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Wal-Mart has big plans for Seiyu; What took so long?

January 10, 2008
By Ken Worsley


We have been following the ongoing saga involving Wal-Mart and Seiyu for some time now. Back in August, we reported that Wal-Mart, which at that time held a 53.6% stake in the ailing supermarket chain, expected to see Seiyu post its sixth consecutive year of losses in 2007, to the tune of 5.9 billion yen (about $50 million). In September, we reported that Seiyu had revised its losses downward to $91 million. Seiyu also announced that it would spend about 4.5 billion yen in an effort to reduce its workforce by 450 people.

In October, it was announced that Wal-Mart intended to sink another 40 billion yen or so into Seiyu in order to turn it into a wholly-owned subsidiary. That figure, however, was grossly underestimated. On December 6, it was reported that Wal-Mart would spend about 93 billion yen in order to boost its equity stake from 53.6 percent to 95 percent. At that time, we outlined the reasons why this was a bad idea.

To the present: It was reported in the Nikkei on New Year’s Eve that Seiyu would embark upon a five year plan of restructuring, renovation and building new stores. The article tells us that Seiyu intends to return to the black after two years, and merge five regional subsidiaries with the parent company. The Nikkei tells us:

…[T]he new plan represents a commitment by Wal-Mart to implement its Every Day Low Prices strategy in Japan to revive sales at Seiyu. But in the past, Seiyu lost customers who viewed it as cutting costs at the expense of quality, so there is no guarantee that Wal-Mart’s approach can be transplanted.

Until now, I’ve been confused at those who criticize Wal-Mart for trying to bring an “American” style of supermarket to Japan. They clearly have not really done so at all - and perhaps that’s been part of the problem. Seiyu has shed some non-core operations, but at the end of the day they have remained firmly within the genre of Japanese supermarkets. And that genre is no longer in the best-seller section, as supermarket sales continue to slide across the country.

Given the fear of rising food prices, cheaper food just might be a good idea, if Seiyu could shed the public image that it’s a “cheap” store. Problems with Seiyu’s brand identity are what worry us; a new logo and CEO did little to convince the public that Daiei was a new or better place to shop a few years back, and Seiyu’s going to have to go much further than Daiei did in order to win back shoppers.

The consolidation of wasteful subsidiaries is a great move. Costs should be greatly reduced by streamlining redundant payroll, purchasing and accounting operations. This, however, most likely won’t go far towards bringing about profitability.

The big question is why has it taken six years since Wal-Mart first began investing in Seiyu for such cost-effective restructuring moves to be undertaken? Sure, things sometimes move slowly in Japan, but it seems as though the inefficient system was so firmly entrenched that Wal-Mart had to buy 95% of the firm in order to effect any real change. Bad sign.

Thus, corporate culture might be more of a barrier than we anticipated. We are skeptical that Seiyu can truly return to the black after two years, given the fact that it intends to renovate more than the 70 stores it did last year, and is looking to build 60 new stores by 2012.

Wal-Mart is obviously in for the long-haul here, and perhaps their strategy is to increase market share as other retailers go bust due to the impending demographic squeeze. Still, it’s surprising that they haven’t sought to launch a new brand or do something that would tell the market that Seiyu is somehow different than it used to be.

Long-term results are difficult to predict, but Wal-Mart’s deep pockets might go a long way and prove a valuable resource. In effect, it is acting somewhat in the manner of a private equity shop, taking full control of equity and delisting the firm. That’s a good sign, as it removes quite a bit of distraction. We’ll be interested to see if there’s another IPO in the works at the end of this 5 year plan.

Filed Under Business, Supermarkets 

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Comments

18 Responses to “Wal-Mart has big plans for Seiyu; What took so long?”

  1. Garrett on January 10th, 2008 11:01 pm

    Seiyu did and does sacrifice quality on the altar of price, so does Wal-Mart. the only difference is that Japanese consumers don’t seem to have taken to it quote as well as Americans have. Seiyu stores tend to look dirty, their meat, fish, and frsh vegetables tend to be just plain bad, and they seem to have imported one thing from Wal-Mart: some of the least friendly, least helpful staff in their industry. (Any idea whether or not they’re instituting Wal-Mart wages? it would explain a bit.)

    I speak of Tokyo, though, especially when talking about what customers go far. In other parts of the country to which I fairly regularly travel, I imagine a Wal-Mart store, dropped part and parcel, would do bang up business, especially with an expanded hair dye and hot pants for toddlers section.

  2. Ken Worsley on January 10th, 2008 11:34 pm

    Seiyu did and does sacrifice quality on the altar of price

    No argument there - and that’s certainly not unique to Wal-mart, nor did they invent it. The point is really that Seiyu has not brought “US-style” bulk low prices to their shops, despite there being criticism of them out there for doing just that.

    And they’ve been voted as having Japan’s worst seafood section (by me).

  3. Pellegrini on January 11th, 2008 12:13 am

    We’ve got an Inageya and a Seiyu sitting about 100 meters from each other out here, and I agree that Seiyu isn’t really much cheaper than the competition. You can save five yen here and ten there, but that place is just plain depressing on the inside.

    They’ve been struggling to keep their customers since Inageya moved in (granted, Inageya is in a better location and is…well…clean), but the only thing they’ve thought of that would qualify as fighting back is staying open 24 hours a day.

    That’s a start, I guess, but it might also be wise to turn the lights on in the north side of the second floor so that people can see while they’re shopping.

  4. Garrett on January 11th, 2008 12:16 am

    I think the best way to turn most of the country vegetarian would be to make Seiyu the only place to get meat and fish.

    If and when Seiyu does move more toward a Wal-Mart style purchasing and selling system, it will be scary. It certainly couldn’t hurt them, though.

  5. Garrett on January 11th, 2008 12:17 am

    Pellegrini, do they sell booze?

  6. Ken Worsley on January 11th, 2008 12:19 am

    Inageya’s still kind of low-end though. I know the one you’re talking about - it looks new, so it’s not so bad. Where I used to live there was an Inegeya from about the Jomon Era that was just like a Seiyu inside, except they didn’t have broken bicycle pumps for sale next to denture cream. That Inegeya lost all the competition to Tokyu Store about 200 meters down the street.

    The thing is, I’ll shop at the place with better looking people. Tokyu Store won that hands down versus Inageya and versus Seiyu (where I lived before that).

    Now I just get “OK” - which is actually an apt name for the place.

  7. Garrett on January 11th, 2008 10:17 am

    You bring up a very good point there, Ken. While you, Pellegrini, and I are pretty typically middle-class in terms of income and spending habits (part of that is assumption, of course), we’re all willing to spend a little more and go a little farther to shop in a cleaner, better-looking store with better quality on the shelves.

    For some people, either out of necessity or temperament, Sam Walton was right - people will go farther and accept a cheaper-looking store to save a few pennies. For others such as us, though, there’s still an idea that not all food is the same. You don’t always get what you pay for, but you often do.

  8. Shari on January 11th, 2008 10:37 am

    There are two Seiyu supermarkets, one Inageya, and a Peacock within about 15 minutes of where I live and one of the Seiyu supermarkets is quite clean and the other is rundown and relatively grubby (it’s also much smaller and further from a major station). I don’t shop at either Seiyu regularly though I do buy store brand vacuum cleaner bags at the cleaner one once every 6 months or so as they’re one of the few places that carries them.

    Inageya is actually pretty clean and has a lot of customers almost all the time, but their prices are still too high compared to places like Utakaraya and Hanamasa. I have to wonder if the small, low profile places with extremely low prices for meat, fish, poultry and fresh fruits and vegetables are what is really cutting into business for supermarkets. I tend to only buy dairy products and imported food at Inageya and Peacock (though Peacock has the added draw of a Daiso 100 yen shop on the second floor) as the smaller shops which may look like crap are vastly more economical. There’s also a good chance the QQ and other 99 yen shops which offer fresh food cheaply are playing a part. Three tomatoes for 99 yen, even smallish ones, is better than 3 medium-size ones for 298 yen (or more) at a market.

    As for service, I’ve always found Japanese service highly overrated, especially when it comes to regular shopping areas (like supermarkets and convenience stores, but even some “mom and pop” shops). Sure, department stores are great but they also cost a fortune. Most of the time, I get relatively indifferent service with perfunctory mumbles of “thank you” and “welcome”. I’ve even had the experience of being ignored as cashiers chat or conference over an important issue which people seem to think only happens in America.

  9. Albrecht on January 11th, 2008 1:22 pm

    I completely agree in that Japanese service is tremendously overrated. My image of outstanding service is Nordstrom, but that could never happen here because that level of service requires flexibility and creativity in solving problems, which doesn’t match the above-mentioned perfunctory nature of service. Why do insincere pleasantries and extra wrapping equate to excellent service?

  10. Ken Worsley on January 11th, 2008 1:40 pm

    I don’t know…I’ve had some truly excellent service in places. I’m not going to say the service in Japan is any better or worse than anywhere else. Like other countries I’ve been to, people in big electronic shops tend to know nothing about the products on the shelves. So be it. But the uber-geek shop in Akihabara is always able to help me fill odd requests.

    Restaurant service is lacking, without a doubt. But waitstaff are not tipped, so I wouldn’t expect much more.

  11. WG on January 11th, 2008 10:54 pm

    Convenience trumps all else in this market. If a station can only support one supermarket, that’s where I’d want to be. Wal-Mart’s going to have to improve the Seiyu locations where there’s another supermarket vying for yen.

  12. Pellegrini on January 12th, 2008 1:33 am

    “Pellegrini, do they sell booze?”

    Garrett,
    They do now, but that first year that they were open was rough. They had to wait until the local 1st-year-of-business means no-booze-selling-except-during-festival-weekends edict expired during the first half of last year. The new convenience stores on the north side of the station have suffered the same bullying.

    Even though I have welcomed the introduction of the three lanes of alcohol at Inageya, the beer selection is dire. I don’t understand how they can sell 34 different varieties of happoshu (I counted), and then about 15 clones of the “high-grade” stuff and call that a beer case. The lone non-Japanese brew in the bunch is Guiness, but it’s contract-brewed and over-priced. And they expect me to be happy just because they include a bunch of green Heartland bottles there on the bottom shelf.

    This is one of the few areas that Seiyu has a leg up on Inageya, but that’s only because they have Heiniken and Corona, so it’s not like I hustle over there after I get off work.

    Likewise, their wine and spirits section is dismal. Unfortunately, I have yet to plow through their Nihonshu selection. However, I can confirm that they do indeed have one.

  13. Garrett on January 12th, 2008 10:23 am

    I was thinking more of the simple, but powerful combination of being open 24 hours and selling alcohol. It is the late night/early morning availability of beer and whiskey that is responsible for most of the blogosphere. Not JEN, though, of course. JEN is fueled by the heady sweet sherry-and-Jaeger-bombs-but-hey-at-least-he’s-not-on-crack.

    Albrecht, I fear in your debunking of the Japanese service myth, you may be going to far in the Japanese-clerks-only-follow-routines direction. While I would agree that clerks rarely have the power to do anything helpful, I’ve had some great, even flexible service here.

    All of that said, I do agree that there’s not an enormous difference between American and Japanese service other than that, in the US, I occasionally encounter outright rudeness or hostility from shop clerks, which (perhaps I’ve been lucky), I have yet to see in nearly seven years in Japan.

  14. Garrett on January 12th, 2008 10:24 am

    And, Shari, Hanamasa is a wholesale store, not really fair to compare them to Seiyu or retail supermarkets on price.

  15. www.japansoc.com on January 14th, 2008 6:35 pm

    Wal-Mart is looking to make big changes at Seiyu…

    Wal-Mart has delisted Seiyu from the stock exchange and has put forth a plan to return the company to profitability within two years. Is this possible?…

  16. CMM on January 15th, 2008 12:51 am

    Anyone know what the rules actually are for selling booze? Some convenience stores have it, then the place next door won’t. Is it a national licensing system or what?

  17. Seiyu’s 2007 losses projected to be twice as bad as expected Japan Economy News & Blog - Business, Economy, Marketing and Economic Reports on February 13th, 2008 4:41 am

    […] month, we reported that Wal-Mart intended to bring struggling Japanese supermarket chain Seiyu back to profitability in about two year’s time. We were skeptical then, and outlined the reasons why such a project threatens to be nothing but a […]

  18. madmilker on June 29th, 2008 11:35 am

    quote***Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. are they doing the same in Japan, America and India?

    The “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price….
    it’s all about the currency…..and if the people of Japan want a strong currency….they need to buy…..made in Japan!

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