to prominence of \100 shops. There were of course ultra-cheap retailers before the recession, such as stallholders and businesses known as battaya (a form of cash-and-carry wholesaler) that bought up bankrupt companies’ products from stock liquidators for cheap resale. \100 yen shops, however, are children of the recession and deflation, and they have grown dramatically in number in response to the needs of the times. By laying in huge amounts of stock on a temporary basis, they are able to sell an amazing range of products for \100. Typical examples of the types of goods they sell are earthenware pots, neckties, digital watches, alarm clocks and umbrellas. There are also many cosmetics items available for \100. A well-stocked \100 shop may sell 85 types of scissors, all for \100. Such a company would take delivery of more than 80 (20-foot equivalent) containers every per day from overseas. Even Japanese housewives, who are not inclined to make impulse buys, will loosen their purse strings when they go into a \100 shop, where they reportedly buy an average of five items per visit. For them, \100 shops are a recreation zone, and shopping there serves to relieve stress.
|
| A : |
Japanese consumers are dividing into two camps, aren’t they?
|
| B : |
Yes. They are splitting into those who seek good quality at low prices, such as those who shop at \100 shops and buy Uniqlo clothes, and those who buy expensive leading brands. Shoppers are willing to pay high prices to get what they want, but want to spend less on daily necessities. For example, there are people who go out in jeans and a t-shirt, but at the same time wearing a Rolex or Omega wristwatch that cost over million yen. Ashiya in Hyogo Prefecture has long been famous throughout Japan as being a home to the rich. The “Ashiya-ites” who live there would in the past shop only at exclusive department stores and supermarkets. Nowadays, however, they go out in their Mercedes to shop at suburban \100 shops, cheap supermarkets and convenience stores.
|
| A : |
So customers’ needs have changed, as have lifestyles. Is IT playing a part in contributing to the changes in distribution channels we see at present?
|
| B : |
IT is also certainly having an impact. If they want, consumers can buy all manner of products from around the world via the Internet. But as Japanese consumers prize quality so highly, the products that they buy over the Net tend to be limited to things whose quality they can be sure about, such as theater, concert and hotel reservations, books and magazines, and share transactions, which make up the bulk of business to consumer, or B2C, e-commerce in Japan. As Japanese people do not buy clothes and food unless they can see it for themselves, products of this kind are not suited to sale over the Net. B2C business therefore is only one twenty-first of the value of B2B business. (B2C and B2B e-commerce are respectively forecast to come to \3.2 trillion and \68 trillion in 2003.)
|
| A : |
Wholesales and other middlemen that look likely to be bypassed are in serious trouble then.
|
| B : |
They are working frantically to survive because their raison d’ętre is being challenged. One way they are doing so is be reinventing themselves as “solution” providers that maintain close ties with consumers to acquire information to pass on to manufacturers and retailers, design their own products, and assist manufacturers with product development.
|
| A : |
What will happen in the future?
|
| B : |
Only those middlemen that have made all-out efforts to survive will remain. The speed of procurement of products from Japan and overseas will increase further. To survive, they must get to know and put the consumer first. Consumers will no doubt continue to have the initiative. Only those companies that keep an eye on world trends and respond to them will survive. Manufacturers and retailers too will go under unless they think of ways to differentiate themselves from their competitors.
|
| A : |
We live at a time of tremendous change.
|
| B : |
That is the reality of global competition and globalization. Companies now face an unforgiving environment where they can no longer survive if they think only of the competition in Japan.
|
|
