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How Walmart flopped in Japan, and elsewhere overseas

New majority holders KKR and Rakuten race to revive battered Seiyu brand

Walmart's foreign flops can be attributed largely to tone-deaf management, which failed to take into account local business customs and other concerns. (Photo by Yo Tanaka)

TOKYO -- The overseas outlets of U.S. retail giant Walmart have been burdened by a jinx, the severity of which seems inversely proportional to their distance from the American mainland. In other words, the further away, the weaker their earnings.

This jinx was often mentioned by Walmart employees about 15 years ago when the world's biggest retailer retreated from Germany and South Korea. Whispers of the "jinx" resurfaced again after Walmart pulled out of Brazil in 2018 and Britain in 2020.

Walmart's foreign flops can be attributed largely to tone-deaf management, which failed to take into account local business customs, dietary habits and labor relations, among other glaring oversights.

In Japan, Walmart will sharply reduce its presence after struggling to match its operations -- primarily that of handling processed and frozen food products -- with those of the supermarket chain it acquired, Seiyu, which had traditionally been more reliant on perishables. The inability to figure out regional differences in the relatively compact country also played a big role in Walmart's failure.

When Seiyu directed procurement for regional operations to corporate headquarters in Tokyo, popular local items disappeared from shelves, resulting in customers fleeing the chain in droves.

Judith McKenna, CEO of Walmart International, put a somewhat happy spin on the chain's misfortunes in Japan, which culminated in the sale of its majority stake in Seiyu to U.S. investment company KKR and Japanese e-commerce major Rakuten. McKenna explained to Nikkei on Monday simply that Walmart had forged a business partnership with Japanese characteristics.

In other words, Walmart never managed to develop significant ties with local partners alone.

A woman enters a Walmart in the U.S. state of Illinois on Nov. 5. The American chain is still dominant in the brick-and-mortar segment at home but has been pushed out of the Japanese market.   © AP

When Walmart clarified the division of duties at Seiyu, ostensibly to improve store efficiency, cooperation between workers disintegrated. During overnight restocking of shelves, for example, cardboard boxes were left in aisles as nighttime workers maintained they were not responsible for tidying up after their duties. Headquarters paid more attention to managers rather than rank-and-file employees.

Japan was the world's second-largest economy after the U.S. in 2002 when Walmart decided to invest in Seiyu. But the U.S. giant entered with neither an overall strategy nor in-store tactics to achieve much of a presence in a country faced with an aging population and declining purchasing power.

Walmart now aims to grow in China, India, South Africa and other emerging economies. The reason Walmart did not rid itself most of its Japanese business until now was partly because it has positioned the country as a steppingstone for pan-Asia aspirations. It also needed to save face. When Walmart considered leaving around 2010, the idea met with internal resistance, as a complete withdrawal would likely have made it impossible to advance into a developed economy again.

In the U.S., Walmart has been promoting e-commerce over the past decade with mixed results as it looks to challenge Amazon. It changed its name from Walmart Stores to Walmart in 2018, testifying to its resolve to compete in the EC market. It is drastically strengthening its presence in the EC market, but it still lags behind Amazon. Compared to its U.S. rival, though, it has an overwhelming edge as regards product delivery, thanks to its vast physical presence, which serve as pickup points.

Given its increased focus on competing with Amazon in the online sphere, Walmart may have lost interest in its sagging Seiyu stores.

Still, as a food supermarket executive said on Monday after reports of Walmart's stock sale: "Walmart's junk is Rakuten's treasure."

Rakuten will buy the stake jointly with KKR, apparently aiming at Seiyu's customer data.

People visit Seiyu for fresh meat, produce and other perishables. While shoppers may buy online a few times a month, they ordinarily visit supermarkets two or three times a week -- a fact that makes Seiyu's customer database all the more valuable to Rakuten, which is looking to expand its retail platform. Seiyu's data will improve the accuracy of predicting consumer behavior and could yield insights into the creation of new services. In short, Rakuten wants the data as part of its "economic zone."

Attracted by the amount of consumer data generated by brick-and-mortar retail, Amazon acquired high-end American supermarket Whole Foods Market for 1.5 trillion yen ($14.4 billion) in 2017.

Japan's e-commerce giant Rakuten is eyeing Seiyu's customer data to solidify its own "economic zone." (Photo by Yo Tanaka)

Rakuten will likely recast its business model, making use of Seiyu's logistics and store network. But just having Seiyu on board is hardly a reason to create an entirely new retail-based business model. The supermarket has been on the defensive due to increased competition from drugstores and convenience stores, as well as rival supermarkets.

Seiyu parent Walmart Japan Holdings posted a net profit of 470 billion yen in the fiscal year ended December 2019, notching its first profit since changing from a limited liability company to a joint-stock company. But profits remain small.

Media reports say that KKR and Rakuten will purchase Seiyu for under a hundred billion yen, a fire sale considering Walmart's initial outlay of about 250 billion yen for the chain. In the end, Walmart will book a loss of more than 210 billion yen.

Being an investment fund, KKR is undoubtedly preparing to exit after raising Seiyu's value. It will seek to reinforce Seiyu's core business as a retailer then create a business model that aligns with a digital world. Seiyu will also need to address changes brought about by the pandemic.

Now that 18 years have passed since Walmart's investment in Seiyu, making up for lost time and rebuilding the chain in the face of a rapidly changing world has become imperative.

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