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Wal-Mart to boost its holdings in Seiyu to 95% - Why we still think it’s a bad idea

December 6, 2007
By Ken Worsley


We’ve written before on why we think Wal-Mart’s tie-up with supermarket brand Seiyu is a bad idea and will continue to lose money unless something about the Seiyu brand is drastically changed. Certainly, Wal-Mart went about entering the Japanese market in the right way, by joining forces with an existing Japanese firm in order to take advantage of existing operations and name recognition. The problem, however, seems to be that the wrong partner for this project was chosen.

Almost two years ago, James Fiorillo, the founder of Ottoman Capital in Tokyo, told Bloomberg, “You walk into [their Sangenjyaya location in Tokyo] and you know why the company was failing. It’s horrible and as long as those stores are out there, people everyday are walking in and getting a bad feeling about Seiyu.”

Although one may say the same about walking around Sangenjyaya in general (that’s just a joke - I love Niku no Hanamasa), the thrust of Fiorillo’s comment is dead on. To quote myself, “Renovating [Seiyu stores] is a waste of money, because being in them will still be a waste of time…Not to mention, Seiyu has one of the worst seafood sections in Japan. That should tell you something.”

None of this seems to bother Wal-Mart, who announced today that they intend to sink about 93 billion yen in order to boost their equity stake in the firm from 50.9 percent to over 95 percent, making official a plan that the company first announced back in October. Wal-Mart offered 140 yen per share as part of the deal, and Seiyu shares closed at 137 yen in trading on Wednesday. Seiyu’s shares rose 3 percent on the news, while Wal-Mart’s fell 3 percent. In 1999, Seiyu traded above 800 yen per share.

The Nikkei quotes Michael Exstein, an analyst at Credit Suisse, as saying, “Japan has long been a thorn in Wal-Mart’s side. Management will need to justify its decision and provide its long-term strategic view for its Japanese operation.”

The Nikkei also scratches the surface of why it has been so difficult for Wal-Mart for turn Seiyu, which has lost money for 5 straight years and expects to lose about 10.4 billion yen in 2007, around:

While juicy for foreign retailers as the home of the world’s second-biggest economy, Japan is a notoriously tough nut to crack in the supermarket sector. The country has a passion for shopping unmatched in most other countries with few restrictions on trading hours, but retailers must juggle the concept of offering deals to customers with an instinctive built-in conception among buyers that low prices may mean low quality.

Those reasons are absolutely all part of the problem, though one might add the fact that supermarket sales continue their death spiral in Japan: In October, sales at Japan’s supermarkets fell for the 22nd month in a row, and that when one compares sales over the full year, receipts have been down for the past 10 years in a row.

Of course, we know that trends reverse. What goes down, must come up, right? Possibly, except for sinking ships. I do think that there are a host of other relevant factors that will prevent Seiyu from getting turned around. But in the end, it comes down to the fact that it is simply not a brand that can be reborn and revamped in the mind of the shopping public.

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Comments

14 Responses to “Wal-Mart to boost its holdings in Seiyu to 95% - Why we still think it’s a bad idea”

  1. Garrett on December 6th, 2007 10:53 pm

    I once bought a decent lightweight sweater for 1,000 yen at a Seiyu store - wearing it now, in fact. Other than that, shopping there is akin to going to a discount store - low prices, yes, but in the case of Seiyu, they often do mean low quality.

    The only reason to go to Wal-Mart is that it’s ridiculously cheap, which is fine for things like shaving cream (Barbasol is Barbasol.) Nine times out of ten, though, it’s worth the extra pennies to not have to deal with the giant, unpleasant, dirty stores staffed with the surly and/or unhelpful. (And worth the extra pennies to know you’re not shopping at Wal-Mart.)
    The Seiyu experience is not much different. The supermarkets in the city (as opposed to the suburbs and bedroom towns, where they’re a bit nicer) are dirty, staffed by people who seem really pissed off to be there (unusual for retail in Japan), and sell inferior products in every category except for brand-name prepackaged goods.

    Americans are apparently into that. I give credit to Japanese consumers for considering products on more than a simple “cheaper is better” level.

  2. Ken Worsley on December 6th, 2007 11:00 pm

    Thanks for reminding me that I need to include “There is no need to describe what you’re currently wearing” in the comment moderation policy. If only we had one…

    I don’t think I’ve ever been in a Wal-Mart where the level of ‘dirty’ approaches that of the many Seiyu stores I’ve been in. Of course, I probably lived most of my time in the US in the part of the country that saw the last Wal-Marts open up.

    Even when Seiyu knocked down and built a new store near where I used to live - in 2003, I believe - what they rebuilt made little sense. It was a mess months later and everyone went back to Tokyu Store.

  3. Kraig on December 7th, 2007 3:17 am

    You have to think maybe Wal-Mart is betting on the income disparity growing, the economy tanking a bit and that shoppers will be more driven by price when it comes to food purchases. A lot of Japan’s shoppers are old people on fixed income, and maybe they have something up their sleeve to bring them in.

  4. Pause on December 8th, 2007 4:51 am

    Wal-Mart is digging an expensive grave here. What’s the point? Seiyu is totally useless, completely yesterday’s place to shop. It has no future.

  5. JJ on December 8th, 2007 10:52 pm

    Kraig might have a good idea here. Eventually something is going to work, and Wal-Mart has enough cash to wait. The question is whether or not it’s worth it. I agree that they have to pretty much rebuild all their locations and rebrand like crazy, but it could work. Daiei tried with a new logo and pretty much failed, I’ll be the Wal-Mart/Seiyu people were paying attention to what they did wrong.

  6. Harv on December 10th, 2007 4:25 pm

    I don’t know…I think the Daiei failure is a sign that these old Showa-esque supermarket/department store dinosaurs are on the way out. They’re just not fashionable anymore, and there’s now a market for people who want to buy ‘fashionable’ food.

    They’ve been kept alive with continual bank loans from banks that hold their shares, and in Seiyu’s case, with cash from overseas. It’s just a matter of time. I don’t think they can rebrand.

  7. Ken Worsley on December 10th, 2007 7:47 pm

    there’s now a market for people who want to buy ‘fashionable’ food.

    Lifestyle branding killed the supermarket star?

  8. Aaron on December 11th, 2007 9:15 pm

    Wal-mart will dominate the retail markets all over the world.
    Domestic retailers should change their minds, how to meet consumers’ needs is still a big question to them.
    This phenomenon doesn’t only exist in Japan, but also in many other countries.

  9. Ken Worsley on December 11th, 2007 10:53 pm

    Wal-mart will dominate the retail markets all over the world.

    Including Germany and South Korea?

  10. wondering on December 18th, 2007 9:22 am

    They should get out now. In Japan the super cheap stores and the expensive stores will thrive, stores in the middle of the road like Seiyu, Ito Yokkaido, etc. will continue to struggle.

  11. Fiorillo on January 17th, 2008 2:35 pm

    In addition to the comments that Ken quotes from me above, I think the problems for WalMart are as follows: 1) the job of turning Seiyu around was much more massive than expected, 2) there has been some resistence within Seiyu, 3) the setting up of the logistics infrustructure and achieving real buying-power size has been elusive, 4) Seiyu’s many multi-layered stores and stores smack in the middle of city centres really doesn’t match the location characteristics for the WalMart strategy elsewhere. I am just brainstorming here, there are many other large-ish obstacles but these are among the bigger headaches.

  12. Fiorillo on January 17th, 2008 2:37 pm

    By the way, if Japanese have such a big problem with buying things that are discounted, I wonder why Don Q and others like the 100 Yen shops are doing so well. I am not sure that is such a huge issue.

  13. Theo on January 27th, 2008 1:48 am

    Hummm…. I live here in Asagaya Tokyo and the local Seiyu is wonderful. It is very fresh. The one in Ogikubo is good too. That is where we get quality. As for cheap, we go to Summit or any of the 99 or 100 yen stores around here. Both of those Seiyus are constantly full with people. I got to admit however that there is one around here that is the pits. So, I suppose it is possible to say that it just depends. If some of them are good, they should just spread their methodology around. I got no idea why some of them are so bad however, the one I go to is top quality.

  14. Ken W on January 27th, 2008 3:36 pm

    Theo, Thanks for your comment. I definitely agree that the rebuilt Seiyu locations are on par with their competitors. But, consistency is the hallmark of a strong brand. About 5 years ago I lived just north of Asagaya in Nerima, and the Seiyu we had there was awful. Depressing to be in. The one at the next station was worse. But that one got knocked down and they built a new one, which was ok.

    Some of them are bad because they’re old, worn out and way past their life cycle. Seiyu didn’t put money into upkeep for a long, long time. It looks like Wal-Mart’s finally going to put some effort into speeding up that process. But without consistency, it’s going to be hard for them to really build back the brand image.

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