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Business

Japan's Rakuten losing shine as business model grows rusty

Rakuten President Hiroshi Mikitani

TOKYO -- E-commerce pioneer Rakuten is showing its age, failing to keep pace as sprightlier rivals ride shifting consumer currents and hatch novel services appealing to online shoppers drawn to convenience and word-of-mouth marketing.

The 20-year-old Japanese internet giant's group operating profit slid 12% on the year to 48.7 billion yen ($481 million) for the January-June half. Profit in domestic e-commerce operations tumbled 25% to 17.5 billion yen in the second quarter, even as their revenue rose 7% to 72.5 billion yen. President Hiroshi Mikitani has demanded that the segment produce 40% annual growth. But removing such services as travel from the mix indicates that the core "marketplace" retail business hardly grew at all.

The marketplace, a central fixture of Japan's internet retail sector, resembles nothing so much as an online shopping mall. Companies peddling their wares have a good deal of leeway in building their own seller pages and pay Rakuten to host these digital stores.

Mikitani has worked to make that service the center of a digital economy encompassing everything from online auctions to travel planning. But many such ancillary businesses have little new to offer and lag behind rivals as a result. There is almost no synergy to speak of among these disparate fields.

Creaky complacency

As the whole enterprise has expanded, Rakuten has gotten "more sluggish in responding to consumer shifts," said Tatsunori Kawai of kabu.com Securities.

Amazon.com now leads the e-tail market, having overtaken Rakuten by users. The American giant was among the first to develop a sophisticated product suggestion function and introduce such convenient options as free shipping and delivery within a specific time window. Amazon also ensures consistent prices and service quality by selling goods out of company warehouses. Rakuten's mall structure renders this difficult, drawing complaints from users that search terms return unrelated products or that different shipping rates from various sellers are hard to understand.

Newer entrants have proved adept innovators as well. Yahoo Japan's shopping service lets sellers set up shop free of charge, encouraging growth, while such websites as Mercari have thrived by letting consumers sell their own belongings quickly and easily. Meanwhile, the spread of such social networking services as Facebook and Instagram has increased the power of celebrities and other influencers to push specific products.

Move on

Rakuten has had a tough time picking up on these trends, leading to exits from Southeast Asia and Europe. The onetime pioneer now "gives off a very defensive vibe," said an executive at a company on the marketplace platform.

"They lack the nerve to risk failure in order to come up with novel services," this official said.

Rakuten has kicked off a few efforts to get its e-commerce segment back on track. Shoppers using Rakuten credit cards will earn four times the normal amount of reward points on purchases, for example. Users of in-group services will also get special bonuses. A subscription music-streaming service was announced Thursday, while September will see the debut of a mechanism for kicking out sellers that treat customers poorly.

Mikitani recently began touting Rakuten's ambition to become a global innovator. But it needs to act fast: Once a company loses momentum, the lightning pace of the internet industry means that it can rarely reach full speed again.

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