Aeon vs. Trend of Japanese and world retailers

An insider's look at ERP and how it will help the Japanese Retailers fight back

JI: Can you tell us something about the company?

Talbot: Jim Armstrong, our current CEO, originally formed JDA Software as an IBM Midrange software provider in Canada in the late 1970's. Now, over 25 years later, we're a global leader in delivering integrated software and professional services for the retail demand chain with 1,200 employees and 4,800 customers worldwide. We started here in Japan in September 1999, on the back of a deal signed with Aeon for our core merchandising system. Our software runs in of Aeon's merchandise categories except home electronic appliances and perishables. We call the product that Aeon uses "Portfolio Merchandise ManagementE" system -- essentially a host transaction systems for retailers, handling everything from Master Data Management, Inventory Management, Cost and Price Management, PO Management, Automated Replenishment, Analysis and Alerts, etc.

JI: What's the best way to describe your software, it's rather wide in scope. We've got demand chain and supply chain functionality in there.

Talbot: Yes, we refer to our suite of more than 50 software products as JDA Portfolio®. Our clients can licenses these products as an integrated package or as standalone. With seven acquisitions over the past five years, we've made a significant investment in best of class products that support the needs of retailers and their suppliers.

At the demand chain end, we have In Store systems, including a new Java-based package that supports the POS, Back Office and Customer Relationship Management. In the stores we also have Internet Portals that provide store associates with real time access to views of inventory status, purchase orders and other key information from the Head Office systems.

In the Corporate Headquarters we have the core merchandising system. Our Strategic Merchandise Management solutions enable retailers to optimize their inventory investment. These specialized and advanced products support Merchandise Replenishment, Forecasting, Merchandise Planning, Merchandise Allocation and Assortment Planning. We also have Space Management products that enable retailers and suppliers to manage mid-level, tactical space and floor planning to increase store and product productivity, as well as strengthen category management initiatives.

With our Business Intelligence products, our clients can make better, fact based decisions with Demand Planning and Seasonal Profiling solutions. We also have a suite of Collaborative Solutions then enables retailers and wholesalers to more effectively collaborate with their suppliers. On top of all this, we offer professional and implementation services, 24/7 support and a leading educational program.

JI: Very deep range... Are they based around mainframes or open systems?

Talbot: Although the majority of our products run on Open systems such as Unix, we continue to have a market for our original merchandise management system (MMS®) that our founder built for the IBM AS400 environment.

JI: AS400 is pretty popular here.

Talbot: Yes, AS400 is very popular and we still have many customers running it. A couple of our other products are also on the AS400. In Aeon's case we run it on Unix. While we plan to support those environments, we are currently migrating the JDA Portfolio suite to the Microsoft .Net environment.

JI: JDA appears to have a "trim" operation here in Japan. It must be a challenge to support and sell all those different products.

Talbot: That's right, we are progressively localizing the products. For example we localized both the AS400 and the Open Systems merchandise management solutions. We also have a large number of global contracts with our Space Management by Intactix solutions for which we have a dominant market share worldwide. Our customers include P&G, Kraft, Coca Cola and other large retailers and manufacturers that use our products in Japan. As a result, we've localized our space and floor planning to support their requirements.

When we started in Japan, we had the task of also providing full implementation services. Worldwide, over 580 of our total 1,250 associates are consultants who provide implementation, support and education services to our customers. So in Japan, we not only localize the software, we also implement and support it as well. Over the past year, we have trained consultants from our strategic Partners in Japan, so they can assume some of the implementation roles. We still bring consultants over as required to supplement our Partner's resources. Currently we have about 30 associates working in Japan involved in selling, presales, consulting, localization, admin and marketing.

JI: Who are your main competitors?

Talbot: With our vast product line, we have several competitors that may focus on a particular point solution or vertical. In our core merchandise management area are major competitor is Retek, a public company based in Minneapolis, USA. However, we are the only vendor supporting the global market with such an extensive and proven product line.

JI: Aeon appears to be a key client for you... how are they doing?

Talbot: Aeon is actually a phenomenon here in Japan as they're almost the only retailer talking to Western consultants. They are working with Kurt Salomon Associates (KSA) to reengineer their business. So, Aeon is taking a stand against the expected onslaught of global retail powerhouses from the U.S. and Europe that are entering Japan.

JI: How big is the concern about Walmart ...and how real is the threat?

Talbot: Let's first take a step back and look at what has been happening recently. The smaller supermarket chains around the country are slowly being acquired. They are consolidating and expanding their territories, such as taking their supermarket chain Max Value to Hokkaido. At the moment Hokkaido is run by a small number of chains including one, ARCs, formed last November as the result of a merger between Rarusu and Fukuhara. The sales of the top 10 supermarkets in Hokkaido account for 60% of the total market in that region.

In the same way, Wal-Mart's controlling share of Seiyu gives them instant store network and infrastructure, which they now have to improve. They are bringing information systems from the USA and will implement them in Japan.

According to the August edition of Nikkei Information Strategy, Walmart will probably still have to use some large Japanese wholesalers, particularly one that works closely with Seiyu. These wholesalers are still necessary to carry food products, which will contribute to the costs of doing business.

Aeon is also following a direct purchasing model and is looking to drive costs out of the supply chain where possible.

JI: How do you see today's internal systems of Japanese retailers?

Talbot: Typically, large Japanese retailers are still running large mainframe systems. These systems are usually written by the major SI companies, in particular Fujitsu, NEC and IBM. Just about every system out there produced by the SI'ers is a customized job. So if a retailer really wants to restructure and improve, it not only needs to downsize, but it also needs to change the way it does business. This generally calls for implementing a packaged system, such as JDA's, that will support the new business processes. If they don't do this, they will be stuck in the same rut with the SI companies customizing solutions that are risky, costly, and results in the total cost of system ownership being a lot more.

JI: There are many foreign retailers looking anew at the Japanese market, belatedly -- Ikea and others. Can they take your software and use it as is in Japan?

Talbot: Well, if they're in retailing and following a US or European -style Best Practice retail model, then they could implement our system as it is. The question is how the company, be it foreign or Japanese, leverages their IT resources. Far too many Japanese companies think of their IT division as a cost center, not as a strategic part of their business. They're very budget conscious rather than benefits focused.

JI: While clearly many have these companies are in financial distress.

Talbot: Well actually, this particular case is still a profitable operation. The problems are that most firms in Japan are more focused on driving revenue than reducing inventory thereby reducing costs and thereby increasing profitability. So they are focused on one or two metrics rather than the whole business. Fundamentally their business focus needs to change -- thinking more about cost of doing business, rather than just increasing sales.

JI: Getting back to Aeon. What makes this company different?

Talbot: The president, Motoya Okada, studied in the US and has a goal that Aeon will become one of the world's top ten retailers by 2010. One of the key ways in which he intends to compete with large foreign retailers in his own backyard is to improve his business systems.

A lot of this success came from inventory management -- a traditionally weak area for Japanese retailers. Many do not know how much inventory is on the retail floor, out the back, damaged or stolen. Cost of inventory is a major burden for retailers, and according to Aeon's 2002 Annual Report, it reduced inventories in apparel and other areas in existing stores by 11.9 percent. For a $20 billion plus operation, this is an enormous cost saving

JI: Business reengineering in Japanese companies is typically hard. What do you think the problem is?

Talbot: Certainly in all companies worldwide, Change Management is very important as an ingredient for success because you can't just implement new systems and new processes without counseling and education. But in AEON's case, I think that the fact they have a very clear goal is playing a key role in the implementation of new systems and processes. . Also, AEON has a precise mission and a precise time frame and also sets a strict timetable. I see the above as an essential element for new system and -process implementation.

JI: Can you share with us what costs did you wring out of the system at Aeon?

Talbot: Aeon piloted our system in Mensware, apparel. According to Aeon's 2003 Annual Report, improvements in the accuracy of inventory management brought on by JDA's merchandise management system allowed Aeon to reduce inventories in directly operated stores by JPY4.1 billion compared with fiscal 2002, as sales increased by JPY23.6 billion. The report also states that Aeon is seeking further inventory reductions in the year to February 20, 2004 (fiscal 2004) through further extension of JDA's system to other product categories, such as processed foodstuffs, and to other business segments.

They were able to achieve this because the software lets them manage their merchandise and optimize their control of inventory. When you get down to this level, you're asking very fundamental and important questions, such as: "What I should have displayed on the floor," "Where should I put it," and "How much do I need to put there." This kind of analysis is something that Japanese retailers haven't been able to do adequately before.

JI: Clearly the Aeon account is a major success story for the company in Japan. And yet, your market share is still developing. What are the major challenges in getting other accounts?

Talbot: We have a number of clients using our core merchandise management system, but there is still a strong reluctance in the industry to use package software. Our advanced solutions require retailers to change the way that they do business in order to use the systems properly. For many of these companies, the challenge is just too daunting, even though it may be their only hope for survival. To be honest, I thought that once SAP had broken the ice in the manufacturing and financial industries, there would be a fundamental shift in people's receptiveness to package systems. However, I would say that companies are only just starting to consider package systems and still want to stick with custom software or build their own systems internally. So the biggest hurdle is often the customer. You still find this in the US market as well, but nowhere to the same extent as here.

JI: So what's the solution for this?

Talbot: Because we have strategic solutions that integrate with existing core merchandising systems, we can focus our clients on getting some quick wins. For example, we just closed a deal in July with JUN Co., Ltd. the apparel company. This is a Japanese customer, who looked at our system on the weight of its own merits. They looked at the competition and after cost-benefits analysis from our Partner, NRI (Nomura) decided to go with us. This is a very exciting development and means that we are becoming accepted in the marketplace. We are looking for more deals like this one.

JI: In the cost-benefits analysis done by NRI, did the same cost savings enjoyed by Aeon pop up, namely around 10-15 percent?

Talbot: Because the cost savings depend on what processes a client already have in place, the amount may change. However, the figure you quoted would be a fair target. In the case of a recent client, they were doing everything manually, using Excel spreadsheets, etc., so adoption of our system brings them some very substantial benefits.

JI: Through labor savings?

Talbot: In part the savings are a result of labor and productivity boosts, but more because everyone suddenly has "one view of the truth." With one central repository of data for inventory and other key metrics -- rather than each store manager having their own idea of what they need and when they need it -- companies are able to make wiser decisions.

JI: Let's talk briefly about your company's switch from direct sales to partner sales -- such as NRI. This seems to be a core strategy change.

Talbot: When I joined JDA 13 months ago, we were using the worldwide model, which is to sell direct and implement direct. For JDA to work with partners in an intimate way was a change of pace. My argument to Head Office was to compare the companies that tried to come into Japan by themselves and failed, to those companies that are successfully working through strategic partners and succeeding.

Fortunately before I started, NRI had already started talking to us. After 6-9 months investigating various products and vendors, NRI chose us because of our line-up of strategic solutions integrated with a core merchandizing system. We now have a value-added systems integrator arrangement with them, which is a first for JDA.

Apart from NRI, our other signed partner is Toshiba, and we have others in discussion. This is a very new model for JDA, but it appears to be paying off.

JI: Japanese retailers appear to be lacking in systems expertise, so what do they need to learn or focus on improving?

Talbot: NRI has spent a lot of time focusing on Merchandise Planning, and they have come up with some concepts that they believe are good for Japanese retailing. For example, many department stores like Seibu and Mitsukoshi are run as "stores-within-stores," where they don't own their own inventory. Because they don't plan and control inventory, they don't really need the functionality of our central control-oriented systems.

In response to this market reality, NRI came up with a concept of taking our planning tools and applying them to such stores, versus going for the whole store. However, we believe that those stores will start to understand the value of centralizing the inventory, and will come back to us later.

JI: Where do you see the inevitable battle between some of the world's biggest retailers and Aeon going?

Talbot: As I mentioned, Aeon has been called Japan's Walmart by Nikkei, and has been pursuing a Best Practice model fairly faithfully. I don't expect foreign retailers to simply come into Japan and try to conduct business in the same manner that they do in the USA. These retailers will have to work with the suppliers to get more direct sourcing, renegotiate prices, implement localized systems, etc. There is the big question of how even the very large foreign retailers will deal with the big wholesalers, which control 80 percent of commercial sales in Japan. Indeed, sometimes using a middleman to store small volumes of goods may in fact be more efficient than direct sourcing.

JI: What's your prediction for the retail landscape 5 years from now?

Talbot: I predict that there will be far fewer players and much more consolidation through mergers and acquisitions, some of which won't be the traditional friendly takeovers. Japan has half the population of the US but they have more stores -- so clearly there are too many. Some people say that the service levels are what is more important, and I would guess that "100% service level" here means having massive assortments of colors and sizes. One of the tricks to efficient retailing is to reduce the varieties while not making people feel that they're missing out on variety. This of course is the skill of each merchandiser and the main point of differentiation. @