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Is Retail Service Productivity Really Low in Japan?

Earlier today, the Cabinet Office released its most recent discussion paper in both Japanese and English. The English version is entitled Is Retail Service Productivity Really Low in Japan? — Numerical experiment based on Shepard’s model, and provides an interesting insight into market developments that have affected the retail sector over the past decade.

First, “Shepard’s model” refers to the method employed by Andrea Shepard in her research paper Price Discrimination and Retail Configuration. Shepard’s model attempts to evaluate the level of price competition in a retail market on the basis that a consumer may choose amongst making a purchase of high quality service, low quality service, or making no purchase.

The Cabinet Office is interested in this topic right now because it seeks to measure the effects that deregulation has had upon the retail sector. In the early 1990s, the Large-Scale Retail Store Law was revised, and this relaxed the rules for large retailers that sought to open locations in areas traditionally dominated by small, locally owned shops. Thus, the Cabinet Office is seeking to measure how much more competitive such markets have become.

Our summary will ignore the math and go straight to the conclusion. The study is meant to take a stab at measuring the influences that deregulation, lifestyle changes and “an economic recession” has had upon the retail sector. The report states in its conclusion that both deregulation and “progress in personal transportation” have helped to integrate the urban and suburban retail markets (think Ikea and Costco). This, according to the Cabinet Office, has led to increased price competition. The report states that since the early 1990s, “…[R]etail margins drastically [fell] by 20 to 30%, and consumrs’ welfare [was] improved by 20 to 50%.”

The final three paragraphs of the report pretty much speak for themselves, so I’ll put them here and then we can get to commenting on it:

Shopping arcades in the downtown area are consistent with regional communities. Consumers in such communities not only go shopping there but also exchange information with their neighbors, thus keeping their communities comfortable. Small shops play an important role in providing an area for communication and maintaining a peaceful environment. A recent drastic change in life style has depreciated the value of these services. Consumers now prefer a rich assortment of good in superstores to local communications in small shops. In the simulation this trend shows the effect of lowering the retail margins.

The long term economic recession has caused less income, wage reduction, and, eventually, declining labor quality. The simulation results show that all these changes lead to a fall in retail margins. To summarize, environmental changes that occurred in the last ten years unexceptionably dropped retail margins.

Academic papers on the Japanese retail trade services published in the early 1990s mostly focused on the deregulation issues. Big margin were considered as evidence of imperfect competition and regulations. This view has completely changed. Raising retail trade service productivity seems to be a key to the recovery of the Japanese economy. This policy is quite misleading from the following two points. Firstly, if the service output is measured by retail margins, a shift from competition to monopoly would raise the productivity. Secondly, the causality could be reverse. Although it is ambiguous that productivity gains in the retail trade service sector cause economic growth, the business recovery would raise retail productivity through the expanding market share of productive retail trade service providers.

Comment on translation: I actually have several, but on important one. I think the final sentence should read, “Although it is ambiguous that productivity gains in the retail trade service sector cause economic growth, a business recovery would raise retail productivity through the expanding market share of productive retail trade service providers.”

At any rate, it’s important to note that the Cabinet Office does not see raising productivity in retail as something that will help bring about economic recovery, but rather as a consequence of economic recovery. So, for those retailers looking to get more efficient and productive: Increase your margins first, then worry about how to do it.

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