At first sight, it looks easy enough to explain why Walmart might sell out of Seiyu, its Japanese retail chain, at around the same time as it is spending $16 billion on Flipkart, the leading Indian e-commerce group.
Clearly, so the argument goes, it would make sense for the U.S. giant to pull out of bricks and mortar in an aging stagnant economy whilst putting its money into online in a youthful fast-growing country. And -- equally obviously -- it would be quite right to do so.
But the truth is somewhat different. Bricks-and-mortar retail in Japan is by no means moribund. This is a rich country, with densely packed cities where people are crammed close to their retailers. So, e-commerce is developing more slowly than in other developed economies.
But, store-based retailers still have to get it right. Seiyu's lackluster performance has less to do with technological change than with its own dull offering. Walmart, which bought the Japanese chain in 2008, wrongly applied to Japan its tried-and-trusted formula of Every Day Low Price (EDLP) in general merchandise stores that provided shoppers with nothing special.
The lesson for others in Japanese bricks-and-mortar retail is not to give up -- but to innovate, innovate, innovate. Consumers are looking for excitement.
Speculation about Walmart's investment in Japan has been prompted by a report in Nikkei that it was mulling selling out of Seiyu. The U.S. group later said in a statement that it had "not made a decision to sell Seiyu" and was not talking to potential buyers. But many in the retail sector still expect a deal at some point.
Of course, on the global scale, so-called Amazon effect is certainly hitting bricks-and-mortar players. It is indeed an important reason behind Walmart's Flipkart purchase, for example.
But the U.S. group's Indian investment should not be linked too closely to any decision to about Seiyu, a 335-store chain with an annual turnover of 700 billion yen. A disposal could only marginally to be attributed to e-commerce.
With a highly concentrated urban population close to physical stores, Japanese consumers are proving slow to switch to the internet. E-commerce penetration trails far behind the U.S. or China. While the U.S. online retail penetration rate is around 13% and perhaps heading for 30% in the long term, experts estimate that for Japan the equivalent figures are roughly half for each measure.
Retailers are not rushing to switch. AmazonFresh, Amazon Japan's grocery delivery service, is only available for parts of Tokyo, Kanagawa and Chiba prefectures more than a year after its launch in April 2017.
The flat-growth story of Seiyu reflects the limitations of the one-size-fits-all approach of Every Day Low Price, the tried-and-tested approach Walmart rolled out in Japan. In a deflation-hit market dominated by domestic competitors such as Seven & I Holdings, which operates the 7-Eleven convenience chains and Ito Yokado, and Aeon, owner of Aeon stores, EDLP alone could not turn Seiyu into a retail attraction.
It was particularly questionable how much Walmart could help boost Seiyu's bottom line with its much-vaunted global procurement muscle, except for a few nonperishable lines such as Lego toys. After all, Seiyu's bread-and-butter -- or dare I say onigiri -- business is locally procured fresh produce.
Granted, most of Seiyu's rivals in general merchandising stores (GMS) in Japan suffer from poor profitability. For example, Ito Yokado, with 167 domestic shops, is going through a multiyear restructuring program to de-emphasize fashion and exit from unprofitable locations.
The common trouble across these chains is that they are a legacy of the good old days when consumers flocked to one-stop shopping. An increased array of newer channels from drugstores to convenience stores, combined with greater savviness among consumers has left general merchandising stores behind. These stores have everything, but nothing we want to buy.
These stores were the retail pioneers in the 1980s, often taking over from single-outlet mom-and-pop shops. Later, for the two largest retail groups, Seven & I and Aeon, the GMS businesses, represent their spiritual core and were therefore sacred even when they lost money.
Moreover, the retail sector in Japan has also been largely insulated from international competition with few successful large-scale entries by foreign players. Carrefour of France and the U.K.-based Tesco exited Japanese market in 2005 and 2013 respectively after less than a decade in the face of hurdles such as the complex distribution system.
Protected, GMS operators mostly focused on incremental improvements and not on strategy. Although Seiyu did implement modern retail methods under Walmart, it did not transform the concept. Meanwhile, the world moved beyond EDLP.
Is the possibility that Walmart might exit Seiyu, then, a sign that GMS in Japan is on a dead-end path? Not necessarily. Even with a declining population, Japan still has a robust middle-class. With the threat of e-commerce muted, GMS operators need to leverage their real estate better. There are already green shoots in retail that suggest three keywords could guide GMS companies forward.
Localism: With the backlash against globalization, consumers are increasingly attuned to their immediate environment. The vulnerability of global supply chains to extreme weather and trade wars alike also boosts the attractions of local sourcing
Supply and demand alike can be customized. Don Quijote, a newish discount retailer founded in 1980, and now having with currently 417 outlets and turnover of 942 billion yen for the latest fiscal year ending June 2018, delegates procurement to local outlets, the opposite strategy to Walmart/Seiyu. Messily piling up merchandise, Don Quijote successfully creates a scavenger hunt out of shopping. Local is the new organic. If GMS companies were to let go of mass consumption ideas and focus on localism, they might see things differently.
Inspiration: Having a physical store is a great advantage to connect with shoppers. Retail high-growth performers are almost always companies offering lifestyle choices. Muji, for example, originally founded as a private label for Seiyu in 1980, has grown to 419 domestic outlets and 457 overseas excluding cafes, and 380 billion yen worldwide annual turnover, by staying true to a philosophy of simplicity and universality. Muji means "no brand" signaling anti-commercialism.
Entertainment: With many choices available, consumers need good reasons to visit a GMS outlet. What was once a mundane activity can be fun with some creativity. Some supermarkets such as Seijo Ishii are experimenting by combining groceries and restaurants. Prepared food is already a 10 trillion yen business (2017), 3 trillion of which is supplied through convenience stores. GMS can go beyond merely supplying prepared food to having chefs on site cooking hot meals in-store, or even better, letting the shoppers join in.
The word innovation suggests big ideas, such as flying cars and genomic coding. But not every innovation must be extraordinary. Making everyday shopping fun can be innovation. Japan remains a viable market for retailers willing to think outside the box.
Nobuko Kobayashi is a partner with A.T. Kearney, a global management consulting firm. Based in Tokyo, she specializes in the consumer sector with a special focus on multinational corporations operating in Japan.