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Japan-Update

With Walmart deal, Rakuten gains launchpad for online grocery business

E-commerce group sees real-world stores as key to countering Amazon in Japan

Rakuten CEO Hiroshi Mikitani, second from left, with Walmart CEO Doug McMillon, second from right.

TOKYO -- Rakuten's new grocery delivery partnership with Walmart aims to cultivate one of the least-developed segments of Japan's e-commerce market, blending the strengths of online and physical retailing to cut costs and ensure freshness.

The Japanese e-commerce group and the U.S.-based retailer's Seiyu unit, which runs supermarkets and general-merchandise stores across Japan, will launch a joint venture in March to operate the service. The venture will take over Seiyu's online grocery delivery business by September, incorporating it into the new Rakuten Seiyu Netsuper service.

Like its predecessor, the service will offer delivery from local Seiyu stores. The partners will also create a dedicated fulfillment center for grocery deliveries. The plan is to add such Rakuten offerings as regional specialty foods and heat-and-eat meals to the lineup alongside foods from Seiyu.

Shoppers will earn reward points through Rakuten's existing system, which already has some 93 million members. Transaction histories will be analyzed to fine-tune purchase recommendations.

Hiroshi Mikitani's Rakuten is the operator of Rakuten Ichiba, a pioneering Japanese online shopping mall. 

The hybridization of online and brick-and-mortar businesses is an important trend in global commerce, CEO Mikitani told a news conference Friday. Walmart CEO Doug McMillon noted that no one company can be the best at everything, making it important to collaborate with companies whose strengths are complementary.

While shopping online for household goods and clothing is now common in Japan, only 20.2% of respondents to a Nikkei Marketing Journal survey in September 2017 said they would want to use a delivery service for fresh foods. Many preferred to make their own judgments on freshness and quality before buying or expressed concern about high costs.

Retailers also have their doubts. There is always the risk of damage or spoilage. If inventories are low at a time when demand for grocery delivery spikes -- say, during a period of bad weather -- stores could run out of popular items. Offering delivery also requires more workers, both in the store and as drivers. At a time when labor in Japan is scarce, the additional costs often prove prohibitive.

These challenges have kept many Japanese online grocery services from turning a solid profit, hindering their growth. Only around 300 of the roughly 2,400 supermarkets under Japan's biggest retail group, Aeon, offer online ordering for delivery. While 137 of Seven & i Holdings unit Ito-Yokado's 169 grocery locations participate in the retailer's online grocery delivery service, the business brought in sales of just 44.7 billion yen ($411 million) in fiscal 2016, or a little over 3% of total revenue. Seiyu offers online ordering and delivery from fewer than 40% of its stores.

Yet Japan's aging population and growing numbers of working women and single-member households, coupled with the spread of cashless payment in a society that has long favored cash, create tailwinds for grocery delivery services. The number of shoppers who physically cannot make it to the store or do not want to spend time doing so is only expected to grow. This makes a ready market for a company that can offer fast delivery and keep foods fresh.

Businesses are already working to meet this demand. Amazon.com brought its grocery delivery service to Japan in April 2017. Seven & i teamed up with office supplies seller Askul to launch fresh-food delivery in November.

Rakuten is taking aim at Amazon in particular. The American e-commerce giant does not yet have physical retail locations in Japan. So Rakuten is betting that by making the most of Seiyu's store network, it will be able to build a business with superior earning power. In the U.S., Amazon also understands the importance of physical stores for grocery delivery, as seen in its acquisition of premium supermarket chain Whole Foods Market. 

The Japanese e-commerce group continues to work to diversify its earnings base. It plans to launch in April an electronics site with Bic Camera that will exploit the Tokyo-based retailer's network of stores. Rakuten's two online marketplaces where consumers may list their own secondhand goods for sale are seen reaching 200 billion yen in annual transactions by mid-2018, closing in on top Japanese online flea market Mercari, which is preparing to list on the Tokyo Stock Exchange this year.

Because Rakuten's main marketplace relies on merchants to list products and fulfill orders, competing with the likes of Amazon on price or shipping speed is a formidable challenge. The partnership with Walmart gives Rakuten the greater control it needs to boost competitiveness.

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