UNIVERSITY OF BAGUIO

MASTER OF BUSINESS ADMINISTRATION

INTERNATIONAL BUSINESS

UB MBA IB CASE 4
Walmart in Japan
Walmart’s Expansion into the Japanese market
Walmart is, in many ways, the quintessential American retailer, though this hasn’t stopped the
company from expanding aggressively to overseas markets in recent years. Already the number one
retailer in the three North American markets, Walmart began aggressive international expansion a few
years ago. Walmart bought ASDA Group in Great Britain, making it one of the largest retailers in the
UK, while also expanding in Asia, placing stores in Hong Kong, and setting up a successful joint
venture in Mainland China. However, Walmart has not been able to achieve success with the Seiyu
Group, a Japanese general merchandise and grocery store chain that came into the Walmart family in
2002. Walmart has spent a fortune in both time and money to turn around a once-dominant retailer
and become a force in the Japanese market. Due to mistakes and missed opportunities, Seiyu’s
market share has shrunk and losses have mounted. Walmart’s Japanese protégé has become a
favorite target for shareholder criticism and a blot on the company’s international reputation. How did
this happen?
Seiyu (The Seiyu Co., Ltd.) is older than its partner, Walmart. Founded after World War II as
part of the Saison Group, the company was linked up with the Seibu railway company, helping to
provide a ready stream of customers to its stores. While not a well-known conglomerate like
Mitsubishi or Nissan, Seiyu was part of a group of linked firms with Sumitomo Bank as the primary
shareholder. This arrangement ended only when Walmart bought out Sumitomo’s equity in Seiyu.
Seiyu expanded heavily in the 1980s, but when the bubble economy burst in the mid-90s, and
land values dropped at the same time, Seiyu started to have financial problems. Even before Walmart
bought a stake in Seiyu, the retailer had been struggling, though its core grocery was profitable. In an
attempt to reach new markets, Seiyu was expanding into newly built residential areas and
experimenting with new types of stores such as The Mall, Mizuho 16, a small complex with a Seiyu-
managed store as the anchor and numerous other retailers renting space, and Livin, a department
store with groceries on the bottom floors, a common practice in higher-end Japanese retailing. Seiyu
was also rebuilding and remodeling several stores a year, though it simply did not have a capital to
move as fast as it needed to. Seiyu was a firm that had expanded too much in the heady days of
Japan’s bubble economy. The company had lost sight of its core business and was no longer nimble
enough to fight off rivals. Seiyu was suffering declining sales, declining profits, and declining brand
prestige. Many consumers seemed confused as to what exactly Seiyu offered them. It was just one
more name in a crowded retail field, a name that many consumers did not feel a particular draw to. In
a recent poll, only 5 percent of those asked responded that the reason they shop at Seiyu was quality.

While Seiyu was struggling, competitors were moving up in the industry. In 1990, Seiyu was
the third largest retailer in Japan. The top two spots were occupied by Daiei and Ito Yokado,
respectively, both grocery and general merchandise stores like Seiyu. By 2003, Seiyu had been
knocked out of the top five, while Daiei, Jusco/AEON (another grocery and general merchandise
store), and Ito Yokado remained. The first and fifth spots, respectively, were held by convenience
store chains Lawson and Seven-Eleven (Seven and I holdings owns both Seven-Eleven convenience
stores and Ito Yokado).
In 2002 Seiyu was thrown a lifeline in the form of capital investment from Walmart. After some
years of financial trouble, a tie-up with the biggest retailer in the world must have seemed like a
windfall. Indeed, looking at media reports from the time, there were many voices urging caution but
predicting that with the right moves, Walmart and Seiyu could make money in Japan. Seiyu’s financial
troubles also gave Walmart more of a free hand to make drastic yet necessary changes.
The two companies seemed to be a good fit. Both were general merchandise stores. Both had
built extensively in the suburbs. Seiyu and Walmart both tried to undercut the competition in price.
Walmart had what many were seeing as a golden chance to enter Japan with a well-established
partner. It could thus forgo the risks that plagued firms like Ikea and Carrefour, who had decided to go
it alone in Japan.

Japanese Consumer Behavior – A Greater Challenge than Expected

Japan and the United States are very different places. Japanese shoppers behave differently, have
different preferences for goods, and have different attitudes about what they want from a retailer than
their American counterparts. For the Japanese consumer, price is not the sole determinant of value.
For the Japanese consumer, fresh fish is as important as bulk toilet paper, and packaging is nearly as
important as product. It seemed that Walmart understood the financial risks of its tie-up with Seiyu,
but looking at its action over the next few years, it is far less clear that it understood the fundamentals
of the Japanese retail market.
Everyday Low Prices in Japan?
Japan has often been called a mass luxury market. Louis Vuitton, the famous French purveyor of
purses and fancy shoes, makes nearly one third of its total sales in Japan. Japanese consumers have
a taste for the luxurious, though it has also been shown that on some goods Japanese consumers are
practically giddy about saving money. This fact must be mentioned with a caveat; though Japanese
consumers like saving money, they are still picky about quality. They will not buy cheap goods,
especially if the goods are perceived as an inferior substitute. As the old saying goes, “yasukarou,
warukarou” – “if it’s cheap, it’s bad.” With Japanese cuisine, how the food is presented is as important
as what it tastes like, perhaps even more important because bad looking food will not be consumed.
Pricing is one aspect of presentation. Warehouse stores and Walmart’s deep discounts on national
brands are key to the company’s success in the United States. It is important to ask whether this low-
cost leadership strategy is fundamentally sound in Japan. Management slips and consumer
misunderstandings may have played a part in Walmart’s eventual woes. But perhaps the most
important question to ask is “Will ‘Everyday Low Prices’ work in Japan?”
The Japanese attitude toward price and quality carries over to groceries, but it applies to other
goods as well. Walmart carried a serious risk in Japan by being too cheap. Seiyu and its new partner
were spending huge amounts of money to rebuild and renovate stores, making them more attractive
to Japanese consumers, but they still had to convince consumers that they were getting a great deal,
namely the best products for a price that they cannot believe. This has been a problem from a retailer.
As former Seiyu president Masao Kiuchi lamented: The lower price on sashimi doesn’t mean that it’s
a few days old, but that Walmart got a better price on it.” Sadly, many Japanese consumers cannot
help but the suspicious of items, especially food items, priced in the bargain range.
Reading Japanese Customers
One of Walmart’s first mistakes was to step on the toes of a powerful stakeholder group in Japan:
housewives. One of the reasons for Walmart’s spectacular success in the suburbs in America is the
car society and the shopping habits it engenders. Suburbs Americans will drive the car to the nearest
strip mall or supercenter and stock up on goods and groceries for the week. They have a space in
their homes to stock cheap goods in bulk, as well as cars to transport heavy loads. In Japan,
especially in urban areas, shopping spread throughout the week and is often done by bicycle or on
foot. For several items, especially fresh grains and vegetables, Japanese consumers go shopping an
average of once every other day. Housewives compare prices before they go out by looking at daily
newspaper inserts called chirashi.
In 2004, citing its famous slogan “Everyday Low Prices,” Walmart had Seiyu cut out the
chirashi. In the United States, consumers associate Walmart with lower prices (15 to 20 percent
lower) than the competition. In Japan, consumers still wanted to see the deals in print – they did not
trust Seiyu to deliver the lowest prices without some sort of authentication. Without being able to
compare prices, housewives were confused and simply went elsewhere. After a marked drop in sales,
Walmart was forced to resurrect the chirashi.

Private Brands
Another major arm of Walmart’s Japan strategy is the aggressive introduction of private brands. In the
United States, Walmart is famous for exclusive store brands, like Sam’s American Choice Cola, that
are inexpensive and perceived as a good value by United States consumers. Seiyu is putting more
and more Walmart goods on its shelves in the hope of attracting price-conscious consumers. Other
Japanese retailers have also started down this path. Seven and I Holdings (Ito Yokado and Seven
Eleven’s parent company) and Jusco/AEON have begun to offer many generic items like laundry
detergent and snacks. The recent economic downturn has provided further impetus to Japanese
retailers to speed the introduction of private brands. According to a recent article in the Nikki
Marketing Journal, nearly 70 percent of markets. This is a dramatic increase from even a few years
ago. Since Walmart has introduced its private brands all over the world, the firm should be clearly
ahead of the game in developing its own brands. But will these global Walmart brands fit Japanese
tastes? If Seiyu misreads recent consumer trends concerning private brands, it may wind up attracting
fewer shoppers, not bringing in new ones.

Saying Yes to Japan

To its credit, Walmart has stayed the course in Japan, believing that it can make Seiyu work. This is
not simply stubbornness; Walmart has shown in both Germany and South Korea that it knows when
to quit. Walmart has also shown that it knows how to adapt. In Seiyu, Walmart sees real opportunity.
However, the company has not had full operational control for its entire sojourn at Seiyu. It was not
until 2006 that the Japanese chairman od Seiyu stepped down and Walmart was able to place its own
man, Edward Kolodzieski, at the helm. Walmart did not even make the company a wholly owned
subsidiary until 2007. Looking at these facts, Walmart has been in full control of Seiyu for a relatively
short period of time. Since gaining a free hand at Seiyu in the last two years, Walmart has moved
aggressively to perform triage on Seiyu as the red numbers continue to add up. Yet many of the
problems outlined above remain. Question still remain about Walmart’s understanding of the
Japanese shopper and the Japanese market. Walmart has raised eyebrows by pressing forward in
remaking Seiyu in the American Walmart’s image and by adopting many radically different strategies
from its rivals.
Walmart continues to rebuild and remodel Seiyu stores, hoping to make them more attractive
to Japanese consumers. However, many of the remodeled stores look like Walmart stores back in the
United States. It remains to be seen if this is a style that will appeal to picky Japanese consumers.
Another big change at Seiyu reflecting Walmart’s influence is the introduction of private brand goods.
 Going back to chirashi, Walmart finally embraced the paper leaflets. Showing its continued
desire to be the lowest priced retailer and to make sure that “Everyday Low Price” survive in Japan,
Seiyu announced that it would now honor the chirashi of its competitors, as well – a marketing coup
designed to make sure that when customers think of low prices, they think of Seiyu.

What about the Future?

Seiyu again failed to post a profit in 2008, though some stores were starting to show an increase in
year-on-year sales. There was a new CEO at the helm and the company seemed optimistic. However,
the fact remained that Walmart had embarked on year seven of its tie-up with Seiyu and still had not
made money from its investment.
The Japanese economy, though still the second largest in the world, is not as affluent as it
once was. Consumers may be willing to accept cheaper substitute, assuming they still meet the basic
standard of quality. It would seem that the global recession and Japanese consumer’s appetite for
saving may still mesh well with Walmart’s private brand strategy. Walmart is America’s low-price
leader. It has worked hard to transplant this image to Japan, as well, even going so far as to honor
competitors’ coupons. With the current financial troubles hitting consumers hard, Walmart and its
“Everyday Low Price” should be an optimum position to gain on its rivals in the coming years.
However, Japan is a fickle market, and although rising prices on well-known national brand
foods and consumer goods was the story in the first half of 2008, the second half of the year seemed
set to be dominated by the much cheaper private brands. Only time would tell if this was a long-term
trend or a temporary reaction to the global recession
We have seen Walmart and Seiyu make mistakes and miss opportunities. The economic crisis
has given the company a good chance to increase sales and market share, assuming that it has
learned from its mistakes. In a company that increasingly sees itself as a global entity, failure in Japan
would be a huge blow. Staying the course in Japan longer before admitting defeat would be even
more painful.

Questions
1. Which market entry strategy did Walmart choose to enter the Japanese market?
2. What challenges did Walmart meet in Japan?
3. How does Japanese consumer behavior differ from Western consumer behavior?
4. Should Walmart change its pricing policy in Japan?
5. What effect will economic downturn have on Walmart’s business in Japan?
6. Are there other American retailers that are successful overseas? Please name some and point
out their international marketing strategies.
7. What future strategies should Walmart apply in the Japanese market?