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Retail

Look don't buy: Japan reinvents the department store

Marui Group transforms its business model to focus on delivering experiences

For decades now, department store operator Marui has succeeded by catering to new generations of the hip, young and fashionable. (Photo by Kohei Fujimura)

TOKYO -- One of Japan's big department store operators is reinventing its business model by converting prime real estate in its stores into showrooms where customers look but don't buy.

That is only half of the rethink. While Marui Group's shoppers are invited in to have their measurements taken, to test digital equipment or to trade anime collectibles, they are also hit up about applying for credit cards.

According to a family income and expenditure survey by the Ministry of Internal Affairs and Communications, consumer spending on fashion has declined 40% over the past 20 years.

This helps to explain why Marui has drastically restructured its sales floors. Apparel-related shops at the end of March occupied 29% of Marui's total sales space, down 15 percentage points from five years earlier. The amount of space given over to restaurants and other services increased by 11 points to 29%.

Most of Japan's department stores have come to depend on foreign tourists to make up for sales being lost to internet shopping sites, or for sales that are evaporating altogether as Japan's birthrate declines and its population grays. But not Marui, which for decades has successfully catered to a young demographic.

Marui expects an operating profit of 13 billion yen at its retail business in fiscal 2019, up 60% from fiscal 2014. Profit in the financial technology segment, including its credit card business, is projected to nearly double to 39 billion yen.

Back in the 1980s, Marui burnished a reputation that lingers more than three decades on. Back then, its department stores became known for their hip fashions, especially among young women.

That was also the decade in which Marui began heavily promoting its credit cards.

Today, Marui is stepping away from the conventional wisdom that retailers sell the merchandise they put on display.

It wants to sell something that cannot be displayed, experiences.

At some of its department stores in prime locations, perhaps those near a major train station, Marui is leasing floor space to internet companies so web shoppers can try on or get a feel for something that caught their fancy online.

One day in late August at Shibuya Modi, a sales assistant at a made-to-order suit shop was helping a male visitor. "You don't need to buy here, sir," the salesperson said. "Please take your time to consider."

After taking his measurements, the assistant handed a sample of cloth to the potential customer and bowed his way. The visitor left without buying anything.

The no-pressure haberdashery is operated by Fabric Tokyo, an apparel maker founded in 2012 to sell products via the internet. The company keeps customer measurements on its website so buyers can order customized apparel without having to visit a physical outlet.

"A physical store," said Yuichiro Mori, founder and CEO of Fabric Tokyo, "is merely a part of the customer experience, and it's all right for us that they don't buy there."

Fabric Tokyo operates outlets in seven Marui emporiums across Japan. "I've never cared about profits and losses at each of these shops," Mori said, "and I don't think shop managers even know what their sales are."

Marui's business model used to be to allow suppliers to put their merchandise in its department stores for Marui to sell. This kept suppliers on the hook for inventory risks, at least until their products sold.

In the fiscal year through March 2015, Marui became more of a shopping mall operator, leasing space to other retailers on fixed-term contracts. In the five years through this past spring, Marui has allotted some 220,000 sq. meters of floor space to this model. The number accounts for 76% of Marui's total floor space at its stores across Japan.

Although other retailers are attempting to convert their stores into showrooms for internet-based services, they are much less earnest about making the pivot.

Shopping mall leases usually stipulate that the retailer pay the mall a percentage of sales. But "Marui deals with this matter flexibly, depending on tenants' patterns of operation," said Masahisa Aoki, president of Marui Co., the group's operating arm.

In many cases, Aoki said, there are no such commissions.

Marui's flexibility in this regard gives it an advantage. "We considered opening an outlet in another department store," an executive of an internet-based company said, "but we dropped the plan because the contract was premised on selling goods and needed much time for negotiations."

Kanako Kashiwagi, 24, who operates Fuiuchi, an online shop that sells handmade accessories and other goods, is one of the young entrepreneurs who decided to give Marui a try. "I wanted to meet people who always support my products," she explained.

Kashiwagi started the Fuiuchi brand in 2018. But the number of "people wishing to actually see my products has increased," Kashiwagi said. So in early June, a Fuiuchi pop-up shop opened in a display space operated by Base, a Tokyo company that supports online retailers. Base has run the space, in a Marui department store in Shibuya, since June 2018.

Kanako Kashiwagi, right, opened this pop-up shop in a Marui department store in Shibuya, Tokyo, so customers of her online Fuiuchi brand could see what her accessories really look like. (Photo by Kohei Fujimura)

Base's tenants are situated on the first floor of the department store facing a busy street. During the first week of June, Kashiwagi's shop was visited by nearly 500 people, some of whom follow her on Instagram.

Among them was Yuka Numasawa. "I've been a fan [of the brand's] since last summer," Numasawa said that week. "I've been following it on Instagram but wanted to try on colors and sizes before buying."

After seeing the products in person, the 21-year-old Numasawa bought a pair of morning glory-themed earrings for 2,900 yen ($27.26).

She later volunteered to work in the shop.

"Although there were only a limited number of products on display," Kashiwagi said, "some customers lingered for about 45 minutes."

While Base pays Marui a fixed rent for the floor space, online shops pay 15% of their sales to Base.

Another part of Marui's strategy is to increase foot traffic. So its stores hold special events where nothing is for sale, no fashions, or meals or services. In early June, female anime fans made their way to the eighth floor of a Marui department store in the Tokyo neighborhood of Yurakucho, near the Imperial Palace, to exchange anime goods. The exchange, held in conjunction with an animation fair, generated no profit but was a big hit with the women, possibly encouraging them to visit the store again.

The Japan Department Stores Association has found that the number of department store visits has been on the wane for a decade. But in fiscal 2018, Marui received a total of 214 million visits, the most ever and up about 15% from five years earlier.

More visitors translate into more opportunities for Marui to push its Epos brand credit cards, which make up a core revenue stream.

Marui department stores hold special events where nothing is for sale -- no fashions, meals or services -- in spaces like this in Tokyo's Yurakucho where female anime fans gathered to trade collectibles. (Photo by Kohei Fujimura)

"Marui is in an advantageous position," said Kazunori Tsuda, chief analyst in the Equity Research Department at Daiwa Securities. "Unlike other card issuers, it has a card-issuing presence" in highly visible spots in its department stores, where shoppers can be approached about applying for a card.

In addition, clerks in the stores themselves can make the same pitch.

Marui directly manages a store that was opened in November by Wacom, a leading maker of styluses, in the Shinjuku Marui Annex. Shinjuku is one of Tokyo's busiest shopping districts. Marui says it manages the shop because small and mid-size companies have few if any employees well versed in dealing with customers.

But it has an ulterior motive as well: It wants to increase its interactions with consumers.

Creative types like to test how well styluses work on their tablets or other digital devices before making a purchase. Now Satoshi Hirano, 45, offers advice to shoppers who drop by to do just that. Hirano is not necessarily a stylus expert -- he previously worked in the shoe department at another Marui store -- but has years of experience in winning over customers. Now as he explains how different styluses affect tablets, he also feels out customers about their interest in applying for an Epos credit card.

Marui introduced the Epos brand in 2006. Holders who use their Epos cards to pay their rent can earn points that can be redeemed at Marui department stores.

Last year, Marui set up a securities subsidiary that allows Epos card holders to purchase investment trusts with their cards. The strategy is aimed at establishing a new revenue stream as well as building long-lasting relationships with consumers.

"Internet alone is not good, and real alone is not good, either," Marui Co. President Aoki said, stressing the importance of combining online and traditional operations. Now that it is accepted business practice to fuse physical and online businesses, he added, "we will stubbornly pursue what real should be."

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