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Business deals

Walmart finds US-style retail a tough sell in Japan

Amazon stands in the way of Seiyu's digital push under KKR and Rakuten

Wally Bockl, vice president of fresh foods at Walmart Japan, promotes Angus Beef at a press conference in 2016. (Photo by Masayuki Nakagawa)

TOKYO -- Walmart's decision to sell 85% of Japanese supermarket chain Seiyu represents an acknowledgment that an American-style strategy focusing on low prices and efficiency failed to resonate with Japanese consumers.

Judith McKenna, CEO of Walmart International, told Nikkei that the sale to KKR and Japanese e-tailer Rakuten showed that Walmart was thinking flexibly about Seiyu's shareholder structure amid a trend in the global supermarket industry toward a community-based approach.

Walmart will retain a 15% stake in Seiyu, and McKenna said the two will maintain a relationship in areas including procurement. But the deal signals that the world's largest retailer has given up solo efforts to follow this local trend and pursue growth in an intensely competitive market. Walmart, Rakuten and KKR agreed to value the business at 172.5 billion yen ($1.65 billion) for the deal.

Seiyu was once one of Japan's dominant supermarket groups, giving rise to successful businesses such as the Muji private brand -- now handled by Ryohin Keikaku -- and convenience store chain FamilyMart. But its results took a turn for the worse, and trading house Sumitomo became the top shareholder in 2000.

To turn Seiyu around, Sumitomo arranged a deal with Walmart, then seeking a foothold in Japan. Seiyu and Walmart inked a capital tie-up in 2002, and the supermarket operator was made a wholly owned subsidiary in 2008.

All told, Walmart poured more than $2 billion into the business. Yet "it wasn't as strong as the 'foreign invader' it had been feared to be," a supermarket industry insider said.

Walmart's biggest miscalculation lay in the failure of its signature "Every Day Low Price" strategy to gain traction.

The company planned to attract customers to Seiyu by undercutting rivals on price. But regional supermarkets began taking a similar tack, with budget chain OK Corp. offering a guarantee to match any prices seen at Seiyu or other stores. Walmart used wholesalers by following Japanese business practices, so its price competitiveness did not improve as much as in the U.S.

The focus on efficiency backfired as well. Walmart minimized staffing at Seiyu locations, but this often left stores with too few employees to restock shelves after products sold out. Staff sometimes fell behind on maintaining store interiors, and even burned-out lights in storefront signs went unfixed.

Seiyu tried to undercut other supermarkets on price but was outmatched by local chains.   © Reuters

A former Seiyu executive who worked at the company until around 2017 recalled a "disconnect between leadership and people on the ground."

"At board meetings, directors talked about how to keep their tens of millions of yen in compensation," the executive said.

Even as the U.S. parent company stayed narrowly focused on price, Walmart's Japanese arm tried to adjust its strategy. Takeshi Kamigouchi, who took over as CEO in 2015 after heading Unilever's Japan operations, tried to engineer a sustainable improvement in profitability.

But Kamigouchi could not see eye to eye with a head office that prioritized expansion through moves such as acquisitions, and he stepped down in 2018.

Walmart tried for some time to get the troublesome Japanese operations off its hands. It moved toward a sale in 2018, but negotiations broke down over the price, which Walmart pegged at between 300 billion yen and 500 billion yen.

The business deteriorated further with no CEO in place to lead it. Lionel Desclee was tapped for the post last year, and Walmart said it would seek to relist Seiyu. The business made superficial changes, such as starting to stock more local produce in April, but the moves came too late.

Seiyu logged around 700 billion yen in revenue last year, on par with rival Life Corp. But Walmart's Japanese arm produced just 47 million yen in net profit, showing that core business Seiyu contributes little to its bottom line.

And with the coronavirus pandemic radically altering the industry landscape, Walmart concluded that Seiyu could not survive on low prices alone. KKR and Rakuten now look to succeed where it failed.

The biggest threat to the "new" Seiyu looks to be Amazon. The American company is accelerating integration of e-commerce into bricks-and-mortar retail, expanding its online grocery partnership with Life from greater Tokyo to the Osaka area in July.

Domestic players are responding by going digital. Aeon, Japan's largest retail group, is teaming with U.K.-based Ocado on an automated warehouse that will ship items directly to households, with a launch slated for 2023. Seven-Eleven Japan has rolled out a service that delivers products to shoppers in as little as 30 minutes.

Online shopping has been slow to gain ground in Japan. The consumer e-commerce market grew about 8% to well over $90 billion last year, yet this accounted for less than 7% of overall sales, half the global average of about 14%. But the coronavirus pandemic is spurring companies to tap into what looks poised to become a fast-growing market.

Akira Yamashita in Tokyo contributed to this report.

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