Japan's complex distribution system

Japan's complex distribution system

You will need all the help you can get in distribution because it could be the biggest obstacle you will face in selling in Japan. According to a survey of members of the American Chamber of Commerce in Japan, controlled distribution is the biggest barrier to exports to Japan. Government regulations were listed as number two. Non-market pricing - for example price fixing - was the third biggest impediment.

There are many differences between the US and Japanese distribution systems. First Japan has many more retailers and wholesalers than the United States. On a per capita basis, Japan has twice the number of wholesalers and twice the number of retailers of the US.

Also when looking at the ratio of wholesale to retail sales, the number is twice as high in Japan. That is sales from large wholesalers to small wholesalers occur twice as often in Japan. Sales from one middle man to another middle man are less common in the US.

There are many reasons given for these differences in distribution systems. One is the small amount of space in Japan. Because of limited shelving space in homes and retail outlets, and because of the relative lack of automobiles in Japan, many local, small stores and wholesalers are needed to service customers.

Another reason is that the retail sector has served as Japan's version of a social security program. Small Mom-and-Pop stores served as a protected haven for those workers who retired or otherwise fell between the cracks in Japan's industrial economy. Wholesalers are needed to provide financing and management skills to these small shopkeepers.

Although there may be justifications for Japan's elaborate distribution system, it raises prices for consumers. With a pyramid of large wholesalers selling to smaller wholesalers selling to small retailers, prices to the consumer become inflated with each markup.

This system also reduces any exchange rate advantage that an exporter to Japan might enjoy. Numerous markups turn a 20 percent cost advantage on the factory loading dock into a negligible difference when the product reaches the retailer's shelves.

The area of returned goods marks another difference between the American and Japanese distribution systems. In America wholesalers and manufacturers place limits on the amount of goods that can be returned. Except for damaged goods, in America, you're stuck with the goods that you ordered. The American system shifts much of the risk for estimating demand to the retailer, and the retailer is compensated with higher profit potential.

In Japan retailers often can return all of their products regardless of the quality. Again much of the justification for this is attributed to the small spaces in Japanese shops.

Another reason for returns is that it allows manufacturers to maintain retail prices. They think it is better to accept returns than to have retailers slash prices to clear out their inventory.

Manufacturers also see a liberal return policy as a form of test marketing. If manufacturers wouldn't accept returns, retailers wouldn't want to stock new, untested products.

Thus easy returns have advantages for retailers and manufacturers, but consumers lose because it promotes high, rigid retail prices.

The small size of the retailers means the manufacturers can control them. The return system is needed for small retailers because they can not efficiently dispose of unwanted stock.

Rebates are another way Japanese manufacturers control their retailers. Although rebates are common in America, discriminatory rebates are illegal. There are two Japanese rebate practices which promote monopoly relations with distributors.

One is a loyalty rebate where the manufacturer makes payments according to the dealer's level of "cooperation" with the maker.

The second is a progressive rebate where a manufacturer makes higher payments to a retailer if the store carries more of the maker's products.

Again rebates exist in America, but loyalty and progressive rebates could be judged as discriminatory and therefore illegal in America.

But doesn't Japan have anti-trust laws?

The answer is, "Yes, but..."

Laws like the Anti-Monopoly Law mean that on paper Japanese anti-trust law is similar to America's. But penalties are small and enforcement has been lax.

In 1990 the Japan Fair Trade Commission took legal action in only seven cases. In 1993, after the US asked for more enforcement, that number went up to 34. For comparison, the US Justice Department brought criminal action in 84 cases in the same year.

But in America 90 percent of anti-trust cases arise out of civil suits. In Japan a private anti-trust suit can only be brought if the Fair Trade Commission first investigates the case. Discovery rules and other legal roadblocks make it difficult to bring suit in Japan. There has never been a successful private damage case for violation of the Anti-Monopoly Law in Japan.

Besides rebates manufacturers in Japan also exercise direct control over their distributors. It is very common for manufacturers to own the equity of their distributors and even to send their employees to act as directors for wholesalers. For example, Fuji Film owns a controlling interest in three of the five major wholesalers in the photographic film industry. In a similar vein, Shiseido sells 70 percent of its cosmetics through 25,000 retail chain outlets that sell only Shiseido products.

However things are beginning to change. Just like in America, large retailers are beginning to gain the upper hand through buying power and information systems.

A recent battle between Daiei and Matsushita illustrates this. Daiei is one of Japan's largest retail chains, while Matsushita - the maker of brands such as Panasonic - is Japan's largest consumer electronics maker.

Historically Matsushita sold most of its products in Japan to small, dependent retailers. These retailers offered Matsushita retail price maintenance and exclusive sales of Matsushita products in exchange for a liberal return policy and rebates.

However Matsushita has seen the proportion of its sales through its own chain stores drop over the years. In the 1950s Matsushita sold 90 percent of its products through 30,000 chain stores. Now its 19,000 stores generate only half of its sales.

Daiei's president wanted to sell Matsushita products but Matsushita refused to sell to Daiei. Matsushita thought that Daiei would ignore its suggested retail prices.

However Matsushita finally allowed Daiei to sell its products through a subsidiary that Daiei recently acquired. With the recession already slowing sales, Matsushita needed sales from the retailer.

Thus in this case the economic recession and buying power shifted the advantage to the retailers. Recent regulatory changes will give retailers even more power.