Martha, Wal-Mart and the Next American Invasion

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Martha, Wal-Mart and the Next American Invasion. Japan's retailers pick up powerful partners as they ready for a 'feudal war.'

by Roland Kelts
IN DECEMBER OF LAST YEAR, when the exodus of foreign firms seemed to reach a feverish peak, American domestic mogul Martha Stewart launched her Martha Stewart Living Omnimedia Inc. in Japan. Her magazine hit the stores and quickly became the country's best-selling new women's publication. Her image hung from subway ceilings and walls; her television show, broadcast twice daily on Japan's LaLa TV, drew over a million viewers after only three months on air.

Her products began appearing in Seiyu department stores and her own store, Martha Stewart Yurakucho, the only one in the world devoted exclusively to her product line, opened its doors to Ginza shoppers.

"It's true: We're entering the market at what we hope is the low of the consumer confidence cycle," Stewart told me at the time. "But we hope to rebound with the Japanese economy."

Stewart's first-quarter earnings this year fell 53 percent, due in part to the drag in the US economy and the September attacks, not to mention the bankruptcy of her American retail partner, K-Mart, earlier this year. A more revealing figure, however, is the 41.5 percent climb in her company's March revenues, raised partly by the successful launch of her product line in Japan. Few in domestic retail sectors are speaking so confidently about rebounds. Some Americans, apparently, see a different future.

Japan is a notoriously difficult market to crack for foreign retailers. The rapid departure of Britain's Boots and France's Sephora underscore the unique challenge. "You can't just bring know-how and techniques from overseas and apply them here," says Yasushi Okue, the general manager of LaLa TV, Stewart's cable television outlet in Japan. "You have to really play the game with Japanese consumers."

Stewart, at least, seems ready to play by local rules. She visits Japan twice per year on average. "My favorite areas are the islands off the coast of southeast Japan, and the mountain regions near Nagano," she says, citing the Miho Museum on the outskirts of Kyoto as a choice destination. Okue thinks Stewart will succeed, largely because "she has a real appreciation for traditional Japanese products and food. Last time she was here, in March, we had a joint-event with Seiyu and Martha magazine. She gave a presentation for Japanese housewives, then she spent some time playing with their children. Afterwards, she took a private trip to Kyoto, where she stayed for a week. She immerses herself in Japan." As Martha wooed her consumers, another American retailer unveiled its designs on Japan. In March, Wal-Mart, which topped the annual Forbes 500 list of the largest companies in the world with $219.81 billion in revenues, announced a transnational tie-up -- also with Seiyu.



Wal-Mart's success in America is virtually legendary. The massive discount chain undersells just about everybody in massive single-story behemoths teeming with piles of everyday stuff. But Japan has neither the space nor the low-denominator tastes that would seem to suit the broad-stroke approach of the biggest discounter alive. And with a flat to flailing economy, Japan seems like a lousy place to launch anything. "Yes, with respect to the timing, it has less to do with the exact status of the economy," concedes Wal-Mart public relations spokesman William C. Wertz. Wertz spoke to me from company headquarters in Bentonville, Arkansas, hardly a cosmopolitan center, where Wal-Mart preaches its three principal virtues -- low cost, mind-numbing variety and customer service -- amid the trees and hills near Bill Clinton's rural stomping grounds. "Conceptually, what we hope to do is use this partnership to learn more about the Japanese market. We reached the point where we couldn't study it more closely without getting directly involved."

Wal-Mart's initial investment was tepid, to say the least -- $46 million (or a 6.1 percent stake) to start. But the results of a shareholders meeting in late May changed all that. Seiyu shareholders voted to grant Wal-Mart a series of options to invest about JPY260 billion in new Seiyu shares by the end of 2007. That would give the American giant a 66.7 percent share of Seiyu.

Seiyu president Masao Kiuchi trekked to Arkansas in April, and Wal-Mart US's CEO and president Lee Scott flew to Japan in early May, appearing on NHK's evening news to spread the word. He planned to tour Japanese stores to study the marketing approach and inspect the packaging, he explained, seeking to learn what Japanese consumers want. And, he added, Wal-Mart would also be looking at other ailing companies to scoop up.

The very same day, some 7,000 miles to the East, the US urged Japan to change its rules on mergers and acquisitions to allow more foreign takeovers. According to wire reports, US undersecretary of state for economic, business and agricultural affairs Alan Larson "called on Japan to enable cross-border exchanges of shares under Japan's Commercial Code to facilitate US companies' acquisition of Japanese firms."

American invasions of Japan date back to Admiral Matthew Perry's now-notorious 'black ships,' a naval fleet that entered Tokyo Bay in 1853, forcing the Tokugawa leadership to accept globalism in its larval form. American soldiers and schemers literally occupied Japan for seven years after World War II, enabling "Americans and Japanese to exploit, use and abuse each other," in the words of Tokyo Underworld author Robert Whiting. Denied an active, aggressive military by Constitutional laws, most of which were penned by Americans, Japan returned the favor financially in the 1980s, effecting its invasion by purchasing America's most visible institutions -- Rockefeller Center in New York, major Hollywood studios in California -- and underselling and overproducing America's electronics and automobile manufacturers.

While some complain that America is everywhere in Japan, from the McDonald's on street corners to the decline in social etiquette, Japan is also arguably everywhere in America. Baseball stadiums sell sushi beside the hot dog grills. Every kid knows Pokemon and Hello Kitty. Toyota rules the road; Sony still dominates. Now, as the Japanese retail arena gets a rude reshuffling after a decade of economic malaise, the Americans are again intervening. The question is: to what end? One of the surest signs of the anxiety and chaos surrounding the realignment of Japan's retail sector is the sudden reticence of top retail analysts who get paid to discuss it -- especially those at foreign brokerage firms. Many of them have been blamed by Tokyo-based financial authorities for destabilizing the Japanese economy with their gloomy predictions. No one wants to be wrong; but to be right about the wrong news is not so pleasant either.



Masahiro Matsuoka, co-head of Japanese Equity Research at UBS Warburg, is among the intrepid few. He is also among the more vocal critics of the sudden enthusiasm over American corporate interests. Matsuoka has traveled beyond New York City's island internationalism, and he's not sure he likes what he sees. "Whenever I leave Manhattan, I find that America is not a very global place," he says.

American provincialism frequently takes visitors by surprise: The country is spacious and self-regarding. But Japan's retailers are clearly in trouble. "We thought it was necessary to find a strong business partner like Wal-Mart," Seiyu's Kiuchi told The New York Times. With the recent collapse of Mycal and the desperation of Daiei looming, Wal-Mart and Martha Stewart are not interests to be sneezed at.

"With the entrance of Wal-Mart," says Shinji Shimizu, the chairman and president of Life Corp., a mid-sized supermarket chain, "the Japanese retail industry will drastically change." In Japanese media reports, Shimizu sees Japan's retail companies undergoing another period of "warring states," a kind of feudal civil war, before winners finally emerge. "There are voices within the industry that say we would be better off if we succumb to the powerhouses and become part of their groups. But our standing has not been as weak as Seiyu's, and it is unlikely that we will group with a foreign company that easily."

Seiyu is at the center of both Stewart's and Wal-Mart's gambles on the Japanese markets. Seiyu plans to test-market Wal-Mart products in a limited fashion in October, hoping to find a way to get Japanese consumers to empty their wallets for discount Americana. The unspoken assumption on behalf of both American interests is that the Japanese are strong in savings they've been hitherto unwilling to spend. But how strong is Seiyu?

Seiyu's revenues have dropped over three consecutive years, from 1999 to 2001. But simultaneous gains in operating profits, and the presence of Sumitomo Corp. as Seiyu's largest shareholder evidently attracted Wal-Mart. In the company's official press release, John Menzer, president and CEO of Wal-Mart International, cites the "benefit of Sumitomo's expertise, its solid business base and in particular its focus on the retail sector" as welcome assets in the partnership. Wal-Mart may be more interested in its relationship with Sumitomo than Seiyu. In early June, the Yomiuri Shimbun reported that Wal-Mart was thinking of doing business in Japan independent of Seiyu. Wal-Mart flatly denied the report.

Stewart is positively sanguine about Seiyu, largely based upon the local retailer's ability to turn hip retailer Muji into an independent enterprise. "I admire how Mr. Kiuchi developed Muji into a successful brand retail business. Really, from our very first meeting, I sensed that Mr. Kiuchi was the 'brand steward' my products required." She has a right to be attentive -- her decision to market her goods through K-Mart stores in the US ran into snags when the troubled discounter announced its bankruptcy filing. Now K-Mart's books are been scoured by the FBI for alleged "criminal wrongdoing."

Like General Douglas McArthur, leader of the American postwar occupation who lost his job upon returning to Washington, Stewart may be more secure with her Japanese partners than she is at home.Wal-Mart claims to be equally comfortable. "We thought (Seiyu) was the right size for us," says Scott in a recently published interview. An earlier, rarely mentioned attempt to sell products through Ito-Yokado in the mid-90s failed. And when Wal-Mart approached the Aeon group for a deal last fall, the latter declined.



Wertz backs his boss up, hinting at how an Arkansas office might approach an urbane culture several thousand miles away: "What we were looking at is Seiyu's management team, their successes and achievements. This partnership enables us to get a good retailer there to study the market better. Frankly, we're just at the beginning of the learning curve about Japan and the Japanese consumer."

But UBS Warburg's Matsuoka reminds me of the dangers, and the naivety, of many big-name overseas retailers. "There have been a lot of closures, and the Japanese media are not really reporting the negative news. Costco (of the US) and Carrefour (of France) are really struggling, with sales far behind schedule. Very few firms from foreign countries are successful in Japan."

"Wal-Mart invested JPY6 billion, which is just peanuts;
two days' cash earnings for them. I don't think they're committed."

So, why are they here? With Japan's consumer market in the doldrums, why are American heavyweights like Martha Stewart and Wal-Mart suddenly seeking yen? "The media in Japan are writing positively about the US launches," says Matsuoka, "but I'm skeptical about the Seiyu tie-ups. For one thing, Wal-Mart invested JPY6 billion, which is just peanuts; two days' cash earnings for them. I don't think they're committed. Once they see the lack of quality in Seiyu, I think they'll pull out." The lack of quality in Seiyu? "Yes. Seiyu is one of the best available companies in Japan. But the best available company is not necessarily the best company. In Japan, there are lots of more sophisticated retailers," he says.

Sophistication is difficult to assess, and it remains one of the more nebulous goals for corporations worldwide. How do you marry America's passion for cheap, immediate gratification with older cultures (like Japan) that might seek another kind of satisfaction, based on a high-end reputation? In this respect, Stewart may have the edge. Her product line is defined by her celebrity. The quality of her goods is actually secondary to her promise: A certain sheen of sophistication is inherent in her well-groomed, billionaire image. "The uniqueness of Martha's products is that they look very high quality but they're not very expensive," says Okue. "She meets the test in Japan."

The test Okue describes is one that Wal-Mart and other American invaders will have to master fast if they wish to become more than just temporary interlopers. "The challenge for Wal-Mart is how to Japanize their stores," Matsuoka says. "And I'm pretty pessimistic about that. Once Wal-Mart discovers the need for quality, I think they'll get out. Even Martha Stewart will have to be a brand-driven product. Eventually, Seiyu and other chains should be selling basic necessities, not brand products."

Ultimately, Matsuoka sees the current encroachment of American retail interests as much ado about something that will die out -- or something that should die out. "Well, I hope it won't last," he concedes. "I don't want to see Japanese manufacturers underselling their goods to adapt to American discount ideals. That's bullshit. I don't think Japan should use immigrant labor, for example, and that's what makes these American companies competitive."

He is quick to point out that these are his own opinions, personal insights based on experience, and an apparently protectionist relationship to his native land. But Matsuoka's candor is revealing, particularly when he concludes with a money-go-round analysis, offering a kind of poetic justice for zealous overseas retailers. "You see, the money from Wal-Mart and Martha Stewart is good, as long as they both keep misunderstanding Japan. Because that's the money the US got from Japan in the 80s. We bought all those tall buildings and movie companies, and that money boosted the US economy. Now it's coming full circle, all the way back to Japan. The misunderstandings the US companies are making today are the same misunderstandings Japanese investors made in the 80s." @

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