Marketing consumer products in Japan - includes related article on a US manufacturer's success in Japan

Japan's recession notwithstanding, American consumer goods exporters to Japan have made steady progress in recent years. Sales of U.S.-made consumer goods have increased by 66 percent from 1990 to 1994.

In 1994, U.S. consumer exports to Japan, excludiug food or beverages, grew to US$8.2 billion. Consumer non-durables increased from US$1.8 billion in 1990 to US$3.5 billion in 1994, with American-made clothing making up a large percentage of the increase. Exports of durable goods also grew rapidly--from US$3.1 billion in 1990 to US$4.7 billion in 1994.

The relative success of American consumer products in Japan is due to two factors. Most importantly, the rise in the value of the yen has made U.S. products relatively inexpensive. Incremental structural liberalization in the Japanese economy has also made it easier for Japanese consumers to purchase imported consumer goods.

THE HIGH YEN AND THE "HOLLOWING OUT" OF JAPANESE CONSUMER GOODS MANUFACTURING

The dollar/yen exchange rate has fallen from an average of 240 yen to the dollar in 1990 to approximately 100 yen to the dollar at present. This revaluation of the Japanese currency has revealed low manufacturing productivity and diminished international competitiveness in Japan's consumer goods manufacturing sector.

Some economists divide Japan's manufacturers into two parts one segment competitive at US$/100 yen and the other competitive at US$/200 yen. Examples of the former "hypercompetitive" industries include semiconductors, machine tools, and luxury automobiles. These manufacturing processes are capital and technology intensive.

In the consumer goods manufacturing area, however, the productivity of many Japanese companies is far lower than that of their international competitors and their products could only be competitive at US$/200 yen. Examples include processed foods, textiles, furniture, toys, pet supplies, plastic articles, cosmetics, footwear, sporting goods, and gifts. At US$/100 yen, manufacturing of these products in Japan is not profitable.

Many Japanese manufacturers in the consumer goods industries face dim prospects as the "hollowing out" of labor intensive manufacturing proceeds. They are forced to move production overseas or to import. This realignment of consumer goods production for the Japanese market bodes well for foreign suppliers-imports will gain a larger share of consumer spending in the foreseeable future,

The revaluation of the exchange rate is not alone sufficient to ensure increased imports of consumer goods. Bottlenecks within the distribution system could slow or stop gains by foreign companies. Fortunately, however, the revaluation of the currency has been accompanied by structural reform of Japan's distribution system, especially at the retail level.

RETAILERS GAIN THE UPPER HAND OVER MANUFACTURERS

Japan's traditional distribution system has heavily favored domestic manufacturers and wholesalers, with them often working in tandem. The retail segment of the distribution system was fragmented, weak, and diffuse. This system effectively reduced domestic consumption and maintained high profit margins for manufacturing firms.

But the traditional distribution structure is evolving rapidly to resemble its American and European counterparts. Japanese retailers--due to changes in regulation, technology, risk management, and consumer demand--are growing more powerful and are slowly wresting influence from manufacturers and wholesalers. This will increase demand for consumer goods imports and lead to dramatic price reductions for consumers.

The clearest indication of structural change in Japan is the consolidation of the Japanese retail sector. The total number of retail establishments has fallen 8 percent from 1.5 million in 1976 to 1.3 million in 1995. Small retail establishments have declined in number by 20 percent over the same period.

Meanwhile, convenience store chains and larger retail outlets have experienced significant growth. The number of convenience store chain outlets has doubled over the last decade to reach 43,487 last year. Similarly, there has been dramatic increases in large-scale outlets. Most of these large establishments are specialty stores or discounters. The consolidation and modernization of the Japanese retail industry is driven by a number of different factors.

* First, chains and large outlets have become much more efficient by investing in information management technology such as: point-of-sale equipment, inventory management, and forecasting software.

* Second, many of these large retailers have also invested in their own distribution centers and delivery fleets which reduce the role of wholesalers.

* Third, retailers purchase large quantities directly from manufacturers, at deep discounts relative to the wholesale price.

* Fourth, retail prices are now set in the context of other retail competitors--not at the manufacturers' suggested retail price.

* Finally, Japan's top tier of retailers have opened offices in the United States (and other countries, mostly in Asia) to purchase imported products directly from foreign manufacturers.

In sum, in search of higher profits and independence from their suppliers, Japanese retailers have developed an appetite for commercial risk that has not previously existed. Another indicator of the structural shifts in the Japanese economy is the decline of retail prices. Japan's largest retailer, Daiei, reports that final retail prices declined 15 percent on average in 1994. Other large retail chains report price reductions of an average of 7 percent during the same one-year period. This precipitous price decline is a result of increased imports and leads to higher consumer demand.

Many of Japan's larger retail companies are importing a large amount of "private label" merchandise from abroad. Private label sales are equal to only 10 percent of total retail sales at present, compared to approximately 35 percent in Europe and the United States. Thus, there is tremendous opportunity for growth in this particular category.

The regulatory stance of the Japanese Government has also become more supportive of retailers and consumers. Relaxation of the retail laws--designed to protect small-scale retail operator/owners--is permitting growth of more efficient, large-scale operations.

ALTERNATIVE DISTRIBUTION FORMATS OFFER U.S. SUPPLIERS NEW IMPORT CHANNELS

In Japan's evolving economy, large stores are themselves facing growing competition from alternative retail formats. Companies exploring each of these formats have been able to develop sales channels directly to the Japanese consumer, end-running the traditional high-cost, multi-tiered distribution system.

There is a boom in direct marketing sales in Japan. Catalog sales, for example, are growing rapidly from a very small base. Total catalog sales reached only US$18 billion in 1994, compared to as much as US$300 billion in the United States. American companies supplied approximately 10 percent of goods sold through this retail channel in 1994. The Department of Commerce has organized two shows for American catalog firms, introducing 120 American companies to the Japanese market.

In addition, direct marketing via television and cable TV has shown great promise in Japan. Liberalization of these media in the near future should lead to a proliferation in the quantity and variety of programming available to the Japanese consumer. This segmentation of the market will allow targeted advertising and direct sales over cable-TV and telephone lines.

Using the Internet as a sales channel in Japan is still in its early stages. However, this concept is attracting attention from large corporations such as NTT, NEC, and Matsushita, trading firms, and even small companies which view electronic commerce via the Internet as a means to compete with larger rivals. There are only about 500,000 Internet users in Japan, although the number is growing exponentially with the spread of computers throughout Japanese society. Internet hookup fees are decreasing rapidly, and the number of Japanese companies with home pages, offering product and corporate information on the Internet is increasing.

Recently, several consortia have been established to promote electronic commerce in Japan. For example, Mitsui has begun offering a service under which it contracts foreign merchandise suppliers to offer goods at so-called "power-centers" on the Internet. Individual Japanese buyers can browse, place orders, and have the requested goods delivered to their homes. Mitsui hopes to expand this system and offer significant price advantages in the near future.

AN AGENT OR DISTRIBUTOR IS STILL NECESSARY FOR SUCCESS IN JAPAN

Despite changes in Japan's distribution system, most American new-to-market exporters still require the services of an agent or distributor. Agents are necessary to assist in navigating complex import and customs procedures. Also, agents are helpful in preparing Japanese language labels and marketing the product in the Japanese language. They may advise how to improve the packaging or formulation of the product. Finally, marketing formats are proliferating and it is usually agents who are best equipped to choose the sales channels and advertising media.

American consumer good manufacturers have many options in finding Japanese agents or distributors. Perhaps the best alternative is to participate in a specialized trade show or mission to Japan. This method, while not cheap, gives the U.S. manufacturer direct feedback on the acceptability of the product in the Japanese market. A partial list of trade shows appears on page 13.

Another possibility is to utilize the services of the Japanese or U.S. Governments to assist in identifying potential agents. The U.S. Embassy's Commercial Service has an effective "Agent Distributor Search" (ADS) service which will identify a number of potential agents in any specific industrial sector. The ADS service is available to any consumer goods company for a fee payable at the District Offices of the Department of Commerce.

Japan's JETRO also provides a number of services to new-to-market American exporters, including a free listing in their importers' data base. Some American companies have used this service to introduce their products to a range of Japanese agents, importers, and distributors. Potential exporters should contact JETRO for further information. (See article on page 25.

Not all American consumer goods manufacturers are going to be successful in the Japanese market. Marketing Managers and International Sales Representatives should remember that demand in Japan is growing only weakly and that, while shelf space is limited, there is excess domestic production capacity in nearly every industry. Successful penetration into the Japanese market usually implies careful market research, identification of a suitable partner, and reformulation or repackaging of the product. Patience and a long-term view are required.

American manufacturers of consumer goods who are willing to make these commitments, however, should take a second look at the world's second largest retail market. Now is a good time. Due to currency realignments, the hollowing out of domestic competition, and liberalization of the retail sector--and the inevitable economic recovery--there has never been a better time to start exporting to Japan.

COPYRIGHT 1995 U.S. Government Printing Office
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